Last update:
June 26, 2023, 6:53 a.m. EDT | 4 minutes read
Chyna Qu. Source: DeFiner
Chyna Qu is the co-founder and chief operating officer of DeFiner, a decentralized financial network for crypto savings, loans and payments.
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Source: Adobe/A Linscott
Yield farming has become a mainstream DeFi (decentralized finance) practice that involves investors or liquidity providers and puts cryptoassets to work in the many DeFi applications. Yield farmers use smart contracts and protocols to generate maximum returns from their capital (tokens); They move their assets using various strategies that involve providing liquidity and extending credit. While yield farming is a simple supply and demand cycle, farmers face some significant risks, such as: B. Smart contract errors, sudden liquidation or token devaluation.
Just like the ICO (Initial Coin Offering) boom in 2017, which attracted widespread media attention and increased the adoption of blockchain technology, there is no doubt that DeFi has become the most important crypto trend in this pandemic year. This is reflected in the total value locked in DeFi contracts increasing from just $1 billion in February 2020 to $10 billion in September 2020, with most of the growth occurring this year.
Source: defipulse.com
However, there are a number of important differences between the current DeFi boom and the previous ICO boom that suggest that DeFi has achieved a more sustainable market than during its ICO heyday in 2017. First of all, the market is more mature and has experienced people Investors get involved through well-thought-out strategies. Second, the hype around yield farming is significantly less than it was with ICOs in 2017 and 2018. This begs the question: How will DeFi evolve to conquer a more sustainable financial ecosystem?
How sustainable is the increase in cash crop farming?
June 2020 marked the rebirth of yield farming and its introduction into the mainstream as Compound began distributing its new token COMP. Liquid mining soon helped COMP become the leading DeFi token within weeks. Compound allowed users to earn COMP simply by borrowing and lending the governance token. Some farmers took out leveraged loans to borrow the tokens with the highest COMP yield, resulting in very high returns. This liquidity mining pattern was soon transferred to other DeFi projects and quickly became standard practice in the DeFi industry.
There are now many open source projects and applications involved in liquidity mining and yield farming protocols. At the time of writing, top projects such as MakerDAO, Uniswap, and Aave lead the DeFi space in terms of total value.
The Sushiswap scandal that rocked the DeFi space in September put a spotlight on devaluation risks after Sushiswap's founder converted all of his 2.5 million Sushiswap tokens into Ethereum (ETH). Initially viewed by many as a crypto exit scam, devaluation has now become one of the most feared risks in yield farming. The Sushiswap saga left a number of questions. The most important was: How sustainable is the increasing popularity of yield farming?
For traditional finance professionals and even blockchain enthusiasts, yield farming and DeFi seemed like too much of a risk – exit scams, insane APYs (annual percentage returns), and failed projects are just a few of the reasons why some critics and media outlets have turned yield farming on its head fail in the long run. However, we must remember that, just as with cryptocurrencies, excessive media hype and narratives are to be expected with any new decentralized finance concept.
While I believe that platforms using future revenue to reward users with inflated APYs may not be sustainable in the medium to long term, the increase in the number of new projects and products driven by yield farming will ultimately setting a precedent for the longevity of decentralized finance. Since many DeFi products benefit from large volumes and increased liquidity, most of their sustainability depends on yield farming and how well new products thrive.
Scaling and regulation are the next steps for the long-term sustainability of DeFi
These innovations have the potential to change the face of finance and drive mainstream adoption of cryptocurrencies and other similar assets.
On the other hand, while yield farming continues to grow and increase awareness of DeFi, it now faces Bitcoin's age-old problem: scalability. The Ethereum network's ability to process multiple transactions is increasingly at risk as congestion on the network leads to slower transaction times and ultimately higher gas (transaction) fees.
ETH fee table:
Source: bitinfocharts.com
Every time I think about yield farming and open finance, I go back to the history of Bitcoin and think about how far the crypto and digital asset space has come. In the next few months, a few more failed projects, especially those with unrealistic APYs, could cast a negative spotlight on the DeFi world. But for the many remaining DeFi projects, yield farming will become an industry standard that goes beyond DeFi and becomes an innovative financial solution for many.
The immediate future looks bright for DeFi with the impending launch of Ethereum 2.0, which is expected to improve DeFi's quality of service by reducing congestion on Ethereum, thereby enabling faster and cheaper transactions. As DeFi assets under management accelerate, yield farming should provide practices that lay the foundation for a sustainable decentralized economy.
Yield farming has become very popular among market participants looking to profit from the many emerging DeFi projects. But as the DeFi ecosystem moves to the next stage of development, yield farmers should consider how their practices can evolve to benefit the broader decentralized economy. Only then will we have a truly scalable and transformative ecosystem capable of attracting the mass adoption that the original DeFi market makers initially believed possible.
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Learn more:
DeFi Gains “Optimistic” Fans, But Ethereum’s “Crown” Is in Danger – Survey
Get ready for crypto banking, DeFi and CBDC surprises – venture capitalists
Not a DeFi bubble, just “a blip”
The four biggest risks facing DeFi investors
The DeFi sector is breaking the law – it’s time to act
Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers
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