Yield farming also referred to as liquidity mining is a trend that allows DeFi users to generate rewards with their cryptocurrency holdings by interacting with protocols that distribute governance tokens. Yield farming alone is profitable itself, but another way in which users gain is when the tokens being farmed see price increases as well.
The enormous growth seen in the DeFi sector has partly alluded to the yield farming trend. In the last few months, the DeFi sector saw massive growth in the total value locked in, as this value surged past $9 billion before the bearish wave struck early September. Barely a year ago, the total value locked in was just slightly above $500 million.
The yield farming trend caught on when lending protocol Compound (COMP) started distributing its COMP governance token to users who interacted with the protocol.
Yield farming is unique in a way as it may not be suitable for all crypto holders since it generally requires holders to pledge large amounts of capital to earn more rewards. As profitable as yield farming may seem, it carries a risk which most are not wary of which is the very nature of smart contracts. Popular DeFi protocols are developed by small teams with limited resources, which can increase the risk of smart contract bugs and vulnerabilities.
YFI, the governance token of Yearn.finance is a good example of yield farming as it helps users find the best yields in DeFi protocols. In the last 30 days, YFI surged by more than 400%. Yearn.finance recently set highs of $44,000.
In the last couple of weeks, the Ethereum-based DeFi sector was hit alongside Bitcoin and Ethereum’s selloff. However, there are a few tokens that remained unwavering, withstanding the immense selling pressure brought about by the bearish market wave.
Of these tokens, Yearn. Finance, Aave (LEND), and Loopring (LRC), rank as the best performers, whereas Curve, Meta, and Sushi remain the worst performers, shedding nearly 50%.
SushiSwap is an exchange that does not work with an order book but with an automated market-making, or AMM, model. This model sees liquidity providers add funds to liquidity pools. Recently, Sushiswap’s journey has attracted the attention of mainstream investors and reporters.
A few days ago, Bloomberg wrote extensively on this in “Crypto Exchange Gets Millions After Copy-Paste of a Rival’s Code.” This may be quite notable as it may likely be the first time many Bloomberg readers including Wall Street were exposed to DeFi. It also struck a controversial note as many states that it has some inaccuracies about the crypto space.
It also spurred an interest in DeFi and Ethereum among institutional investors. Recently, Spencer Noon, head of DTC Capital, noted that his institutional contacts now know of Ethereum and DeFi:
“My read on #DeFi after speaking with institutional investors, fund managers, OTC desks, and FOs over the last few weeks: The herd is coming. They’re excited about DeFi but new to it, so they’re buying $ETH first.”
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