What is Yield Farming?

Yield farming is a strategy by which investors seek to establish the best form of investment to maximize their profits, leveraging their positions while using one or more DeFi platforms in their operations. 

One of the most famous concepts in the world DeFi is "Yield Farming" or "Performance Agriculture". This is a concept that seeks to establish an investment strategy by which token holders seek to maximize their profits. To do this, token holders must invest and participate in various DeFi platforms while seeking profit maximization at all times.

Without a doubt, a very interesting way to participate in the DeFi ecosystem and one that has quickly gained space for its use. But, What else is hidden behind this practice? What are your risks? You will know that and more below.

Yield Farming, reaping profits in the DeFi fields

Yield farming or "yield farming" is a strategy used by investors and large traders to achieve the greatest amount of profit from their investments and capital.

The objective is simple: have your capital in one or more investment platforms, in such a way that after a while, said capital grows significantly. In short, yield farmers or performance farmers are only looking for investment opportunities that allow them to increase their capital.

A strategy that is very similar to staking, since the higher the stake, the greater the profit obtained.

However, there is no single recipe or way to carry out this activity. Conversely, yield farming is a strategy that must be adapted to the target platforms that are planned to be used for this purpose. So generally, yield farmers use their large capital or borrow large to achieve their goal. In short, it is a strategy with many risks but also with great opportunities.

In fact, given the nature of DeFi, where you can request loans immediately, and make investments and asset changes quickly, yield farmers take advantage of this ecosystem to make their investments and carry out their farming strategies. In this way, a farmer can reach very high levels of liquidity in very short periods of time, leveraged by well-positioned loans, conversions and investments. The final result?

Big profits, not only because of the interest spreads, but also because many platforms offer usage incentives that end up being transformed into more capital for the farmer.

The Yield Farming boom

The beginning of the practice of yield farming can be traced back to 2017, at which time DeFi platforms began to grow rapidly. At that first moment, the attraction to DeFi was particular, especially due to the fact of obtaining additional profits within the bull market that the crypto market was experiencing at that time.

In fact, the project MakerDAO and DAI, laid the foundations for the first DeFi systems that allow this type of practice. The reason? DAI like stablecoin enabled the ability to offer loans with low volatility risks, at a time in the market where many traders borrowed to buy Bitcoin and other rising cryptocurrencies. This meant that anyone who invested in tokens like Maker (MakerDAO's governance coin) and DAI within lending platforms like ETHLend (now AAVE), was assured of significant profits.

They were the rudimentary beginnings of a practice that later morphed to a whole new level. In fact, it was at the end of 2019 and the beginning of 2020, when yield farming reached its maximum expression with the appearance of the Compound protocol and its governance token COMP. It was the curious model of COMP token distribution, which catapulted the platform and raised interest in this system to the maximum.

The Compound protocol called the attention of investors to inject money into their liquidity pools and thus obtain profits on their investments. Said profits came from two main points, the first one from the interests of the loans made by the platforms using the funds from said pool. While the second, came from the governance tokens that could be earned by participating in said platform as a reward. Ultimately, Compound is a platform that took yield farming to a new level.

As a result, in early 2020 the DeFi ecosystem began to suffer a steady rise in its total locked value (TVL), which at the time of writing this article already exceeds $ 49 billion. A record number that makes very clear the impact and importance of DeFi in the cryptocurrency sector.

Pros and cons of Yield Farming

In the case of yield farming, the main advantages of this strategy are:

1. It is a strategy that can be carried out today with different targets or spaces. Currently, there are several DeFi protocols dedicated to yield farming, some of them with several years of operation and proven robustness.
2. Allows farmers to get quite pronounced benefits on their "crops". Generally, these harvests occur in periods of 6 months to 1 year, and are reinvested to generate higher levels of profits. Indeed, yield farming is a strategy that favors cryptocurrency whales.

Among the cons we can mention:

1. It's a complex strategy and only recommended for people with advanced financial knowledge.
2. The implementation of the strategy favors those who have large amounts of capital to deploy, that is, whales. A person with little capital may not make any profit at all, and in fact, may lose money facing commission payments.
3. Another serious problem is the security of the smart contracts of the yield farming platform. If the platform has not been properly audited, there is a risk of theft of funds and the partial or total loss of them. This is not something isolated, in fact, cases like what happened in dYdX or bZx demonstrate this point.

Platforms to take advantage of Yield Farming

Now, let's know some platforms in which we can put this type of strategy into practice:

MakerDAO

MakerDAO is one of the largest and oldest DeFi projects in the crypto world. Under its umbrella is the Maker and DAI protocol, a stablecoin anchored to the price of the dollar and whose operation is completely decentralized. And all this running on a series of powerful smart contracts on the Ethereum blockchain.

Compound

Another great project in which we can put these two strategies into practice is Compound (COMP). This project that runs on Ethereum created a governance token called COMP, and at the same time a series of liquidity pools of currencies such as ETH, DAI (also SAI), USDC, REP, SAI, WBTC, ZRX, and BAT.

The objective of this platform is to use the liquidity within these pools to offer platform loans, and provide earnings in the form of interest and rewards to those who inject liquidity into the protocol. You can even carry out cryptocurrency exchanges between users of the platform, as if Compound were a stock exchange.

AAVE

AAVE, formerly known as ETHLend is one of the first DeFi protocols that existed in the world of cryptocurrencies. Its launch was on par with MakerDAO, being born from an ICO that managed to raise more than 17 million dollars at the end of 2017.

The idea behind AAVE is to create a market where the interest rate is algorithmically defined by supply and demand practically at the second to lend or borrow assets. The most financial definition would be money markets (market money).

His time in the crypto space and his quality have earned him to position himself today as one of the great DeFi projects in the world. In fact, at the time of writing this article, it has a locked value of more than $5,4 billion.

Balancer

One of the newest players in the DeFi world is Balancer. This is a protocol automated market maker with certain key properties that make it work as a self-balancing weighted portfolio and price sensor.

Balancer turns the concept of an index fund upside down: Instead of paying fees to portfolio managers to rebalance their portfolio, they charge fees to traders, who rebalance their portfolio by following arbitrage opportunities.

Corners

CurveFinance is one of the most curious DeFi products on our list. The purpose of Curve is create liquidity pools and bond curves that serve to provide high-efficiency stablecoin operations and low-risk returns for liquidity providers.

In this way, Curve protects users from the price slippage they would normally face in DEXs when trading from one stablecoin to another.

Uniswap

Uniswap It is a protocol that manages a decentralized exchange (DEX) that allows us to carry out exchanges with a wide variety of tokens such as Ether, Maker, DAI, USDC, BAT, among others. Bearing a close resemblance to Curve, Uniswap seeks create a fast and easy way to exchange value between different protocols, even in the midst of bear markets and profit from such trades.

Synthetix (SNX)

It is a platform, which is based on the value of its network token, the SNX. This platform provides a protocol by which synthetic assets or Synths can be traded on Ethereum. Synths are tokens that represent real world assets such as gold, Bitcoin, US dollars, Euros, among many other assets.