Defi and Yield Farming — New trending of Crypto Markets
During the past time, Yield Farming has been rioting the entire Crypto market. Not only blowing a new wave into the Altcoins market which is “flickering” during 2018–2019, Yield Farming and DeFi also opened the door for a huge source of capital pouring into the market.
Also from the beginning of the year until now, DeFi and Yield Farming have grown extremely strongly. Binance also continuously lists DeFi and Yield Farming projects, most prominent on September 1, 2020 are Sushi and YFII. However, many brothers still do not know what DeFi and Yield Farming are.
This article will take you from simple to complex concepts in DeFi, Yield Farming concepts as well as talking about Sushi and Sushi Yield Farming projects.
In fact, DeFi is a concept that has existed since 2018, but it will not be developed until 2020 and widely known. DeFi stands for Decentralized Finance.
So what is Decentralized Finance? With the current financial system, all your activities related to money need a centralized authority (banks). For example, if you want to borrow money, save money, or trade stocks, it all requires KYC and through these intermediaries. Even Binance, the largest crypto exchange, is an intermediary, a centralized exchange.
Contrary to that, With DeFi, all you need is an ERC20 wallet. In other words, DeFi applications and platforms allow you to “play” with your money freely, without going through intermediaries and of course without KYC.
For example, one of the major arrays of DeFi is DEX (Decentralized Exchanges). With Centralized Exchange like Binance, you need KYC for comfortable deposit and withdrawal. Your money is also deposited into the exchange, but you do not have 100% control of your fund. With DEX exchanges such as BinanceDEX, Uniswap, JST SWAP, SUSHI…, you transact directly from your wallet, as well as do not need any KYC.
As mentioned, DeFi is a very broad concept, but there are 3 big areas that are causing storms this year, they are Assets Lending, Yield / Liquidity Farming and DEX. This article will focus on Yield / Liquidity Farming.
DeFi Lending and Liquidity Pool.
At the beginning of the article, I mentioned that Yield Farming and DeFi are the open doors to welcome new capital into the market. Why is that?
Firstly, to mention the general economic situation in the world. Rising inflation, as well as interest rates on loans and savings, make it imperative that major investment funds in the world find new means of investment to make profits and fight inflation.
With DeFi Lending., You will enjoy a relatively high interest rate. Depending on the pool, floor …, you can enjoy a much higher interest rate than savings from banks (US deposit interest rate is now 0.1% / year). This is much higher than the bank deposit rate, making many people willing to deposit money into DeFi just to receive interest.
Second, with Yield Farming, in addition to the other interest rate, players also enjoy the Liquidity Pool interest, so compound interest.
Sound still a bit confusing, right? So basically, with DeFi Lending, you will lend directly between users and users, eliminate intermediaries, and therefore enjoy higher interest rates.
So who will pay you? Here the person who is paying you is the one who borrows the money from the system (actually borrowed money from you). With a deposit in your wallet, you can completely borrow money through DeFi platforms without having to worry about any complicated confirmation procedures.
But if there is money available, why do we still borrow? There are many people who borrow money / assets for purposes like Trade (for example, if you want to short ETH, you can borrow ETH and sell it, when the price goes down to buy ETH back to make a difference). There are also many Holders who want to both hold coins and trade the market.
If anyone finishes reading this section and thinks about a giant bank, then you get it right. DeFi is a giant bank that lends, borrows, provides capital … for users to run automatically, without anyone taking control of it.
However, there is a “small” factor, which is money. To run a bank requires a lot of money available, a lot of money. And in the financial industry, the concept of money available to do anything is called “Liquidity” or “Liquidity”. For DeFi, those who provide liquidity to the market are called “Liquidity Pools”.
“Liquidity pool simply means that a smart contract contains money in it. These pools allow users to borrow, lend, or exchange tokens. ”
On a Liquidity Pools, there are lots of Liquidity Providers. They are the ones who throw money into the pool for you to borrow, to receive interest. There are Pools that will give high interest, there are Pools that will give low interest, depending on the market conditions.
Throwing money into a pool and for interest, is called Yield Farming.
In essence, Yield Farming is the user putting money into the Pool to receive interest. However, Compound made Yield Farming a step up, when they introduced Liquidity Mining.
Liquidity Mining is a mere term, when Yield Farmer provides liquidity to Compound’s Pool, they will receive more COMP tokens.
With normal Yield Farming, users will receive interest when providing liquidity to the Liquidity Pool.
With Liquidity Mining, external users receive interest, they will receive COMP tokens, for a much higher interest rate. Every day, Compound’s system will “look at” the entire account, see how much Mr. A has borrowed from the system, how much liquidity has Ms. B provided to the system, then send each person a part of COMP corresponding to their contributions.
In fact, there are 2 easiest ways to make money based on this DeFi trend. Option 1, it is Yield Farming / Liquidity Mining. Like what I said above, Yield Farming / Liquidity Mining is not simple at all. In addition, it also needs a relatively large amount of capital to bring in money. Usually Yield Farming / Liquidity Mining is aimed at the Whales / Funds, who have a capital of no less than $ 1 million rather than retail investors.
However, many retail investors immediately followed the water and made money from DeFi, thanks to one simple act: Invest in new DeFi projects, typically projects on Uniswap.
Many of you have heard about Uniswap and still do not fully understand it. On the surface, Uniswap looks like a normal exchange, with candles and volume etc … To play on Uniswap, you just need to visit https://app.uniswap.org/#/swap. After that, a “swap” between coin A and coin B. No orderbook, no pending orders. Uniswap is just an intermediary.
It looks simple but Uniswap has brought a huge change to the crypto market.
First, Uniswap removed traditional Orderbooks such as Binance, Bitmex, and replaced it with the Automated Market Making (AMM) model. With this approach, combined with the decentralized DEX features, Uniswap eliminates most of the problems associated with Market Manipulation (manipulation of prices on the exchange).
Second, Uniswap’s ANM is essentially formed on the liquidity of the Liquidity Pool. Thanks to Uniswap, the Liquidity Pools get a job. (We will talk about the operating model of Uniswap and Sushi Swap in the next section). Uniswap is also a DEX, operating entirely for the community (Founder of Uniswap has absolutely no income from the exchange, and Uniswap does not issue coins). Therefore, the “decentralization” as well as the “intermediary” of Uniswap are relatively high, contributing to helping new capital to enter the market.
However, Uniswap has its own problems. The first problem of Uniswap is high transaction fee, 0.3% / trade. The second issue of Uniswap, is that it only supports ERC20 tokens (running on the Blockchain of ETH). And the last big problem, is that with Uniswap the LPs only earn the pool’s transaction fees when they’re actively offering liquidity for that pool. When they have withdrawn their stake, they will no longer receive get that passive income too. Furthermore, when Protocol gained traction, though as providers of early liquidity, they risk diluted profits when the parties involved (larger and more affluent) such as venture funds, exchanges, and mining pools Protocol with a huge capital.
And at the end of August 2020, a “Fork” version of Uniswap was announced, to solve the problems Uniswap encountered, as well as bring Uniswap and DeFi game to a new level: Sushiswap.
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