An Objective Look Into Yield Farming: Worth It, Or Modern Bubble
Diving into the latest trend in DeFi (decentralized finance), called Yield Farming, in order to better understand what it is, how it works, and assess whether or not it is really a viable component of the broader Ethereum ecosystem.
Ah, Ethereum. The platform behind one of the most successful digital currencies in the history of economics, especially when focusing on terms like adoption, utility, and versatility.
That Ether, yes. The same that rose to $1400 apiece in January 2018, before plunging to $87 in March 2020, and eventually recovering to $440 as of August 16th, 2020.
I mean, Ethereum is great and everything, and in case you’re one of those “not a trader”, but hyped about blockchain-powered applications, it should only make natural sense.
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Yet, the Ethereum subculture that helped ETH gain back its strenght was neither the NFT scene nor Crypto-Gaming, but in fact DeFi, as in Decentralized Finance.
Then again, on its own turn, DeFi is cool and everything, with all these wallet-to-wallet web3-enabled DEXs (decentralized exchanges), flash loans, CDPs, swaps and the rest of the DeFi arsenal, but the true spearhead during this bullrun was crafted using yield farming products, including but not limited to yearn.finance, yam.finance, based.money among other relevant Ethereum by-products.
What Exactly Is Yield Farming
In a nuthsell, yield farming allows Ethereum users to provide liquiduty in terms of Ether (ETH), as well as ERC-20 subtokens and stablecoins in exchange for a small interest rate that will be attached to the provider’s stake with a yield farming product.
Even simpler, you can analogize yield farmers as being the FED of decentralized exchanges. Yield farmers help liquidity platforms that supply popular DeFi products such as Uniswap, Compound, etc. by providing their own funds into the respective yield pool to cover the platform’s needs in terms of liquidity. That is often dubbed as liquidity mining.
Still don’t get it? Coindesk explains that liquidity mining is when a yield farmer gets a new token as well as the usual return (that’s the “mining” part) in exchange for the farmer’s liquidity.
In addition, Richard Ma, from Quantstamp, a smart-contracts auditing company suggests the idea is that stimulating usage of the platform increases the value of the token, thereby creating a positive usage loop to attract users – could that be aka a typical Pyramid? Let’s find out.
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yearn.finance or YFI might not be the first yielf farming product, but it’s certainly the first that skyrocketed up to the top-25 cryptocurrencies by market capitalization, and in a couple of months given time since its launch earlier this Summer.
While other popular ERC-20 tokens also climbed their way to the top, with Chainlink (LINK) sitting on the 5th spot right now, YFI managed to gain some 100,000% in nearly a week. Whaaat?
YFI has only 30k tokens, while over 28k of them are already curculating in the broader DeFi market, so that should make some sense, yet analogizing the fact it started with a price per token at around $3 in July, YFI’s current tag that exceed $30,000 apiece is astonishing at least.
It didn’t took long before DeFi investors identified the new toy and in some way, they helped YFI pump – like for good, if you paid any attention to the numbers mentioned above.
Soon, YFI counterfeits, forks, and copycats started to pop all over the space, with some of them being masters of their own success story as happened in the cases of YFII, YAM, and BASED.
But the question is why would anyone invest in these tokens since they are not regulated, their smart-contracts are not audited, their owners barely have any experience in DLT architecture, hence most of them simply copy paste Synthetix’ protocols, or rippoff YFI itself, which basically did the same. What so cool about them?
While you can find countless Tweets about who’s right and who’s wrong, whether yield farming is a well-planned scam or not, I believe that the main reason people invest in yield farming, and more specifically in YFI, is exactly because it makes sense to old investors and almost zero sense to crypto investors.
What I mean by that, is that old folks have been in the yield/bonds scene for quite some time. So a typical yield that promises guranteed small interest rates, and not speculative volatility is exactly what they’ve been waiting for to dive into the crypto realm.
At the same time, looking at the funding YFI accumulated during the past two months, one can tell that we’re not talking about your typical DEX traders who’d put a couple ETH here and there.
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Instead, we’re talking about decades of millions being locked in YFI, indicating two possible sources:
A. YFI is well-organized scam, pumped by insider-trading whales.
B. YFI is backed by old multi-millionaires, and possibly billionaires.
You do the math on this one, and pick the answer that suits you. For me, anything that rises so fast out of nowhere, without making any noise is dangerous for your wallet at best.
Now, I am now trying to say that yield farming is by default something you should stay away from. YFI might look volatile, and even if most yield farming projects are based on YFI, there are still some gems you might find using smart contracts auditing tools and services.
Keep in mind, I haven’t invested in YFI or any other yield project whatsoever and I’ll be probably staying out of this until the hype is over.
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