The uninitiated might think that “yield farming” refers to the latest crop of corn or peanuts. Rather, the term refers to a cutting-edge trend that allows those who own cryptocurrency to reap guaranteed, steady returns.
Yield farming is a way for those who participate in specific cryptocurrency-powered products to use their crypto to earn crypto. By promising users tokens (and in some cases interest) in exchange for their participation, founders and promoters of decentralized financial products want to spark interest in their platforms.
What is crop farming?
If you understand yield farming, you may need to understand what “yield” means in the context of finance. Per Investopedia, yields are “income generated and realized on an investment during a certain period ”. Yields can generally come in two specific forms:
- Interest earned on an investment
- Guaranteed dividend paid in return for your investment
Income may apply to various classes of financial assets, including but not limited to stocks and bonds. Income can be fixed or fluctuate with various variables such as the value of the security in which is invested. These same principles may apply to proceeds spent in cryptocurrency rather than dollars, but there are also some notable differences between traditional proceeds and crypto proceeds.Yield farming is a term specific to cryptocurrency, and DeFi in particular. Simply put, to grow revenue is to invest your cryptocurrency in a specific DeFi platform or product in exchange for rewards, which can come as interest and / or dividends.
Some of the most prominent yield farming projects to date, such as Compound, involve both cryptocurrency lenders and borrowers who receive Compound tokens (COMP) as revenue. This practice can also be referred to as liquidity mining as those who invest their crypto in platforms while making a return provide liquidity to administrators of that platform. In this sense, their role is similar to that of a lender exchanging cash for:
- The guarantee for future reimbursement, plus:
- Interest payment
While the investor who grows a yield will certainly benefit from the scheme, they may not be the only ones reaping a reward.
Who Benefits from Crop Farming?
It is clear why someone could invest their cryptocurrency in a platform or product that offers them returns. If they had no intention of liquidating their crypto stocks anytime soon, why not make some extra (guaranteed) coin on their stake by farming for returns? Here’s how it goes:
An investor lends his money to the platform, he receives tokens for his investment, he eventually gets his main investment paid back and can earn interest on top of that. It’s the classic lender advantage along with some extra token. That extra token is an important distinction between traditional loans and yield farming with DeFi platforms. If the value of the token distributed as a dividend skyrockets, a DeFi lender investor can earn far more returns than what they could get in traditional, non-crypto markets.
Heck, if the token being used as a dividend builds value fast enough, it might even be possible to make money from agricultural proceeds as a borrower. Suppose someone borrows cryptocurrency and receives tokens as a reward for participating in the lending platform. As long as the value of that token increases at a faster rate than the cost of the borrowing, they can eventually earn a profitable return despite paying interest on their loan. There is always a risk involved in borrowing, and one should be very sure of the appreciation of a token in order to make money by borrowing cryptocurrency. Still, this scenario is not beyond the reach of the possibility, and the rapid appreciation of Compound’s COMP token a few months ago serves as real-world evidence.
The last party that can benefit from yield farming is the governors of a specific platform or token. Whether governors refer to a centralized collective or participant investors in a decentralized platform, the interaction that farming produces is generally positive for stakeholders. As investors flock to a platform that offers valuable returns, the platform itself and each affiliated token become more valuable due to its greater popularity. As the token accumulates value, the yields (tokens) provided by participating in the linked platform become more attractive, more farmers gather to harvest those yields, and so the growth cycle proceeds …
What is the current state of agricultural yield?
As with many specific genres of decentralized finance, agricultural yields have grown significantly in recent years, and especially in recent months. Because compound paving is the most viable blueprint for yield farming to date, subsequent projects have garnered similar popularity. The Balancer Labs BAL token was issued shortly after the COMP token debut and became the second governance token that would facilitate revenue farming in the DeFi space, said NASDAQ. It went on to debut with a single day 235% peak in value, illustrating once more the zeal for yield farming, and by extension the tokens and platforms that enable yield farming.
As more and more investors lower their crypto capital on platforms that offer returns in exchange for liquidity, the sustainability of the practice seems real. Unless regulators confuse the party, the appeal of yield farming can remain.
How do regulators view agricultural yields?
You should be a supervisor to answer this question. Overall, there is some concern that regulators will ultimately want to have a say in how the DeFi industry is run, including how punitive measures are handed out to fraudsters. Yield farming may not be immune to this development if and when it occurs. Whenever the term “risk”, whether reasonable or not, is associated with a financial sector, you can be sure that regulators will act at some point. Whatever you think of their motives, this is usually the case.
Like any investment, yield farming involves risks questions about the legitimacy of the token issuer being one of those risks. However, it is not yet possible to know with certainty how regulation will affect agricultural yields. For now, crop farmers seem to be of the opinion that they can get it (yields) just as well as it is good.