George Harrap is a veteran crypto entrepreneur currently serving as the co-founder of Step Finance, a Solana-focused portfolio management dashboard, and Head of DeFi at YAP Global, a PR agency specializing in crypto, blockchain, and fintech.
Yield farming on decentralized finance (DeFi) protocols is evolving quickly as it overcomes teething problems. It’s now moving from an obscure financial strategy into an easy way for even the less-than-fanatic user to maximize profits and reduce risks. But in this relatively niche field there is still lots of room for improvement.
This piece covers how the yield farming space is changing, how the average farmer can maximize their crypto returns and reduce risks, and overall trends in the space.
Yield farming in DeFi is a way for liquidity providers to put their existing capital to use by lending or staking their idle assets in various liquidity pools in a DeFi market to earn passive income.
This interest in yield farming may be credited to Compound (COMP), the Ethereum (ETH)-based money market protocol, which began issuing its governance token, COMP, to users last June. While Compound did not invent yield farming, the distribution of its token attracted liquidity providers to farm COMP by supplying liquidity to the protocol, creating a massive incentive for users to farm.
Since then, new blockchains with lucrative projects have been popping up every month in the DeFi space such as Polygon (MATIC), a layer two blockchain scaling solution, and Terra (LUNA), a DeFi and blockchain protocol that offers several stablecoin options.
Solana (SOL), a public blockchain created in 2020, is aiming to strengthen the DeFi ecosystem through fast and scalable decentralized applications. Solana’s swift growth in DeFi is fueled by fast transactions and low fees. Because of this, Solana crossed over USD 1bn in total value locked (TVL) in May [due to a correction in the market, it dropped below USD 600m in June – Cryptonews.com]. Solana is one project that is changing the space by bringing affordable transactions that allow for super cheap compounding.
There are plenty of projects in the space that have expanded cross-chain, such as C.R.E.A.M. Finance and Harvest Finance, which have allowed users to earn across a variety of blockchains. Composability has also increased significantly since the ‘DeFi summer’ of 2020 and many more projects using coins that are already wrapped or staked in their own protocols are increasing the depth of wrapping. All in all, this has contributed to making the yield farming space more easily accessible and improving the user experience.
Yield farming is considered the wild west of DeFi and plenty is still being learned about this space.
The most profitable strategies for yield farming are complex and aren’t as easy as they sound, but there are ways that farmers can maximize their profits and reduce risks.
One way is by hedging a user’s farm positions on a crypto derivatives exchange. If a user holds a token which earns yield, what happens when the price goes down? A user protects it by shorting their token on a crypto derivatives exchange, which allows them to remain neutral, in addition to earning yield on their farm.
Trends and alternatives
During the summer of 2020, food-themed coin projects became the latest trend for investors. Everything from yams to burgers to hotdogs to sushi was being turned into coins that took the crypto community by storm. Yet despite taking investors on a wild ride last year, food-dubbed coins have all but fizzled out which indicates burgeoning maturity as developers turn to building projects with longevity and real-world use.
The term capital efficiency has become something of a cliche – especially in the crypto space, but the commonly coined term can be put simply as an influx of money into various ecosystems that are creating more opportunities as a result.
This has very much been the case in DeFi recently as the space garners more attention as an alternative to traditional crypto investing.
Solana utilizes a different programming language compared with other blockchains that requires greater planning to build new projects, but this however increases quality. For example, on Binance Smart Chain developers can copy and paste food farms and food coins to create replica projects, but on Solana you have to put more care into building projects because it uses the Rust programming language, which ensures that people are building better tools and shying away from attention-grabbing “get rich quick” protocols.
As DeFi protocols enabling yield farming continue to grow, users will have more options to reduce their risks by choosing mature projects with a history of success and lower fees by using alternative blockchains.
Many people question whether blockchains like Solana will take over Ethereum, but I believe in a multichain world. The TVL in DeFi is growing at an exponential rate hovering around USD 40bn at the beginning of this year and topping over USD 100bn. Each blockchain has its own spin on things and provides a specific niche of services and a unique value.
Within the multichain universe, there are many projects working to fill the gaps so that things like cross-chain farming are possible.
Portfolio management dashboards like Step Finance take some of the complexities out of DeFi by aggregating all information into one place so that the user can maximize their returns and focus on their portfolio without wasting time manually compiling information.
The DeFi space is designed to continuously change as new farms and projects pop up offering higher and higher returns. Getting involved with the community behind the project is one great way to do your own research and stay on top of DeFi trends in order to grasp the ebbs and flows of this billion-dollar industry.
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