Krypto « Benefiting from DeFi Yield Farming: Expert or Child’s Play?

There are several ways that DeFi users can make a profit through profitable farming. However, it’s not that simple as the technology is still young, experts say.

Crop farming

Crop farming

Productive farming has seen some sort of Cambrian explosion in recent months, thanks in part to the emergence of various decentralized funding protocols. In its simplest terms, yield farming can be viewed as a process where users provide liquidity to DeFi logs and are rewarded with an income / yield, usually in the form of the platform’s native token offering.

The concept was first popularized by Compound, who made COMP tokens available to users who posted and borrowed tokens on the platform. The rate of return offered is generally high and prompts users to provide liquidity to take advantage of the financial resources of a new DeFi protocol.

That being said, this new method of token distribution has gained so much popularity lately – also because the returns are so high – that a number of copier projects as well as random logs have abused the practice since smart yield farming distribution contracts. are open source and there are a number of efficient decentralized applications that can be copied by almost anyone with the right technical know-how.

However, Bobby Ong, chief operating officer and co-founder of CoinGecko – a platform for tracking cryptocurrencies – believes the high returns are temporary and practically non-permanent. He also believes the rewards will become more and more watered down as more people become aware of the technology and provide liquidity to various protocols, with the average rate of return eventually falling, adding:

“Liquidity providers are rewarded in the form of native DeFi protocol tokens. For example, in order to get the actual return in USDT, the liquidity provider must sell the native token to the USDT, which further reduces the price of the native token and the yield. ”

How to benefit from high yield farming

How to benefit from high yield farming

When discussing the concept of productive agriculture, it is important to understand that there are three ways in which one can produce a yield, namely:

Money markets

Simply put, crypto owners can make a profit on their existing holdings by borrowing tokens through a decentralized money market like Compound, Maker, Aave, etc. In addition, different platforms offer different response rates. For example, Aave offers users both a floating rate and a fixed rate. However, in a similar fashion, Compound is offering its native COMP tokens to motivate both lenders and borrowers. While stable rates are more lucrative for borrowers, lenders generally prefer floating rates.

Finally, a unique aspect of DeFi money markets is that borrowers must « over-guarantee » all of their loans. This means that farmers have to deposit more money than they can borrow so that lenders don’t lose their assets if someone defaults. Simply put, the idea behind using an oversized credit line allows the lender to effectively maintain the « collateral ratio » at all times to avoid liquidation.

Liquidity pools

Liquidity is extremely important to most DeFi protocols as they allow their customers to deliver a hassle-free customer experience. From a financial point of view, liquidity pools offer users better returns compared to money markets, but they also involve certain risks.

One of the best known examples of such a setup is Uniswap, an automated market maker that offers users different pools of liquidity, each with two tokens. Technically, whenever a new pool is created, the person who first provides liquidity is responsible for setting the starting price of the assets in the pool. In this context, it is clear that an arbitrage opportunity arises if the initial value of the token deviates significantly from world market prices.

In addition, native platform tokens encourage liquidity providers to put the same value in the pool for both tokens so that their overall ratio remains constant even as more and more people start adding their chips to the pool.

Related Topics: DeFi App Overview: Navigating the New Crypto Financial Wave

While Uniswap uses the above framework, platforms like Curve use a different algorithm that offers users more attractive rates as well as less slippage when trading tokens. Additionally, Balancer allows users to create liquidity pools that can store multiple tokens (up to eight) at the same time.

Incentive programs

Income producers also have the opportunity to generate income in the form of incentives. For example, DeFi platforms like Synthetix give liquidity providers SNX tokens in return for their work. Likewise, Ampleforth enables users to earn native AMPL tokens for their liquidity-related endeavors.

When it comes to how easy it is to start your own productive farm, it all seems to come down to the person’s experience with crypto and DeFi technology. For example, some revenue management strategies are quite complex and require users to have immense in-depth knowledge of various platforms and a solid understanding of the financial and technological risks involved.

