The central theses:
- DeFi offers alternatives for almost every sector in centralized and traditional finance and has developed entirely new functions.
- Besides using DeFi features, users engage in DeFi activities like yield farming, liquidity mining, and airdrops.
introduction
DeFi, or decentralized finance, has democratized the financial market and significantly lowered the hurdles to participate in financial activities. Activities such as market making, underwriting, and the development of structured products that were only accessible to large institutions and individuals with large amounts of capital are now being made available to the general public.
As of this writing (November 2021), there is a decentralized alternative for almost every sector in centralized finance and traditional finance. All sorts of activities can be done with DeFi, including but not limited to:
- Trade cryptocurrencies
- Lend or borrow tokens
- Speculate on price movements
- derivatives trading
- Protect against risks
- gain interest
In addition, DeFi has created entirely new projects. With the decentralized products, users can:
- Send tokens around the globe
- Stream tokens across the globe
- Access stablecoins
- Borrow tokens with security
- Borrow tokens without security
- trademarks
- Manage the portfolio
- Fund your ideas
In this article, we take a look at some of DeFi’s activities, such as: B. Yield farming, liquidity mining and airdrops.
yield farming
Yield farming has been the hottest topic of DeFi summer 2020. It refers to the activity of allocating capital to DeFi protocols to generate returns. Yield farming is a DeFi innovation and has greatly increased the popularity and adoption of DeFi. Since most DeFi protocols are peer-to-peer financial applications that use allocated capital to provide services to end users, the fees charged to users are then split between the liquidity providers (LPs) and the protocol . The fees LPs receive is the intrinsic rate of return. The LPs are called “Yield Farmers” and the yield opportunity is called “Farms”. Yield farming yields are expressed as Annual Percentage Yield (APY). As a rule of thumb, the APY for a new protocol or program is usually high. As more investors join and more funds flow into the liquidity pool, the returns become more diluted. As a result, many high-yield farmers are constantly changing farms in search of the highest-yielding opportunities.
Below are some examples of yield farming, where the capital provided is used for various purposes:
- Exchanges – Provide capital for market making on decentralized exchanges and earn transaction fees in return.
- Lending – making loans to borrowers and earning interest.
- Insurance – Take out insurance and earn premiums.
- Options – Write options by selling call and put options to earn a return.
- Synthetic Assets – Mint synthetic assets or stablecoins and earn fees in return.
liquidity reduction
Like other financial services, DeFi protocols thrive on big capital. That said, the more capital DeFi protocols have, the better. To attract more capital, DeFi protocols incentivize the provision of liquidity in a number of ways. While yield farming has skyrocketed DeFi adoption, another DeFi innovation that has fueled the boom is liquidity mining.
Liquidity mining occurs when a yield farming participant earns token rewards as additional compensation. These tokens typically come with governance rights and can provide the ability to generate cash flows from the DeFi protocols. When designed properly, liquidity mining can be a very effective way of raising large amounts of liquidity in a short amount of time. Additionally, liquidity mining is a great innovation to encourage community participation. Since DeFi protocols are open source, they rely on voluntary contributions from the community. The token distribution encourages community participation in determining the future direction of the protocol.
In June 2020, Compound Finance, a decentralized lending protocol, launched its governance token COMP and rewards all users who lend and/or borrow digital assets with COMP tokens. Since then, many other decentralized applications have followed the steps and issued their own governance tokens. Today, most decentralized exchanges offer a governance model in which governance token holders can participate by voting, and governance tokens have often become a secondary form of reward.
air drop
Airdrop refers to the activity of a DeFi application distributing its governance tokens to users. Projects typically perform airdrops as part of their marketing strategy to attract attention and create hype around the launch of their token. While some protocols airdrop to their early adopters and contributors, others may airdrop solely based on trading volume or staked asset amounts. Each protocol has a criterion to qualify airdrop recipients, such as the timing and quality of the interactions.
One of the most notable airdrops of 2020 was conducted by Uniswap, which awarded at least 400 UNI to early adopters. At the time of writing (November 15, 2021) that’s worth nearly $10,000 (UNI price is $24.83). Another notable airdrop in 2021 came from DyDx, a margin trading protocol. In September 2021, DyDx dropped a total of 75 million tokens to its users and liquidity providers. At the current price of $14.78, that’s $1.1 billion.
Airdrop has encouraged users to take on projects at an early stage and helped the projects to grow and mature. For users, airdrops could be a way to boost their crypto portfolio without having to buy digital assets. However, discarded assets may simply be worth nothing. Users may spend time looking for and claiming airdrop opportunities, only for the price of the airdropped tokens to drop before they have a chance to sell. It is important for users to distinguish the good programs from the bad before investing time and sometimes money into the programs.
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