Aave Vs. Yearn Finance Vs. Curve Finance Vs. DeHive: What Makes These DeFi Protocols Tick?

Cryptocurrency, as an alternative financial instrument, opened up an additional earning opportunity for users. Decentralized finance (DeFi) market participants decided to take advantage of this feature. They created a movement called yield farming. Why is that movement so popular and how can you benefit from it? Let's see.

What is yield farming?

The concept of yield farming comes from a meme, but today it describes the process of making profit through any form of interaction with DeFi protocols. Farming consists of receiving a reward in native protocol tokens for providing loans or obtaining loans, or for providing liquidity to decentralized exchanges and voting.

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Yield Farming's investment strategy, or income pharming, is meant to generate income from the placement of cryptocurrencies on various DeFi crypto lending platforms.

Before Yield Farming, the main trend in DeFi was conventional cryptocurrency deposits, bringing in 4-10% returns. However, Yield Farming allows you to receive up to 100% of the income in annual terms.

How Does Yield Farming Work?

The key to success lies in the global understanding of the process.

Liquidity providers (LPs) lend funds to DeFi protocol smart contracts known as liquidity pools. These pools power DeFi marketplaces for lending, borrowing, or exchanging tokens. As users interact with these platforms, fees are generated and paid out to LPs later in proportion to their share of a liquidity pool in a process that’s similar to staking. The combined amount of liquidity is referred to as the Total Value Locked (TVL) and works for measuring the health of such protocols.

That’s the basic premise, though it can get more complex from there as yield farmers compete to find the best strategies, moving assets frequently between the different protocols in the search to maximize returns. Some pools pay rewards in multiple tokens, incentivizing users with LP tokens and governance tokens via liquidity mining that can then be used elsewhere in a compounding yield generation process across the DeFi ecosystem. This typically takes the form of ERC20 tokens on Ethereum but is increasingly expanding cross-chain.

How can you benefit from yield farming?

Basically, there are two ways to make the most of yield farming.

1. Earning interest through borrowing funds

Both obtaining and providing a loan involves placing the participant's funds in a liquidity pool, either as collateral or as a deposit. The farmer registers in a project that issues loans and transfers funds to another user, who draws up an application for a loan on the condition of subsequent payment of interest. The farmer's income is the bonus tokens received along with the loan interest.

2. Liquidity mining

A liquidity pool is a smart contract on decentralized exchanges (DEX) based on automated market-making (AMM) technology. During trading, the ratio of tokens in the pool changes, as does the price of tokens.

For example, let’s say, a user purchases 100 ETH using an ETH / USDT pool. The volume of USDT in the pool increases, while the volume of ETH decreases. At the same time, the price of ETH is growing.

The participant providing liquidity receives two types of coins, First, profitable LP-tokens, which serve as a share and confirmation that liquidity has been provided to the pool, and “burn out” in the blockchain when liquidity is withdrawn. Second, bonus DEX or DeFi protocol tokens that reward such activity.

A pool can encourage members to provide more liquidity for a specific asset through increased rewards in bonus tokens. The pool's income commission is distributed in proportion to the funds deposited by the participants.

Farmers sell bonus tokens on the exchange in exchange for basic liquidity, which is again supplied to a specific pool, and bonus tokens are again credited to participants. Such manipulations are carried out as long as they remain profitable, overriding the trading commissions and fees of the Ethereum network.

Advantages and disadvantages of yield farming

Similar to any financial process, yield farming has its pros and cons. Let's take a closer look.

The main advantage of yield farming is obvious - the profit for any user. Farmers who have started to implement a new project earlier can receive rewards in the form of tokens and the value can quickly rise. If they sell these tokens at the right time, they can make a significant profit. This income can be reinvested in other DeFi projects to generate even more.

Due to the highly volatile nature of cryptocurrencies and, in particular, DeFi tokens, farmers are at significant risk of liquidation if the market suddenly drops, as happened with HotdogSwap. Moreover, the most successful income-generating strategies are complex. Hence, the risk is higher for those who do not fully understand how all major protocols work.

Farmers also take on the risks of project teams and smart contract codes. The growth potential in the DeFi space is attracting many developers and entrepreneurs who start projects from scratch or even copy the code of their predecessors.

That's why even if the project team is honest, their code is often untested and may contain bugs that make it vulnerable to attackers.

Top yield framing platforms

So what are the options available for yield farming and how do they differ? Let’s take a look at some of the leading platforms.

