Decentralized Finance (DeFi) took the cryptocurrency world by storm in 2020 and we all know why. Money talks and the language is universal. If you make the right move at the right time, you can strike big and become yet another self-made crypto millionaire. That’s the dream and it has certainly been the case for some.
Tech-savvy cryptonauts have made fortunes navigating this nascent industry, finding the best ways to generate “passive” income by actively researching and investing in the most profitable products in DeFi, generating incredible returns on their investments through what is now known as “Yield Farming”.
To those that have done so, I salute you. It takes time, patience, and intelligence to be one of the first movers in any industry. When it comes to something as experimental as DeFi, however, it also takes a certain level of risk appetite. These people have paved the way for the masses, generating interest, validating the industry, and serving as the proverbial “canary in the mine”.
Fast forward to 2021 and DeFi is still the talk of the town. In this short time, the industry has even branched out into other niches with the advent of Non-Fungible Token (NFT) and GameFi platforms, showing that the possibilities are endless when you equip people with the tools needed to create peer-to-peer ecosystems.
Nevertheless, the core elements of DeFi are here to stay and as more tools and information become available, I expect to see more people jumping in to take a piece of the pie. This is exactly what my team and I are trying to accomplish with Coinchange. We want to make sure that everyone can participate in this brave new financial world, regardless of their technical knowledge.
In this regard, Coinchange serves as a bridge between the common retail investor and the complex world of DeFi investment. Our goal is to provide a simple and safe environment where people can take advantage of these products without having to deal with its inner workings. However, I also feel it’s important to lift the curtain and show you what makes this blossoming industry tick.
Today, I want to share what I consider to be the definition of Yield Farming. I feel this is important because the term has been used so loosely within the industry and there are many contradicting sources of information as to what Yield Farming is.
Do not be alarmed, however, as it is normal for such things to occur in this incredibly fast-paced industry. Coming up with concrete definitions for complex concepts takes time, especially as they keep evolving before our eyes.
Nevertheless, there are a few distinctions that need to be made in order to fully understand the concept. By rooting out misconceptions, this post will take you through the building blocks of Yield Farming and will hopefully help make things clearer.
Decentralized Finance can be easily described as a peer-to-peer financial industry. Instead of relying on banks, exchanges, and other centralized institutions, we, the people, can now take on the role of clients and service providers, according to our needs and resources.
Smart contracts replace the old third-party service providers and allow us to interact directly. Instead of depositing funds in a bank which would then be lent to people looking to access capital, we can simply lend and borrow directly from each other.
Take out the middleman and what you’re left with are higher return rates for those who provide liquidity and lower interest rates for those taking out loans. DeFi goes way beyond this. Check out my previous post about DeFi and CeFi to learn what sets these two industries apart.
Delving deeper into DeFi, there are many products that will allow you to generate “yield” on your holdings. For example, you can provide liquidity to lending protocols like Aave, to decentralized exchanges like Uniswap, or insurance protocols like Nexus Mutual or Opium Finance. In turn, you will receive a reward in the form of trading fees or interest accrued in the process of lending to these platforms.
Is this yield farming? No. This is what is known as decentralized Liquidity Provision. It’s a simple concept taken from traditional finance and applied to the decentralized world of blockchain.
Going a step further, there are projects that provide additional rewards to liquidity providers in order to generate liquidity and make trading a specific token or pair more appealing. This is known as Liquidity Mining and is also often confused with yield farming. In this case, governance or utility tokens will be allocated as rewards to people providing liquidity.
While both of the aforementioned products will grant you a yield, they should not be considered Yield Farming.
So, now that we’ve gotten rid of some misconceptions, let’s get down to business: Yield farming can be defined as a complex investment strategy in which the investor will take on varying degrees of risk and exposure in order to maximize their gains.
Yield farming is the practice of actively managing passive income. The investor can maximize his earnings through the use of leverage and amplify their access to capital, move funds between several DeFi platforms, and take advantage of liquidity provision and liquidity mining rewards.
Defining Yield Farming is complicated, as there are several different strategies that can be taken. Different strategies will incur different levels of risk, depending on the amount of leverage used and the number and quality of the platforms used to compound profits. Higher risks come with higher returns.
With the advent and growing popularity of yield farming, several projects have surfaced to provide automated Yield Farming strategies. These simplify the process for users and reduce the gas fees associated with the activity by pooling user funds in smart contract vaults that group transactions into one single transaction in order to reduce costs.
Coinchange is one such platform, creating a bridge between the DeFi and traditional finance system through an automated strategy (yield oracle) that scours different protocols for the best opportunities and ensures up to 25% APY on users’ stablecoin holdings. Focusing on simplicity and ease of use, our project aims to mitigate some of the risks associated with the activity, including impermanent loss and smart contract hacks.
As so, we believe to have achieved the perfect balance between ease of use, low risk and high profitability, targeting all demographics of the cryptocurrency and traditional finance investment sectors. Users can manage their funds in a single place through an intuitive user interface without having to worry about manually searching for the best yield farming opportunities.