What Exactly is Yield Farming?
There are a growing number of DeFi dApps and protocols on the Ethereum network. Each protocol is slightly different, but they all have something in common. Each of them allow you to lock up some sort of cryptocurrency, and do one of two things.
- Loan your locked assets to earn interest
- Use your locked assets as collateral to borrow more cryptocurrency
A certain number of users have figured out how to “farm” these services. These users are borrowing from one service at a low interest rate. They then loan those borrowed assets on another service at a higher interest rate. The difference in interest rates becomes their profit, or their yield.
Some group of DeFi hackers decided to term the use of this barnyard of crypto services as yield farming. This whole phenomenon spurred from the release of a new lending protocol, on the Ethereum network called Compound.
Compound is a new token on the Ethereum blockchain that just formally launched their platform on June 16, 2020. As seen on the Compound about page
“The majority of cryptocurrencies sit idle on exchanges and in wallets, without yielding interest. We’re on a mission to change that.”
Decentralized finance is about creating autonomous financial services. As stated above, the majority of cryptocurrencies are not really in use. They are sitting on exchange, and being used in ways that are not transparent to the users of the exchanges. Projects like Maker, and Compound both aim to make use of idle cryptocurrencies. Their use of the word yield has clearly struck a nerve with cryptocurrency users that have idle assets. So much so that Compound has immediately established itself as a top 25 coin on coinmarketcap.
The Compound token itself is a governance token. This means that users that own the token are able to participate in the governance of the protocol itself. Currently, the platform is in its distribution phase. By using the platform, and lending out, or borrowing assets, you may earn a Compound tokens. This incentivizes users to put their assets into the platform. Aside from the yield you will earn for locking your tokens, you will also receive a bit of Compound. Any Compound earned this way is paid out on a daily basis.
Ethereum Wallets Integrate DeFi
A swath of Ethereum wallets have opted to integrate DeFi services directly into their software. This is in an attempt to simplify the inherent complexities of these financial services and instruments. Let’s face it, decentralize finance, collateralization, and yield farming is not exactly a walk in the park. This is a very positive step in the right direction for the entire cryptocurrency space. Direct integration and simplification exposes a wider range of cryptocurrency users to DeFi services. If DeFi services become comprehensible for the average user, then we will inevitably see greater adoption, and ultimately strength in these products.
The number one problem with DeFi is simultaneously its strength. The capacity and potential of DeFi is growing faster than many people can adjust to the new services. What this does is creates use and excitement amongst power users. However, it also shuts out the hobby cryptocurrency investor. The average investor typically likes to spend a lot of time understanding an investment before making it. What cryptocurrency wallet providers are aiming to do is integrate the services directly into the wallets, creating a seamless experience. DeFi needs to be sufficiently demystified and available at the click of a single button. One such example of a cryptocurrency wallet that integrates a variety of dApps and DeFi products is argent.xyz.
Massive Growth for DeFi
The Compound token is currently approaching a billion dollar market cap just one week after its launch. The introduction of the Compound token has brought new money into decentralized exchanges, and lending/borrowing protocols such as Maker. This represents massive growth for the decentralized finance space. New liquidity and market depth is now available to regular users of the DeFi ecosystem. In other words, new money into DeFi ultimately means the overall space is stronger than it was before. The price of Ethereum is a fraction of what it was at its all time high. However, the network itself has never been stronger. The development environment is thriving, and new and exciting protocols are around every corner.
The future looks very bright for Ethereum. The introduction and deployment of Ethereum 2.0 is right around the corner. With Ethereum 2.0, more features will be available. New protocols become possible. Ethereum has one of the largest cryptocurrency development followings on the planet. Ethereum developers have been itching to get their hands dirty with the variety of new capabilities that Ethereum 2.0 has to offer. In general, the world of cryptocurrency has been very impressed with what Ethereum developers have been able to manifest. From virtual plots of land, to decentralized financial platforms, the possibilities seem endless. I have a feeling that we have only scratched the surface with what DeFi has to offer. The highlight from last week is this. Yield farming has taken over DeFi.