Aave

Aave is a decentralized finance lending and borrowing protocol that supports a range of cryptocurrencies as well as advanced features including uncollateralized loans, rate switching, and flash loans. Aave offers liquidity providers algorithmically adjusted stable and variable interest rates according to market conditions.

Lenders who provide funds to the platform receive aTokens in return that retain a 1:1 peg to the underlying asset such as aETH. Users then earn compound interest for the duration of liquidity provision, increasing their total number of aTokens held.

Aave also utilizes its native governance token, AAVE, to allow holders to participate in deciding the future direction of the protocol, to incentivize lending or borrowing funds by offering AAVE liquidity mining rewards, as well as staking to earn additional protocol fees in AAVE.

Compound Finance

Compound is an algorithmic money market enabling users to lend and borrow a variety of crypto assets. With the launch of its COMP token distribution incentive, the project kickstarted the yield farming boom that brought a lot of liquidity to the DeFi market.

Compound’s audited smart contracts manage pools of capital deposited by liquidity providers with that stake tracked using interest-earning cTokens, such as cDAI. A user’s cToken balance is proportional to their share of assets in a lending pool, accruing interest with each block. So, in contrast to Aave’s aTokens, it is the value of cTokens that increases rather than the number held.

The COMP token serves to allow holders to vote on protocol governance as well as a liquidity mining incentive reward for lending or borrowing on the platform, adding to the yield farming opportunities.

Yearn Finance

Yearn Finance is a liquidity aggregator that provides lending aggregation, yield aggregation, and insurance via several DeFi protocols governed by YFI token holders, which can be earned through liquidity mining on the platform.

The first Yearn product was the yEarn lending aggregator that shifted funds between Aave, Compound, and dYdX automatically to achieve the best interest rates and gain a higher yield. Users simply deposit to the lending aggregator’s smart contracts and the protocol optimizes the interest accrual process for them.

Yearn Finance yVaults are like savings accounts, accepting deposits and then automating the yield generation and rebalancing process, routing capital to take advantage of the best opportunities with a more passive yield farming strategy.

Curve Finance

Curve offers a decentralized exchange protocol that is specifically designed to use liquidity pools and bonding curves to deliver efficient stablecoin swaps. Curve’s model, therefore, provides lower risk returns for liquidity providers, allowing them to generate yield on high volumes without being exposed to volatility or slippage.

Unlike other DEXs, Curve lends out assets on the compound platform when they aren’t being used for trading, allowing the additional interest to be delivered to liquidity providers. Instead of accruing interest through cTokens, Curve enables liquidity providers to use Yearn Finance yTokens that can rebalance the underlying tokens to achieve the highest interest rates while holding the stable asset.

The Curve DAO token, CRV, also serves to facilitate governance of the protocol as well as provide additional liquidity mining incentive rewards on top of the interest rates earned.

DeHive

DeHive works differently, providing a decentralized protocol to wrap funds into an index of the top DeFi and NFT crypto assets. It optimizes user portfolios while offering the benefits of passive yield farming strategies across the DeFi ecosystem.

With no need to navigate multiple platforms, users can access the index representing a customizable weighted crypto basket in one step, which is algorithmically rebalanced to reduce the risk of price fluctuations.

By staking those indexes, DeHive smart contracts can then automatically optimize strategies for depositing the underlying funds into yield farming protocols to maximize returns.

Funds remain in the user’s control at all times, tracked transparently on the Ethereum blockchain, expanding to Binance Smart Chain, Polkadot, and Avalanche, and developing cross-chain integration over time.

The native DHV token provides access to the DeHive ecosystem, allows indexes to be issued, enables participation in the protocol’s DAO governance mechanism, and enhances yield farming returns via DHV liquidity mining rewards.

Let's sum up

Yield farming may seem confusing due to the abundance of specific terms and the use of complex strategies. However, the goal of the movement can be described in just one phrase - to achieve maximum income using DeFi-protocols.

Of course, similar to any financial operations, it might be risky. No one can guarantee that the project you choose will keep bringing profit tomorrow. That is why it is essential to stay cautious and pay attention to the level of investment security.

And most importantly, to benefit from the majority of platforms offering yield farming, you need to understand the principles of the DeFi market, digital assets, and your possibilities when interacting with them. Good luck!

Disclaimer: This material is not sponsored by any organization mentioned in the article.