CEO and co-founder of Platinum Software Development Company. Blockchain enthusiast, blogger.
Yield farming has taken the cryptocurrency industry by storm, becoming the cornerstone concept for DeFi in 2020 and likely far beyond. The craze started with Compound, which was the first to initialize this investment mechanism in June 2020. Even though yield farming is still quite a niche strategy, it’s popularity is accelerating. The experts from Platinum Software Development Company have taken an analytical dive into the current state of yield farming and are ready to share their key findings and insights.
What is yield farming?
Yield farming or liquidity mining is a fresh way for users to earn passive income in the DeFi ecosystem, basically by making more cryptocurrency with their existing holdings. Instead of just HODLing, a person can generate profits in exchange for participation in DeFi applications.
Here is how yield farming works. A user, called a liquidity provider, adds his or her cryptocurrency assets to a smart contract (liquidity pool) of a certain DeFi platform. For doing this, they receive a reward in the form of tokens.
Currently, yield farming is generally executed on the Ethereum blockchain and its ERC-20 standard, since the rewards usually also belong to the Ethereum ecosystem. However, this might change in the future as the demand for yield farming grows. We at Platinum believe that at some point the yield farming strategy will shift towards being blockchain-agnostic and will be supported by other types of blockchains.
Yield farming as an investment strategy took off with the Compound platform and their COMP governance token distribution system, which offered high-rate rewards for Compound lenders and borrowers. Before the scheme went live in June 2020, Compound was the second-largest DeFi application per total value locked in its smart contracts. In a single day, after the kick-off, Compound overtook Maker DAO and the COMP token became the largest market cap of any DeFi token.
Numerous DeFi protocols followed Compound’s example and introduced yield farming activities in their own ecosystems. To name a few, the list includes Yearn.Finance, Curve.Finance, Synthetix, Balancer, Sushi.
Unlike the usual DeFi deposit strategy, which offers a yearly yield of 10%, yield farmers can expect much higher returns, which could reach 100% APY. However, there is a lot of complexity and a colossal risk behind yield farming. Searching for the super high gains, users typically need to move their funds from one DeFi protocol to another quite frequently. In turn, this requires deep analytical skills, constant monitoring and a light-speed reaction to any change in the market, even the slightest one.
Having examined multiple sources’ analysis of crypto and DeFi markets, we’ve portrayed here the key characteristics of yield farming – the volumes and APY’s, the top players, farmers’ behavioral patterns, prominent tendencies as well as necessary signals to watch out for.
These insights from Platinum Software Development Company could help you refine your yield-farming strategy for today and tomorrow.
Yield farming market overview
According to CoinMarketCap data, the total locked value of liquidity pools in yield farming projects exceeded $4.9 billion as of 3rd October 2020. The entire DeFi market stands at $10.94 billion in total value locked.
This means that nearly half of the volume locked in DeFi is involved in yield farming.
Yield farming platform rankings
At the time of writing, the five leading yield farming pools were as follows:
Uniswap. Its total value locked (TVL) amounts to $1.7 billion. Depending on the pool and cryptocurrency pair, APY’s range from 23.82% (ETH / WBTC) to 33.85% (ETH / DAI). Impermanent loss is high though.
Curve. The total value locked in its pools has also surpassed $1 billion. Curve has significantly lower APY’s than Uniswap – from 5.80% to 15.99% yearly.
Sushi. The TVL stands at nearly $310 million, while APY’s range from 17.07% to an incredible 109.24% per annum (for the YAMv2-ETH pair). Just like Uniswap, impermanent loss is also high.
Yearn.Finance. Its total value is nearly three times smaller than that of Curve’s and Uniswap’s – it levels out at around $300 million. Yearn users can receive from 0.05% annual yield (for aLINK tokens) to 13.29% (for TrueUSD stablecoins).
Harvest. This pool has $170 million in total value locked. Its users can earn from 23.04% to 106.82% yield annually.
Yield farming popularity among crypto holders
According to a Yield farming survey conducted by Coingecko in August–September 2020, 23% of the respondents participated in yield farming in the past 60 days (meaning in July–August). This is every fourth person. It’s a clear testament to liquidity mining shifting from a niche phenomenon to a steady, widely-adopted investment strategy among cryptocurrency users.
From a geographical perspective, the majority of farmers come from Europe (31%), Asia (28%), and North America (18%). Such distribution is very logical and expected since these particular regions are the main drivers of cryptocurrency and the DeFi movement in general.
Farmers’ motivation and strategy insightsUsually, liquidity mining protocols offer governance tokens. Governance tokens are coins that give holders the power to impact decisions concerning its protocol, product development, and roadmap, affecting essential changes to governance parameters. Nevertheless, Coingecko’s research reveals that most farmers are not interested in governance or the project per se – they are primarily concerned about their assets and profits.
As the chart shows, the absolute majority of respondents consider their benefits as the main motivation for participating in yield farming; 54% of users intend to hodl; while 32% farm to sell. Only 11% of farmers are interested in governance opportunities in the first place.
Farmers’ awareness of the risks
Liquidity mining offers high-interest rates, which make this investment strategy lucrative to both investors and speculators. At the same time, yield farming also involves colossal risks, quite similar to those associated with the ICO boom of 2017.
