“Yield farming”, which is based on DeFi protocols, leads to interest rates of up to 100%. Users receive tokens to finance and request loans, being able to multiply their profits.
Nowadays, farmers no longer engage in planting bell peppers, tomatoes, or potatoes. They have specialized in a new type of crop and more exotic lands: using cryptocurrencies in decentralized finance (DeFi) protocols to take advantage of the high return rates of these platforms.
This practice is known as “yield farming”, a term that originated as an internal meme. Traders considering that these operations resemble a “farmland” have played it. They patiently wait for their multiple cryptocurrency crops to yield up to 100% annually.
Today, the words “yield farming” designate one of the most popular capital yield strategies in the DeFi ecosystem in recent months. Those who implement these operations seek to take advantage of the different DeFi protocols and products to generate high rates of return, mainly focusing on holding or requesting cryptocurrencies in collateral loans, or with the support of other digital assets.
Process of Cryptocurrency Farming
This cycle of operations is similar to the sowing of an organic product. Users can commit their cryptocurrencies in a collateral loan with another individual or request a loan in this supply market. In the case of lenders, the operation already allows them to earn interest on the funds that they offer. In both cases, the more cryptocurrencies they deposit on the platform, the greater the number of assets that they can borrow.
However, these users can not only gain interest in the cryptocurrencies that they deposit in the protocol. They also receive governance tokens inherent to each DeFi platform, which represent a reward or “cash return” for the liquidity that they provide to the market. In this way, each actor would be earning not only for the interests of the borrower but also for a high-interest rate the loan protocol proposes.
If the trader is skillful and fully engages in yield farming, he will commit more money (even borrowed money) in other DeFi protocols to take advantage of better arbitrage and other rewards. For example, a user can lend and borrow money on the Compound platform, and then also invest in protocols such as Synthetix or Balancer, which also engage in these strategies.
Analyst Tony Sheng considers that a user can generate up to 100% annual interest doing yield farming if he receives “the right instructions”.
The president of Ether Capital Corporation, Stefan Coolican, is not as optimistic about profits. The expert believes that these strategies can offer good returns, but he estimates that the highest annual rate of return would be 20%. In the worst case, when these operations have become popular, users could make annual profits of 2 to 3%.
These percentages are seducing a large number of investors and traders that comprise the DeFi ecosystem. However, a strategy with high return potential carries, in turn, great financial risks.
By Willmen Blanco