A detailed explanation from an expert behind the boom in yield farming.
Decentralised Finance (DeFi), an emerging financial technology that aims to remove the intermediaries in financial transactions, has opened up multiple avenues of income for investors. One of these investment strategies in DeFi is Yield farming, which entails lending or staking cryptocurrency coins or tokens to earn rewards in the form of transaction fees or interest.
Yield farming is currently one of the most significant growth drivers of the DeFi sector, helping it expand from a market cap of US$500 million to US$10 billion in 2020 alone.
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In this context, The Tech Panda spoke to Mohit Madan, CEO and Co-founder of UniFarm, a group staking and yield farming platform, that provides alternative investment options to its users while increasing the value behind multiple visionary web3 startups.
Due to its similarity to the traditional lending system, investors are more likely to invest in it. Here, one is enabled to earn passive income by buying and locking up their crypto vaults to be used by DeFi applications for providing liquidity
According to DeFi Pulse, US$95.28 billion in crypto assets are locked in DeFi right now compared to US$32 billion in the last year. Madan says that one of the main catalysts to this growth is rising investments in yield farming, which provides a unique ROI centric investment opportunity. In the last one year, various projects have come up offering yield farming.
“Similar to depositing funds into a savings account to receive interest payments, crypto investors can now lock up their funds or use them to provide liquidity across a range of decentralised platforms and receive regular interest payments,” he says.
“Due to its similarity to the traditional lending system, investors are more likely to invest in it. Here, one is enabled to earn passive income by buying and locking up their crypto vaults to be used by DeFi applications for providing liquidity,” he explains further.
In return for providing liquidity, investors are rewarded in tokens with annual Annual Percentage Yield (APY) ranging from 3-10%. Some of the popular traditional yield farming platforms are Aave, Compound, Uniswap, Sushiswap, and Curve Finance.
How Does Yield Farming Work?
Yield farming is an investment strategy in DeFi industry that involves staking a cryptocurrency coin or token to yield rewards.
“Traditionally, yield farming offers rewards in the form of transaction fees or interest. It is somewhat similar to earning interest on a Fixed Deposit wherein technically lending money to the bank,” he explains.
Yield Farming involves two factors, Liquidity Providers (LPs) and Decentralised Application (dApp). LPs are users providing their cryptocurrencies for the functioning of the DeFi platform. They provide coins or tokens to a liquidity pool—a smart contract-based decentralised application (dApp) that contains all the funds. Once the LPs lock tokens into a liquidity fund, they are awarded a fee or interest generated from the underlying DeFi platform the liquidity pool is on; this is how yield farming works.
Traditionally, yield farming offers rewards in the form of transaction fees or interest. It is somewhat similar to earning interest on a Fixed Deposit wherein technically lending money to the bank
Here, the lending happens through smart contracts with no middleman or intermediator, and at the same time, you get an opportunity to earn additional income from existing resources for a fixed amount of time in exchange for a reward. The estimated return in the yield farming process is calculated in terms of Annual Percentage Yield (APY).
“With UniFarm, we are breaking the traditional attributes associated with yield farming. Yield farming offers rewards in the form of transaction fees or interest, but with UniFarm, we brought in a one-of-a-kind solution that allows a person to earn passive income by maximising your holdings,” he says.
“Here, we get 4-5 projects/coins/tokens form a reward pool of all their tokens combined; a user can stake one of these and get rewarded in all tokens within a given pool, earning a reward of min 35% APY to a max 250% APY,” he adds.
Risky but Popular
Compared to earning interest from a bank account yield farming is considered riskier. Why is it still popular?
Madan answers that ‘yield farming in the DeFi sector is crypto’s answer to traditional lending in Centralised Finance (banking sector)’. But yield farming is also prone to con jobs. In most situations, it is associated with a phenomenon called ‘Crypto Bank Run,’ which refers to a situation when a large number of customers withdraw their funds from a bank (referring to a liquidity pool in the crypto space), making it insolvent.
If you’re interested in yield farming, it is always recommended to stick with safer liquidity pools with more stable APY’s or the projects that have utility attached to it. As a rule of thumb, always ‘Do Your Own Research’ before investing
“Often large investors remove their tokens from the liquidity pools, causing the value of the concerned project to plummet, hence, the loss,” he explains.
“So, if you’re interested in yield farming, it is always recommended to stick with safer liquidity pools with more stable APY’s or the projects that have utility attached to it. As a rule of thumb, always ‘Do Your Own Research’ before investing,” he advises.
Is Asset-Backed Lending a Safe Way to Invest?
Asset-based lending occurs when money is loaned in an agreement that is secured by collateral. An asset-based loan or line of credit is likely to be secured by inventory, accounts receivable, equipment, or other property owned by the borrower. Is it a safe option?
Asset backed lending is a comparatively safer option, says Madan.
“Here, you commit your assets to a liquidity pool, and when the price of assets locked up in a liquidity pool changes after being deposited. If one faces a loss, the loss will be that of the locked asset versus the loss one faces if the liquidity provider had simply held the assets in a crypto wallet,” he explains.
“Due to the presence of the Automated Market Maker system in the liquidity pool, one has to maintain a certain ratio of assets in the pool, which helps in balancing the pool. So, the rise in the value of the liquidity pool is often less than the value of the assets held by the lending protocol, making it a safer investment option,” he says.
How Yield Farming platforms like UniFarm are bringing an evolution in DeFi for Investors & Startups
UniFarm is a one-of-its-kind global multi-chain supporting group farming/staking protocol.
“Our platform provides staking solutions wherein top DeFi projects come together to form a reward pool of all their tokens combined. We aim at providing an opportunity for users to be able to earn passive income by maximising their holdings all while allowing projects to reach out to wider audiences and attract long term holders,” Madan informs.
UniFarm’s unique gamification framework allow a user to stake one token in the pool of multiple projects or tokens and get rewarded in all tokens within a given pool.
We aim at providing an opportunity for users to be able to earn passive income by maximising their holdings all while allowing projects to reach out to wider audiences and attract long term holders
“We offer a minimum APY, which is guaranteed to the user/investor. This favours both the investors and the projects entering the cohort of UniFarm as high APYs result in a higher demand of the token. For stakers, the rewards are distributed in phases where a user can get the yield in one token (Initial phase) to get all the tokens later on,” he adds.
UniFarm’s unique model of supporting multiple tokens puts it in a separate class of DeFi projects that ends up being valuable for both the users and the projects. It is 100% decentralised, so that a user can stake and unstake at any time.
“It provides an opportunity for users to be able to earn passive income by maximising their holdings,” he says.
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Currently, more chain specific farms apart from ETH, BSC, Polygon and AVAX are coming to UniFarm like HECO, CELO, etc.
“It is a one-of-a-kind staking solution where the best projects in the DeFi space come together,” he concludes.