Yield Farming (income farming) is one of the key trends actively developing in DeFi. Thanks to this earnings strategy , the Compound project recently made a rapid take-off , taking first place in terms of the amount of user funds blocked in the protocol. How the Yield Farming sector is developing and what role it will play for the cryptosphere?
Yield Farming's investment strategy, or income farming, is to generate income from placing cryptocurrencies on various DeFi cryptocredit platforms. Before Yield Farming, the main trend in DeFi was conventional cryptocurrency deposits, bringing 4-10% of the profit. However, Yield Farming allows you to get up to 100% of revenue in annual terms.
Yield Farming - the main driver of the DeFi sector
The number of cryptocurrencies blocked in DeFi (Total Value Locked - TVL) is now $ 2.29 billion. At the same time, the capitalization of funds in DeFi has more than doubled over the past month, largely due to the popularity of income farming. At the same time, five top-end DeFi protocols attracted crypto assets worth $ 2.1 billion, i.e. 91.7% of the total volume of TVL.
And the total number of users of these projects was about 230,000.
The sharp increase in interest in Yield Farming is associated with one of the new protocols on the market - Compound. Users of this platform can provide loans or take loans in nine different cryptocurrencies, for which they receive COMP project tokens. With these tokens, Compund users can make decisions regarding its future development. In other words, conditional “shares” of the Compound project are distributed to those who provide liquidity to the site, as well as to those who take loans on it. This is largely consistent with the concept of SAFG (“a simple agreement on the possibility of further gaining the right to manage”) as a logical development of other principles for the distribution of tokens - SAFE and SAFT .
COMP for BAT
2880 COMP is issued daily, which at a token price of $ 180.1 is equivalent to $ 518 688. Half goes to liquidity providers, half to borrowers. Moreover, distribution is carried out on each of the nine markets (BAT, ETH, USDC, USDT, Dai, REP, 0x and Sai) - to all those who borrow or take loans at Compound, in proportion to the interest rate, as well as their interest or income payments. The higher the loan or loan rate, the more COMP tokens are paid.
At the same time, Compound is constantly updating token distribution rules. So, according to the latest update of July 2, COMP payments begin to be made based not on interest rates, but on the dollar value of funds in the transaction. This should ultimately lead to greater use of stablecoins. Borrowing rates for them can be less than 1%, which is ten times less than for the most volatile asset in DeFi - the BAT token .
It is worth noting that, until recently, in transactions with BAT, Compound users received the maximum number of COMP tokens. As a result, for the period from June 19 to July 2, the volume of transactions with this asset reached $ 931 million, which exceeded the total turnover of Ethereum and DAI for the same period. However, another change in the rules sharply increased the volume occupied by DAI and USDC.
Yield Farming: borrowing is better than borrowing
The changes did not affect the main advantage of Compound - the COMP tokens received by users still cover the costs of loans in cryptocurrencies. In other words, to Compound userstaking loans is more profitable than borrowing (this is noted , for example, with the Tether stablecoin) . Paying COMP tokens to borrowers looks like a cryptocurrency cashback for participating in the platform - this can be considered as if, for example, American Express bank shared a small share in the share capital with users for each transaction.
Such a Compound policy has led to a sharp increase in loans, as well as an increase in income for those who provide liquidity, as they also receive COMP tokens for participating in the platform. Moreover, such a cashback is in plus to the interest that is earned on borrowed cryptocurrencies. Moreover, since borrowers receive repayments for loans, liquidity providers can use their own assets to borrow more. As a result, their income increases, and they again provide Compound liquidity.
Not only compound
But not only Сompound played an important role in the popularization of Yield Farming. So, Aave makes it possible to borrow cryptocurrencies at a fixed rate, and then place them in order to generate income. Aave’s fixed rate is usually higher than Compound’s variable, which means that those who provide cryptocurrencies, Aave gives more income. There are also liquidity pools, such as Uniswap, which offer large profits (sometimes at 100% on an annualized basis), but associated with higher risks.
While the СOMP price shows a clear downward trend (a study of the Delta Exchange platform claims that this token is five times overvalued), Compound is overgrown with competitors. So, on June 22, the COMP token cost $ 327.82 (on the day of listing on COINBASE Pro, June 23, at the time the price went up even to $ 427), and on July 12 it was already $ 180.1. The fall of COMP is noticeable, but it is worth noting that at the beginning of its issue, the token cost only $ 16. Moreover, about 80% of COMP tokens are distributed between the top 10 addresses in Compound, and the volume of tokens in free circulation is $ 686 million, which corresponds to the Free-float rate of 38%. It is not high, and this will contribute to the strong volatility of the COMP.
