DeFi yield farming


Productivity, "high-yield farming" or "farming" is the practice of placing in a pool or blocking part of the cryptocurrency in exchange for a reward. All in all, a well-known investment strategy that has regained popularity due to the growth of the decentralized finance sector. In short, the idea behind pharming is that users can make a profit in exchange for various forms of participation in DeFi applications. This includes the regulation of the project, and the provision of computing or monetary resources to it, and simply the active use of tokens associated with it.

Many people compare the current situation to the boom in the initial coin supply in 2017. And for a reason. What then, what now, each new project attracted a huge number of those wishing to get quick profits, who actively invested their money in it. And this led to both the strengthening of tokens and an increase in demand for them. But the ICO boom ended quite quickly and with numerous scandals, so many predict the same outcome for decentralized finance.

How does yield work?

There are many mechanics that depend on the features of a particular DeFi app. But the initial option was to offer users some share of the commission in exchange for depositing funds into the liquidity pool. For example, Uniswap or Balancer work according to this principle. But at the moment, the most popular pharming method is to obtain and sell various internal tokens through the active use of the respective DeFi applications.

The beginning of this method was laid in the early summer of 2020 by the Compound project, which announced that it would issue a new COMP management token, which it would distribute to lenders and borrowers actively cooperating with the project. This initiative quickly propelled him to the top of the DeFi rankings.

Other companies have followed suit. Surprisingly, many of them repeated the success of COMP, for example, the internal BAL token of the Balancer project, the price of which rose to 230 percent almost in a day.

So farmers are extremely active in monitoring all innovations in this segment. And not just like that - here you need not only to be in the forefront, but also to choose an investment strategy that promises maximum profit. As a rule, this is implemented by placing tokens in different protocols and composing real chains from them. The basis is usually stablecoins, such as DAI, Tether (USDT) or USD Coin (USDC). Simply because they are easier to work with.

Benefits and risks

The advantage here is obvious - profit. If you invest in a project at an early stage, you can get a reward in the form of tokens, the price of which can grow very much. They can then be either sold or reinvested in other DeFi projects, which will bring an even greater harvest.

The problem is that the initial investment takes money. Big ones. Only this will provide a normal profit. But at the same time, you need to be prepared for the fact that everything does not go as planned - due to the high volatility of the market. An example is the situation with HotdogSwap, when the market suddenly collapsed and many investors lost large sums.

It is also worth remembering that the work of new projects can be accompanied by technical problems - errors and vulnerabilities in the code and smart contracts. And if such flaws are revealed, interest in the project will instantly collapse, as will the price of its tokens. An example is the situation with the bZx project, which was repeatedly broken, and recently also withdrawn assets worth about $ 8 million from it. Or the YAM Finance project, whose token first reached a capitalization of $ 57 million in 2 days, and then collapsed downward when a serious error in the code was revealed, and further audit found many more serious flaws.

Opportunities and Challenges

The main problem with the productivity of DeFi stems from the fact that the vast majority of applications are based on the Ethereum blockchain, which is known to have huge scalability issues right now. Simply put, more interest, more transactions, more network load, slower work, higher commission, less profit. And the further, the situation will only get worse.

The problem is that the developers are mainly working on Ethereum 2.0 - a new blockchain that is not very compatible with the old ecosystem. And various locks, bridges and other second-level solutions are under development.

On the other hand, not Ethereum alone. Applications based on other blockchains are beginning to gain popularity. For example - Binance Smart Chain, which became the basis for such a project as BurgerSwap and a number of others, so far less popular. And the worse the situation with the Ethereum ecosystem, the more actively farmers are looking at alternatives, which in general is extremely useful both for DeFi in particular, and for the world of cryptocurrencies in general.

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