An introduction to the rise of DeFi and the manic world of Yield Farming.
Within the Cryptosphere, 2020 has undoubtedly been the year of DeFi.
DeFi, short for “Decentralised Finance”, describes what a growing class of cryptocurrencies is trying to achieve. These DeFi projects are using one or more crypto assets in order to create financial services which are more open and convenient than those available in the traditional banking world.
This could include, for example, a platform that grants users access to a loan, without the need to go through an application process or even to require permission from a third party. These loans are often given in stable-coins, which are non-volatile crypto currencies that are kept at the value of government currencies, such as the US dollar. The implications for such easy access to personal finance in countries with particularly complicated legacy banking systems are huge, and the innovation is only just beginning.
Many of the projects that are being built today will serve as the backbone of the decentralised finance layer for years to come. For other projects, especially those looking to simply cash in on market excitement, it will be a case of here today, gone tomorrow.
Yield Farming has, for better and for worse, been at the cutting edge of DeFi for the past few months. You may have watched on, confused, as yield farming ‘Chads’ spoke enthusiastically about farming hot dogs, swapping sushi and pouring large amounts of money into a protocol that has a sweet potato as a logo.
Huge percentage returns have been reported, but as with all get-rich-quick schemes, one should proceed with caution and seek expert advice before jumping headlong into the manic and convoluted world of ‘food’ tokens.
Two DeFi projects were arguably responsible for kicking off the yield farming craze: the Compound Finance dapp and the Uniswap decentralised exchange.
Launched in June, Compound allowed users to lend their crypto assets to the platform in exchange for high interest rates and additional rewards in the native COMP token. This model was one of the first to offer users high ‘yield’ in exchange for ‘planting’ their otherwise stationary tokens. This proved to be very popular, and the price of the COMP token increased accordingly.
This, however, lead to the creation of ‘vampire’ platforms like Hotdog Swap and Sushi Swap, which copied the open-source code from the Uniswap exchange, and leeched away its users and liquidity by offering greater rewards in SUSHI or HOTDOG tokens for switching to their new copycat platforms.
At the initial value of these tokens, yield farmers appeared to be getting rich overnight. But those familiar with Ponzi schemes will know what happened next: users who sold quickly enough made a fast profit, whereas those who joined late were left with handfuls of SUSHI and HOTDOG tokens that were rapidly using their value on exchanges.
It’s a familiar story amongst many other failed yield farms. These projects are unaudited by anyone either inside or outside crypto, and all that is required to start such a scheme is a pre-mined token and a handful of liquidity pools that are ready to be milked. Worse still, these same pools are used for dumping the useless tokens, so participants find that not only did they ‘farm’ an increasingly valueless token, but that they had been slowly giving away their original, valuable tokens (BTC, ETH, USDC etc) to the liquidity pool. And thus the classic pump and dump is complete. A few people make money at the expense of those who come too late to the party.
The crypto currency world is still at the cutting edge of financial and technological innovation. For this reason, new crypto investors more than anybody else have to keep in mind that if something looks too good to be true… then it probably is. Scams like this come around every year, but always in a slightly different form. The ICO craze of 2017 and the Bitconnect Saga of 2018 are two notable examples of when malicious actors persuaded people to hand over millions of dollars’ worth of Bitcoin and Ethereum in exchange for exciting, new tokens that promised huge returns, but offered only huge losses to the majority of unlucky investors.
But, it has to be said that some valuable crypto projects were born out of those Initial Coin Offerings in 2017. Likewise, it appears that the world of yield farming can still be of some benefit to the crypto industry in general.
yEarn finance, pioneered by developer Andre Cronje, provides a useful service by acting as an automated yield farming platform, but with the additional benefit of being completely transparent and governed by users. As the developer, Cronje made sure that the native token was fairly issued between yEarn users only, and that there was no investor ‘pre sale’ or special token allocation. This, coupled with the relative ease-of-use, means that crypto enthusiasts can be automatically guided through finding the best returns on their assets without worrying about being scammed or making costly mistakes on an overly-complicated platform.
Pickle Finance is another new DeFi experiment which aims to positively benefit the crypto community by adjusting their farming yields in a way which helps keep the price of stable-coins (such as USDC and DAI)… stable. This is important for the crypto economy, because sometimes people wish to settle bills or make payments in a currency which isn’t going to change rapidly in price from one day to the next. Pickle Finance does this by offering higher rewards for stable coins which are needed, and reducing the rewards for those that are not.
For now, all of these projects are new and should be considered as highly speculative. Novel ideas can sometimes be tempting in the midst of a speculative rush or the promise of instant riches. This is why it’s important to have a few wise old heads on your side, to help you distinguish between the good, the bad and the downright ugly.
For more information on DeFi, Bitcoin or any other Crypto-related issue, why not contact advisors below.