Yield farming or liquidity harvesting is undoubtedly picking up pace in the DeFi world as the next best initiative of value. In fact, DeFi platforms such as Flurry Finance have been one of the major reasons investors in the crypto space have shifted focus and are now diversifying to the altcoin space.
Yield farming is one of the driving forces behind decentralized finance’s market cap shooting from $500 million to a massive $10 billion. Asides from obvious pointers like the DeFi market cap, yield farming is making it easy for loans to be processed in the crypto space.
But the whole practice of liquidity harvesting did not just begin. In fact, you can trace yield farming back to 2017, a period when DeFi platforms experienced rapid growth.
Most people go into it for the sheer fact of cashing out on the extra profits the bull market of that period afforded them. Since then, yield farming has grown from a phase to a DeFi phenomenon. But really, what is yield farming?
Are Cryptos Getting Planted? Here’s What Yield Farming Is Truly About
The first thing that comes to mind when people hear yield farming or liquidity harvesting for the first time might be cryptocurrency in relation to agriculture. However, the term relates more to the banking sector in practicality.
Yield farming is the lending of crypto and receiving interest and fees in return. What makes yield farming profitable is the potential for coins to appreciate rapidly.
In other words, a user lends a decentralized platform their digital assets or cryptocurrency via smart contracts, and they get rewards for doing so. Users accumulate more rewards when the coin they lent out does well on the market.
Rewards, as you’d expect, come in the form of an ERC-20 token too. For now, most yield farming transactions are carried out on the Ethereum ecosystem, but there are indications this might change in the future to include other blockchains.
The reason for the ERC-20 tokens’ popularity in this sector is that some of the most popular DeFi protocols operate on the Ethereum network. In essence, they offer their governance tokens for liquidity harvesting/yield farming.
Decentralized Apps are at the Forefront of Yield Farming and Its Numerous Benefits
With great risks come great rewards, and yield farming has its perks. Yield farmers make life easier for DeFi platforms—simply moving their cryptocurrency funds to liquidity pools for profit or the highest possible interest goes a long way to help the DeFi platform’s operations.
Yield farming bears similarity with banks and what they do with customers’ funds, especially as loans to borrowers. In that case, banks lend to borrowers at rates that exceed what they pay to their account holders.
However, decentralized platforms such as Flurry differ from banks in a number of ways. For one, users can withdraw their funds from a pool at any time.
What’s more, yield farmers know it is a lot more profitable to dive into liquidity harvesting than leaving their funds in a savings account or their crypto wallet. Yield farming is no doubt a great source of passive income.
In all, yield farming as a strategy is thriving mainly because there are lots of DeFi protocols dedicated to it. Some of these protocols have years of operation and have been proven to be legit.
Disadvantages of Yield Farming?
While it has its perks, yield farming has some risks and is leaving some industry players skeptical. Popular platforms like Uniswap aren’t making things seamless enough for yield farmers.
The high amount of Uniswap gas fees is one discouraging factor to yield farming that is hard to overlook. But perhaps one of the biggest surprises and a stance you wouldn’t expect to see is the co-founder of Ethereum not being fully sold to the current idea of yield farming.
“Seriously, the sheer volume of coins that needs to be printed nonstop to pay liquidity providers in these 50-100%/year yield farming regimes makes major national central banks look like they’re all run by Ron Paul,” Vitalik Buterin tweeted while referencing ex-republican congressman known for seeking the end of the Federal Reserve when he ran for president.
Well, It’s Hard Not to Agree With Skeptics for a Number of Solid Reasons
For one, DeFi applications or dApps are usually open sources. Such a setup leaves them vulnerable to hacks, and 2020 showed just how vulnerable they could be.
The largely unregulated nature of yield farming makes it an easy target for con jobs and a hotbed for poorly designed services and products. Users have lost millions of dollars to DeFi fraud cases within 2020 and this year already.
And if you join DeFi platforms with unproven tokens or coins with an increased chance of losing their value, there could be real issues. The entire decentralized application ecosystem may well crash when such cryptos lose their values.
No wonder Buterin tweeted disapprovingly of yield farming and its instability. In one of his tweets in August 2020, he said,
“I personally am steering clear of the yield farming space completely until it settles down into something more sustainable.”
Liquidation is another real risk when it comes to yield farming. The risk stems from yield farmers borrowing and lending in quick succession to increase their revenue that could be mined from giving liquidity to DeFi platforms. A fall in the coin’s value can lead to a loss of all the yield farmer’s capital.
Notwithstanding these challenges, the crypto world is bracing up for the positive revolution projects like Flurry and a host of others are bringing into the Yield Farming space, making it safer, cheaper, and more sustainable to partake in.
Yield farming is bringing great benefits to both borrowers and lenders, with one harvest at a time. The traditional lending system is forever changed because of this initiative, and the process is ongoing.
There are still a number of telling issues that need fixing, especially in how secure and safe the whole ecosystem is at the moment. Once these issues are put to bed, we will be seeing yield farming gain even more adoption and going mainstream.