DeFi yield farming is the new thing in the Crypto Universe! DeFi Yield Farming is the act of leveraging DeFi protocols and products to generate incredibly high rates of return, sometimes reaching over 100% annualized yields!
Decentralized Finance (DeFi) is an ecosystem of decentralized applications that allow anyone with an internet connection to access financial products and services. This includes margin trading, financial derivatives, synthetic assets, algorithmic trading, and lending markets.
One of the first mainstream DeFi use cases was high-yield interest income. Users would deposit their crypto to earn a much higher rate of return than traditional financial instruments. DeFi yield farming takes this concept and compounds returns by utilizing leverage to gain more exposure to various crypto assets.
If using yesterday’s rates, an individual who lent out 1,000 DAI (worth the equivalent to $1,000 dollars), and took out a loan for $2,5000 worth of the BAT crypto asset would have generated 77.48% APY in COMP rewards paid out daily.
It’s important to note that at COMP’s price point, the rewards would exceed the cost to borrow BAT, making it profitable to borrow crypto.
Compound is now by far the most popular DeFi lending protocol in the market now. They overtook MakerDAO last week, teaching over $550 million locked in the protocol. COMP exploded from 16 dollars a token to 360.
There is risk associated with DeFi however. Multiple protocol exploits and blowups are to be expected as the space matures – we’ve seen this with recent activity such as dForce and bZx. Since DeFi protocols use automated smart contracts without intermediaries and crypto assets are nearer assets, there’s always the risk of a big in the code that hackers may exploit to steal funds.
But in terms of a risk to reward aspect, banks are offering 0.1% while DeFi products can yield 100%+ annualized yields. Does this mean that DeFi products are 1,000 times riskier? Probably not. Investors and traders are cashing in on these arbitrage opportunities while they still can. The rates will naturally become battle tested and hardened, and so they will decrease eventually. Until then, DeFi yield farming will serve as yet another on ramp for users to acclimate themselves to the world of Crypto.
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