Amid lower COMP costs, the Balancer platform, which provides cryptocrediting services from a pool of various ERC20 tokens, began to distribute liquidity providers each week with 145,000 native BAL tokens. These tokens, like COMP, provide the right to participate in the management of the platform. Of the maximum possible issue of 100 million BAL, 65% will go to payments.
Risks of Yield Farming
Despite the popularity of Yield Farming among DeFi market players, this trend is not without its pitfalls. So, Ethereum co-founder Vitalik Buterin continues to criticize DeFi, stating that " interest rates that are significantly higher than what you can get when working in the traditional finance sector are either a temporary arbitration opportunity or are obtained through undeclared openly declared risks ."
Indeed, when using Yield Farming, the following risks should be kept in mind:
Yield Farming gives hope for the growth of cryptocurrency quotes
But how does Yield Farming affect the cryptocurrency market as a whole? Over the last week of June and the first decade of July, an additional 2430 bitcoins were added to Compound, plus 170 already available at that time. The Balancer platform during the same time saw an influx of bitcoins from 126 to 1787. In total, for the implementation of Yield Farming in DeFi-protocols more than 12,000 BTC. Potentially, an increase in the influx of bitcoins in this sector of the cryptocurrency market can play a positive role in relation to the growth dynamics of quotes of the first cryptocurrency. Indeed, the popularity growth of Yield Farming maintains interest in BTC, which is especially important if you consider that in July the turnover of trade in this cryptocurrency fell by 31% compared to June.
Since most DeFi projects are based on the Ethereum blockchain and utilize the assets of this ecosystem, ether can potentially receive an incentive for strong growth. Although the example of XRP and the development of innovation from Ripple shows that such market success is not guaranteed. It is also symbolic that the total capitalization of ERC20 tokens reached $ 33 billion, exceeding the total capitalization of ether ($ 26.6 billion). Messari analyst Ryan Watkins, commenting on this data, said that the broadcast has shown very modest growth over the past two months, only 20%.
The continued growth of interest in stablecoins and the increase in trading volume with them are also caused by their popularity in Yield Farming. Along with this, stable coins, which have long become the “bridge” between the world of classical finance and the cryptosphere, also contribute to the soon appearance of various CBDCs on the market.
Yield Farming meets institutional investors
Yield Farming has become a natural stage in the evolution of the cryptocurrency ecosystem. However, his further fate, as well as all areas of DeFi, is directly related to ensuring reliable cybersecurity. This is also important from the point of view of investors who invest in infrastructure: for example, it is annoying that the dForce platform faced theft of assets for $ 24 million, a few days before receiving $ 1.5 million of financing from investors.
In this connection, Silicon Valley venture funds are being invested in the development of infrastructure for Yield Farming. So, ParaFi invests $ 4.5 million in Aave, supporting a platform that offers instant cryptocurrency loans without collateral. These are high-risk operations for the borrower, but it is important that Aave develops further. So, she has a service integration with Uniswap. Moreover, Aave was the first DeFi protocol to start working with the Tether stablecoin. Plus, the platform now offers a new product - credit delegation, where a depositor can lend their assets to a specific platform participant in an unsecured scheme. Both parties enter into a loan agreement, which, thanks to the integration of Aave with OpenLaw, allows you to reliably keep such a contract on the blockchain. In fact, this is the real exit of DeFi with Yield Farming to the classic financial market, for working with institutional investors as well.
There is also a trend towards the integration of various platforms in DeFi, which thereby help each other to develop. So, internal tokens and “synthetic” tokens (with Tokens) Compound began to be used in Uniswap. And just three projects - Synthetix, Curve and Ren - launched a joint pool that provides liquidity in the form of tokenized bitcoins.
Also, over a short period, insurance products targeted at participants of Yield Farming began to appear on the market, such as that of Nexus Mutual. Now the Nexus Mutual team has insured assets worth $ 8.5 million. Such an opportunity is most interested in Curve Finance (insured $ 1.6 million of assets). Cryptocurrencies for an average of $ 700,000 are also insured on the sites of Balancer, Compound, Aave and 1inch.exchange.
Yield Farming, along with decentralized insurance products, confirms the opinion of analyst Chris Burniske, who emphasized that DeFi recreate all the elements that are in classical finance, but on a new, innovative basis. So it cannot be said that Yield Farming is a short-term trend. This segment of the cryptosphere will develop, even despite a decrease in net margin in it, as can be seen in the example of Compound
