This situation occurs just 5 months after DeFi platforms reached USD 1,000 million deposited. Yield farming seems to be the main reason for this increase.
DeFi platforms, which emulate the traditional banking system, exceed a total of capital locked as collateral of USD 2.15 billion. This new mark comes with new leadership since Compound takes MakerDAO’s first place as the DeFi platform with the most funds stored.
Just five months after having exceeded the USD 1 billion mark, the amount of cash available for loans on DeFi platforms reaches a new high, doubling the previous value. The technical term of this type of capital is total value locked (TVL).
Different analysts consider that this growth on DeFi platforms is occurring as a consequence of a phenomenon known as yield farming.
Yield farming arises from a condition that DeFi platforms like Compound have. As an incentive for more participants to deposit their money, DeFi platforms offer reward tokens that they issue and generally use for governance. This would be a stimulus for all those users who provide them with liquidity.
The existence of DeFi platforms in the market has a business model that, in principle, simulates that of a traditional bank. In other words, they earn money by lending money or, in this case, cryptocurrencies, while borrowers accrue interest on their loans.
However, they do have one major difference from traditional banks. By issuing their tokens to reward those entities that give them liquidity, DeFi platforms are issuing money that is, inflating the market.
In the case of Compound, users who deposit cryptocurrencies for collateralized loans receive as a reward the allocation of COMP tokens, in an amount proportional to the money that they have mobilized. Something similar occurs with users who apply for loans.
Opinions about DeFi Platforms
In recent days, some experts have given their opinion on how people have been using the favorable conditions that DeFi platforms offer to obtain a 100% annual interest rate.
Dulce Villarreal, blockchain developer at IOV Labs, said that the Decentralized Finance platforms that currently exist are only for the 1% of the 1% of users. She believes that they do not offer financing solutions for the common user, but that they come from the rich to give them tools to become richer.
These opinions are in addition to many others that are present in the ecosystem. For instance, Messari analyst Jack Purdy notes that this incentive mechanism can theoretically compare to the distribution of capital among a company’s shareholders. As the use of the DeFi network increases, so does the value of the native token. In turn, this motivates the use and continuation of the cycle path.
However, users should remember that when artificial incentives inflate the market, their money may be in a bubble and they risk losing it. Therefore, they need to increase their knowledge on the subject to make their transactions on DeFi platforms more securely.
By Alexander Salazar