DeFi: Farming For A Profitable Yield

Asia Blockchain Review
August 3, 2020

The Decentralized Finance (DeFi) ecosystem which has established itself as the pretender to the throne through its innovative investment strategy in the form of yield farming, is the topic of discussion.

With more than half a million lives having been lost to the coronavirus, the Covid-19 pandemic is proving to be quite a formidable foe for humanity.

On the economic front, the Covid-19 pandemic has devastated the global economy with Uncle Sam i.e the United States (U.S) bearing the brunt with the International Labour Organization (ILO) estimating that a mind-boggling 305 million Americans have lost their jobs during the period from April 2020 to June 2020.

As if things are not bad enough, the U.S Federal Reserve had on 10 June 2020 voted to keep their interest rate levels near zero (0.0% to 0.25%) for the short to mid term future to support the country’s economic recovery.

If the world’s largest economy is being subjected to such a beleaguered state of affairs, one can’t even begin to imagine how the rest of the world is faring as their respective economies are besieged by the havoc-wreaking Covid-19 pandemic.

In these unprecedented times, the economic devastation caused by the Covid-19 pandemic has highlighted the inherent fault lines of the conventional financial system.

Safe to say, it defies logic to endeavor to search for a remedy for the devastation through the conventional financial system with its regimentalized and inflexible capitalistic framework because as Albert Einstein once said “we can not solve our problems with the same level of thinking that created them”.

DeFi and Yield Farming: A Synergistic Combination

From the outset, the DeFi ecosystem consists of decentralized applications through which internet users are able to access a host of crypto-based financial and investment products and services.

At the early stages of its inception, the central idea of the DeFi ecosystem as illustrated in the first mainstream use cases is to allow users to earn income by depositing their crypto to earn a high rate of return.

Yield farming essentially takes this central idea to another level by allowing users to earn compound interests by leveraging on their crypto to invest in DeFi markets particularly in Ethereum-based crypto assets which are collateralized by USD-backed stablecoins.

A supporting feature of the DeFi ecosystem which facilitates yield farming is the fact that DeFi money markets generally adopt an over-collateralization operating model whereby borrowers are required to deposit assets which are greater in value than that of their loans.

Further boosting the viability of yield farming is the supercharging effect brought about by the liquid mining phenomenon whereby a yield farmer obtains new tokens on top of the usual return as a reward for the farmer’s liquidity.

Risks Management for Yield Farming Activities

Leading the way in the yield farming domain is the decentralized lending protocol Compound which as of June 2020 has a locked in value of US$1 billion.

A yield farmer who uses Compound’s platform will effectively be constantly moving around his assets on the platform with the movements of the assets being based on the pool which is offering the highest annual percentage yield (APY) at any particular time.

Nonetheless as with any form of financial investment, yield farming does bring it certain risks especially taking into consideration the fact that yield farming is only profitably viable when undertaken on a significant scale given the high level of competition among farmers and the high gas prices i.e. the price value required for the execution of a transaction on the Ethereum platform.

In order to mitigate the risks associated with yield farming, farmers can have recourse to the liquidity pools provided by Automated Market Makers (AMMs). As a liquidity provider, AMMs such as Uniswap provide liquidity to a pool of funds by depositing assets into the pool.

As the fundamentals of financial investment goes, higher levels of liquidity reduce the instances of trade slippages whereby this in turn enhances the price discovery process thereby lowering the risks associated with yield farming.

People’s Power Boost for the Financial Investment Domain

In this capitalistic society of ours where there is a perennial need for money, it is only natural that we find ourselves constantly on the lookout for opportunities to grow our wealth.

With the conventional financial system letting us down with their record low-interest rate levels, the DeFi ecosystem with its yield farming innovation offers a saving grace of sorts for those who are looking to boost their earning power.

Unlike the conventional financial system where central bankers dictate the terms of engagement, DeFi returns the autonomy to the masses thereby enlivening the true spirit of democracy and standing testament to the notion that might is not right.

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