For less advanced users, there are therefore easier ways to participate in income farming, mainly through platforms such as Yearn.finance, where it is sufficient to deposit tokens such as Ethereum (ETH) or stablecoins and collect the income.

Gray areas

There are currently a number of revenue projects like Kimchi and Pickle that claim to be making profits in excess of 3000%. So it seems fair to consider how this is even possible, and is there a fraudulent element associated with these systems?

One of the main reasons behind the high returns is that governance tokens associated with platforms like Kimchi look more like stocks – that is, they represent a claim to profit. The future of the platform. Given that most protocols divert more than half of their hundreds of millions of dollars’ worth of capital to liquidity providers, it is not surprising that extraordinarily high returns can be achieved, at least in the short term. Kris Marszalek, CEO of Crypto.com – a crypto payments platform – told Cointelegraph:

“Projects like Kimchi and Pickle are a different breed than conventional platforms like Compound or Curve. The fundamental difference is that they don’t have a product that generates profits to add their symbolic economic value. Since these tokens derive all of their intrinsic value from promises of future revenue that may not materialize, they have to distribute a much higher percentage of tokens in a much shorter period of time to attract users. ”

Likewise, Jason Lau, Chief Operating Officer of the OKCoin crypto exchange, believes these APY percentages are misleading as these numbers are usually based on an expected return as the price is held for a full year. He added that the current returns from platforms like Katana, Solarite and Kimchi are based on a combination of hype, restricted access and hidden risks.

« The actual calculation of the yield percentages is not transparent, and farming for a given reward often only takes a few days to weeks, with projects often reducing the reward over time. »

Risks

There are a number of major risks associated with high-yield farming. For starters, the annual percentage return of most of these platforms is often given as a reward marker that is being grown – which is usually quite volatile. Also, once farming begins, there is tremendous selling pressure on the reward token, and as a result, the APY often drops quickly.

There is also the problem of non-permanent or divergent losses, where new projects typically reward those who provide liquidity in AMM liquidity pools that require two different assets. So if the price of the asset changes relative to each other, users could suffer losses from directly holding the underlying tokens. Joel Edgerton, Chief Operating Officer of the crypto exchange bitFlyer USA, shared his thoughts on the subject with Cointelegraph:

“The most fundamental risk is that the software code is corrupt. It may not work as advertised, or it may be compromised or hacked. These projects are still very young and have not stood the test of time or have been subjected to a stress test. Even if these projects claim the DeFi coat, there are still some unique sources of error such as: B. whoever wrote the code could mine the tokens in advance, pump the price, dispose of the assets and disappear with the money.

From a security point of view, Lau believes that the smart contracts that make up most revenue programs are often started quite quickly and therefore go unchecked. As a result, there is a possibility that these smart contracts could be subject to security flaws, either accidentally, as seen with the first iteration of the YAM token, or on purpose by the creator of the contracts.

Not only that, due to the complexity of these protocols, those that have undergone security clearance can also run into issues like bZx. Lau added, « A lot of these protocols are actually pretty centralized, with one or a handful of people making decisions and executing them. »

Ong also pointed out that protocol developers can lure high-yielding users into farm tokens – with a 50/50 uniswap pool in which ETH is involved – and issue their tokens later. Likewise, he pointed out that developers can steal staked tokens as some contracts sometimes require users to send tokens to a separate smart contract, which makes it easier to steal. Ong added:

“The rate of return offered is quoted at a certain price based on the price of the native token. If the price of the native token goes down, your returns can also go down significantly and you may not get the returns you expected. In addition, the front end can lie or hide some information that differs from the contract. «  »

Source: Article by Shiraz Jagati, Cointelegraph, see »Article in English

Disclaimer: The information and opinions contained in this report are for general information only and do not constitute an offer or an invitation to buy or sell currency contracts or CFDs. Although the information contained in this document comes from sources believed to be reliable, the The author does not guarantee its accuracy or completeness and accepts no responsibility for direct, indirect or consequential damage that may arise from the fact that someone relies on such information.

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Krypto « Benefiting from DeFi Yield Farming: Expert or Child’s Play?
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