Originally published in NOWNodes Blog.
Yield Farming is the talk of the town in the crypto world for some time now. Did the term “Yield Farming” piqued your interest? No worries if you haven’t heard about it. We will explain everything that is to explain about yield farming in this article. You must be wondering what exactly is yield farming, how does it benefit people, and are there any risks involved in it.
We must be diligent in our investment choices regardless of the type of investment instrument. There is tremendous competition among crypto investors today, and that along the high gas prices makes yield farming challenging. Hence, it requires a considerable sum of money to turn a profit in yield farming.
Yield Farming! What’s That?
Yield farming includes a crypto asset holder putting his crypto assets to work by investing it in a DeFi market. In return, they are paid a fixed or variable interest on their invested crypto assets. Purchasing a crypto coin like ETH and waiting for the price rise of your crypto coin is not yield farming.
Yield farming doesn’t mean making a profit by buying a crypto asset at a low price and selling it when its price rises by a considerable margin. You get involved in yield farming when you invest your crypto asset such as ETH on a DeFi lending platform for a return. Many of the DeFi players also hand out their new cryptocurrencies to the investors. They do it to attract more investors.
The DeFi platforms can attract more investors by offering their newly created cryptocurrency along with the interest on the crypto assets lent by the investors. On the other hand, the investors too, are benefited as they receive the DeFi platform’s crypto coin along with an interest on their invested crypto assets. The investors will make a real profit when the price of the DeFi platform’s coins appreciates.
The Roots of Yield Farming Frenzy
Compound is a leading Ethereum-based credit market. Yield farming came into the mainstream with Compound distributing COMP, its governance token. Compound distributed its token to the protocol users on June 15th. The current demand for yield farming took off with COMP’s rise, and this sudden growth helped Compound become a market leader in the DeFi segment.
Now, you must be wondering why Compound team decided to launch their crypto token to distribute among its users. There’s a strategic reason behind it. Before Compound came up with its governance token, the Compound team was mainly responsible to govern the Compound protocol. Compound was not a fully decentralized platform at that time. To enable decentralization, a COMP token was launched by Compound, and this token will be used to govern the Compound protocol.
What if we tell you that yield farming did not start with Compound? There’s no doubt about yield farming coming into the attention of the crypto community with the distribution of COMP tokens. Yield farming existed in DeFi space for some time now. Synthetix has the honor of introducing protocol token rewards to users in return of them providing liquidity to the Uniswap V1’s sETH/ETH pool in July 2019.
Is Yield Farming a fad?
Experts are voicing their opinions that there are similarities between the frenzy for yield farming with ICO frenzy in 2017. Many investors invested billions of dollars during the ICO frenzy with hopes for astoundingly high rates of return. It resulted in millions of disappointed ICO investors as many of the ICOs proved to be not worthy enough for market traction.
Of course, there is a difference between the tokens distributed through ICO in 2017 and today’s governance tokens. The governance tokens are being issued by established protocols whose product is seeing market traction and increasing adoption rate. These protocols are also adding value to the crypto ecosystem. Hence, the governance tokens are not an outright scam like the majority of ICO tokens of 2017.
We expect that the current frenzy around yield farming will continue for the foreseeable future. However, there will likely be a market correction down the road. It will lead to a decrease in the yield rate. However, for now, yield farming is attracting new users, and in turn, more developers are getting attracted to the DeFi ecosystem. We can safely say that decentralized finance will benefit from the growth of yield farming.