An in-depth explanation from an expert behind the yield farming boom.
Decentralized finance (DeFi), an emerging financial technology that aims to eliminate intermediaries in financial transactions, has opened multiple income opportunities for investors. One such investment strategy in DeFi is yield farming, which involves lending or staking cryptocurrency coins or tokens to earn rewards in the form of transaction fees or interest.
Yield farming is one of the key growth drivers of the DeFi sector right now, helping it expand from a market cap of $500 million to $10 billion in 2020 alone.
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In this context, The Tech Panda spoke to Mohit Madan, CEO and co-founder of UniFarm, a group staking and yield farming platform that offers its users alternative investment opportunities while increasing the value of several visionary web3 startups.
Mohit Madan
Because of its similarity to the traditional credit system, investors are more likely to invest in it. Here, one is enabled to earn passive income by buying and locking their crypto vaults to be used by DeFi applications to provide liquidity
According to DeFi Pulse, $95.28 billion in crypto assets are currently locked in DeFi, compared to $32 billion last year. Madan says that one of the key catalysts for this growth is rising investment in yield farming, which presents a unique ROI-centric investment opportunity. In the past year, various projects have emerged that offer yield farming.
“Similar to depositing funds into a savings account to receive interest payments, crypto investors can now freeze or use their funds to provide liquidity across a range of decentralized platforms and receive periodic interest payments,” he says.
“Investors are more likely to invest in it because of its similarity to the traditional credit system. Here, one is enabled to earn passive income by buying and locking their crypto vaults to be used by DeFi applications to provide liquidity,” he further explains.
In exchange for providing liquidity, investors are rewarded with tokens with an annual percentage return (APY) of 3-10%. Some of the popular traditional yield farming platforms are Aave, Compound, Uniswap, Sushiswap, and Curve Finance.
How does yield farming work?
Yield farming is an investment strategy in the DeFi industry that uses a cryptocurrency coin or token to generate rewards.
“Traditionally, yield farming offers rewards in the form of transaction fees or interest. It’s sort of like earning interest on a fixed deposit, which is technically lending money to the bank,” he explains.
Yield farming involves two factors, Liquidity Providers (LPs) and Decentralized Application (dApp). LPs are users who provide their cryptocurrencies for the functioning of the DeFi platform. They provide coins or tokens to a liquidity pool – a smart contract-based decentralized application (dApp) that holds all the funds. Once the LPs lock tokens in a liquidity pool, they receive a fee or interest generated by the underlying DeFi platform where the liquidity pool resides; This is how yield farming works.
Traditionally, yield farming offers rewards in the form of transaction fees or interest. It’s somewhat similar to earning interest on a fixed deposit, which is technically lending money to the bank
Here, lending is done through smart contracts without a middleman or intermediary, and at the same time you get the opportunity to earn additional income from existing resources in return for a reward for a set period of time. The estimated yield in the yield farming process is calculated as Annual Percentage Yield (APY).
“With UniFarm we are breaking with the traditional attributes of yield farming. Yield farming offers rewards in the form of transaction fees or interest, but with UniFarm we have introduced a unique solution that allows a person to earn passive income by maximizing their holdings,” he says.
“Here we get 4-5 projects/coins/tokens from a reward pool of all their tokens together; A user can stake any of these and be rewarded with all tokens within a given pool, earning a reward of a minimum of 35% APY and a maximum of 250% APY,” he adds.
Risky but popular
Compared to earning interest on a bank account, yield farming is considered riskier. Why is it still popular?
Madan responds that “yield farming in the DeFi sector is crypto’s answer to traditional lending in centralized finance (banking sector).” But yield farming is also prone to fraud. In most situations, this is associated with a phenomenon called “Crypto Bank Run”, which refers to a situation where a large number of customers are withdrawing their funds from a bank (referring to a pool of liquidity in the crypto space), causing them becomes insolvent.
If you are interested in yield farming it is always recommended to stick to safer liquidity pools with more stable APYs or projects that come with utility. As a rule of thumb, you should always “do your own research” before investing
“Often large investors remove their tokens from the liquidity pools, causing the value of the project in question to decrease and hence the loss,” he explains.
“So if you are interested in yield farming, it is always recommended to stick to safer liquidity pools with more stable APYs or projects that come with utility. As a rule of thumb, you should always “do your own research” before investing,” he advises.
Is asset-backed lending a safe way to invest?
Asset-based lending occurs when money is lent in an arrangement that is backed by collateral. An asset-based loan or line of credit is likely to be secured by the borrower’s inventory, receivables, equipment, or other property. Is it a safe option?
Asset-backed lending is a comparatively safer option, says Madan.
“This is where you set your assets in a liquidity pool and if the price of assets included in a liquidity pool changes after deposit. When faced with a loss, the loss is that of the blocked asset compared to the loss faced if the liquidity provider had simply held the assets in a crypto wallet,” he explains.
“Due to the presence of the automated market maker system in the liquidity pool, one has to maintain a certain ratio of assets in the pool, which helps balance the pool. As such, the increase in value of the liquidity pool is often less than the value of the assets held on the loan log, making it a safer investment option,” he says.
How Yield Farming Platforms Like UniFarm Bring DeFi Evolution For Investors And Startups
UniFarm is a unique global multi-chain supporting group farming/staking protocol.
“Our platform offers staking solutions where top DeFi projects come together to form a reward pool of all their tokens together. Our goal is to provide users with the opportunity to earn passive income by maximizing their holdings while allowing projects to reach a wider audience and attract long-term owners,” Madan informs.
UniFarm’s unique gamification framework allows a user to pool a token into multiple projects or tokens and be rewarded with all tokens within a given pool.
Our goal is to provide users with the opportunity to earn passive income by maximizing their holdings while allowing projects to reach a wider audience and attract long-term holders
“We offer a minimal APY guaranteed to the user/investor. This favors both the investors and the projects entering the UniFarm cohort as high APYs lead to higher demand for the token. For stakers, the rewards are distributed in phases where a user can get the yield in one token (initial phase) to later get all the tokens,” he adds.
UniFarm’s unique model of supporting multiple tokens puts it in a separate class of DeFi projects that are ultimately valuable to both the users and the projects. It is 100% decentralized, so a user can hop on and off at any time.
“It offers users the opportunity to earn passive income by maximizing their holdings,” he says.
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Currently, other chain-specific farms like HECO, CELO, etc. are coming to UniFarm in addition to ETH, BSC, Polygon, and AVAX.
“It’s a unique staking solution that brings together the best projects in the DeFi space,” he concludes.
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