Here are the most common risks related to liquidity mining:
Protocol hacks. The assets a holder lends are ‘stored’ in the protocol – a smart contract – which is a piece of software. Hackers are always searching for new ways to exploit vulnerabilities in the code and steal cryptocurrency.
Сrypto market manipulation. When users lend cryptocurrency by adding it to any protocol and later borrow it back, basically, they blow up the demand for this token and make its price grow.
Too complex strategies. We’ve already outlined that to maximize gains, farmers move their assets from one DeFi app to another very often. Any mistake may cost a user all the profits earned so far.
Institutional regulations. Security tokens, DeFi, and cryptocurrencies are the subject of never-ending disputes among governmental and financial bodies. Their position and adopted policies can make or break yield farming.
Alarmingly, Coingecko’s figures show that despite a generally cautious approach, a large portion of farmers are not informed enough about the risks associated with liquidity mining. They put high returns above everything else.
In particular, 40% of respondents don’t know how to examine smart contracts for security breaches or scam signals and nearly a third (33%) don’t know what impermanent loss means.
Users’ plans to continue yield farming
High rewards are the key motivating factor that attracts investors and speculators to the liquidity mining market. At the same time, big gas fees in the Ethereum network and multiple risks might put off small or inexperienced players. Is this hypothesis true?
Surprisingly or not, it looks like we are repeating the same situation that happened during the ICO hype.
Despite many hassle and potential dangers, most DeFi participants (70% of Coingecko’s respondents) strongly intend to continue yield mining, while 25% are still in doubt.
That means that only 5% of the participants flatly state that they plan to stop participating in liquidity mining.
Venture investments in DeFi
Yield farming is promised to become the silver lining of the DeFi universe, expanding the industry and drawing in financial capital and new players to the field. VC investors from Silicon Valley are already expressing their interest.
To name a few, Michael Anderson, co-founder of Framework Ventures, notably invested in Chainlink (as an Angel investor in 2017) and Synthetix (investing $3.8m and purchasing 5 million SNX tokens in 2019).
ParaFi Capital, the Silicon Valley VCl fund, focused on decentralized finance and blockchain by investing $4.5 million in open-source lending protocol Aave. As of today, Aave is among the leading DeFi lending protocols worldwide. The platform’s main and most innovative feature is its ‘flash loans’, with which users can borrow instantly and easily without needing any collateral. Aave also integrated with Uniswap and became the first DeFi protocol to support Tether.
Other protocols to receive funding during 2019-2020 include Injective Protocol which raised $2.8 million, FinNexus raised an undisclosed amount, Hedget raised $0.5 million, Alpha5 raised $1.5 million, Serum raised $1 million and the list goes on with Vega Protocol, Futureswap, MonteCarlo DEX, Strike Protocol, Auctus Project, Hegic Option, Primitive, Pods Finance and others.
The state of DeFi software development
As DeFi is growing in popularity (by +1,000% from Q2 2019 to Q3 2020), more and more financial services companies want to embrace blockchain and shift from their conventional finance setups to a decentralized ecosystem. In turn, this creates a high demand for providers of such services and platforms – outsource IT companies capable of building and delivering complex, enterprise-grade, DeFi solutions.
The market for DeFi development hasn’t yet matured – and it’s easy to explain why. A blockchain company needs to have deep-rooted knowledge and versatile expertise in: building decentralized exchanges and dApp products, tokenization, deployment of non-custodial protocols, DeFi asset management and much more.
Now you may think that it is not possible to find partners that can build DeFi solutions. Still, such providers do exist on the horizon. Antier Solutions, DeFi Solutions, Technoloader and of course, Platinum Software Development Company.
We’ve taken a brief but deep look at the latest buzz in the cryptocurrency space – yield farming or liquidity mining.
Let’s outline the key takeaways:
Yield farming is a high-return investment strategy (up to 100% APY) that underwent extreme hype after the COMP governance token kicked-off its distribution system. To some extent, liquidity mining popularity is similar to the ICO frenzy of 2017.
The total locked value of liquidity pools in yield farming projects has almost surpassed $5 billion, so farming and mining will likely grow further.
The leading platforms for liquidity mining are Uniswap, Curve, Sushi, Yearn.Finance and Harvest.
Yield farming is no longer a phenomenon known to a small circle of users. It’s moving towards being a widely-adopted investment strategy among cryptocurrency holders. The majority of farmers are from Europe, Asia and North America.
Even though liquidity mining usually involves governance tokens, users are not highly interested in governance and voting. High gains remain the main reason why they get into yield farming.
Yield farming poses colossal risks related to hacks, regulations, and the overall complexity of the strategy. It requires farmers to be experienced, fast, and sensitive to any change. Yet a big share of farmers are still ill-informed about the associated risks.
Yield framing is here to stay. Searching for large profit potential, the majority of users don’t plan on abandoning yield farming in the future.
Growing demand for liquidity mining attracts venture capitalists to DeFi platforms. Synthetix, Chainlink, Aave, Injective Protocol are among those who have received venture funding.
The market for DeFi software development companies is yet to shape up, though strong players already exist. Platinum Software Development Company is one of them.
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