DeFi and Yield Farming are the PB & J of cryptocurrency.
I got interested in agriculture out of curiosity. I enjoy watching things grow. As I got older, the pragmatic benefits of growing food became apparent. If I’m going to spend time on something, I may as well get some food out of it? Any who, it’s fun to watch things flourish and then eat them. If you’re going to dive in to this defi landscape, you should yield a few bucks too. In decentralized finance, the idea of farming means something different, although they are very related to me. The memes and pictures are silly, although some are not so nice caricatures of rural farming folks. I believe the similarities are worth exploring briefly before I tell you to farm more.
Agriculture and asset allocation, or growing food and growing wealth, are darned similar philosophically. A person (could be a team if you’re not a jerk) operates in a wildly dynamic system, full of variables they cannot control or predict. Into this system, the farmer brings an initial number of resources. Through time and effort, the farmer endeavors to get more resources out of the deal at the end than they started the season with. growing broccoli or savings, harvesting sunlight or yields. You want to capture something and transmute it into something else that can sustain your life or lifestyle. I’m going to try to briefly explain how yield farming popped up so fast in crypto.
Farming yield or being a defi farmer came about as an occupation just a little over a year ago. At least that is when I first heard it described as such. Bitcoin made the idea of decentralized digital assets possible in 2009. Then, when smart contracts were put on a blockchain, truly decentralized finance was possible. Ethereum made defi possible, and then on top of eth were built the dApps that grew to be the first iteration of a decentralized financial ecosystem. There were many an excited nerd, but the implications of defi were not readily apparent to many. The circumstances that led to the frenzy of defi summer had started to brew. For most, there wasn’t a huge reason to speculate on this new system yet. Some people were led to defi from traditional finance based only on a distrust of the old system or human intermediaries. The rest of us would soon come.
Liquidity mining would be the incentive that sparked the frenzy. The world was losing opportunity for yield in 2020. It had been for quite some time, but now everybody cared. Treasuries in many countries had started to pay negative yields. Large swaths of the populous were kept from working because of the pandemic. Not only did these families lose income but they had a lot of time to hole up inside. While stuck inside they learned from TikTok that stocks only go up and the titans of industry got so by the simple application of leverage. Firms and families alike were pushed further out on the risk curve, then told they were lame if they didn’t go harder. More people were entering crypto land and becoming willing to speculate on digital assets. Then came the governance tokens and their liquidity mining.
Synthetix and Maker had introduced the idea of governance tokens to some extent. Compound was the first to launch a governance token and use its issuance as incentive to interact with their protocol. Fucking boom! Not only does this allow protocols to bootstrap the liquidity needed for financial products, but it offers an exciting new niche to crypto investors. Early consensus emerged that governance tokens allow speculators to get something akin to equity in early-stage projects. This is truer in some cases than others. The governance these tokens confer, and their economic properties are far from uniform. Some protocols that had already found a thriving community without the need of a token airdropped governance tokens to their users retroactively. Every protocol had to have a token. Everyone went nuts.
Tokens went from zero to tens of thousands of dollars instantly. Check out an early chart of YFI. In addition to being able to put on more risk in this ecosystem, farming allows you to structure very personalized risk.
The Cambrian explosion of financial products that launched that summer goes far beyond what is possible in the traditional financial world and it continues to expand today. Lending out your crypto to these protocols allows you to get yield on what would otherwise be idle funds. The fact that every protocol will need liquidity for not only their new token, but eth, wBTC and many USD denominated tokens allows one to structure very interesting things indeed. Farming allows for capitol efficiency of the investor as well as the protocol. Not only is farming necessary for these sketchy and interesting new products to get tested out, but it also offers an interesting playground for a speculator. It is impossible to convey how exciting, frightening, and interesting the space is.
You can actively monitor the space all day and still miss things. Therefore, I think it is important to build up a community of people you can trust to chat with, research with and bounce ideas off. If you are reading this and you lack that group, hit me up. I am always looking for more contacts excited to explore. This space moves extremely fast and there is a great deal of fraud to find, but there are also extremely asymmetric opportunities. The first summer was all us.
Everything was too new and sketchy for big money to play with. This has changed. Retail is no longer alone here in this bizarre space. Venture capital and institutional funds have increasingly been deployed in the space over the last year. In addition to what has already been deployed, an insane amount of money has been raised. This money will flow to some of the proven defi primitives, as well as newer yet to be imagined financial instruments. It would behoove the reader to get into the right protocols before this flow comes. As BTC and eth have reinforced the idea that decentralized digital money is here to stay, it’s hard not to think defi is as well.
Decentralized finance has shown the largest product-market fit thus far for block chain technologies. If you think crypto will increase in adoption why wouldn’t defi as well? If defi adoption is set to increase why the hell wouldn’t you dip a toe? Come on in, there’s yield in yon field!
Alright so defi is the buzzword of the future and I need to invest. Why not just buy a few of the leading defi tokens or maybe even an index? This article is about farming yield and not just making money on appreciating defi assets. There are actually decentralized index products that allow you to hold them and also farm yield with them while retaining some manner of meta governance (DPI, NDX, etc.).Those products will have to be in the next article where we discuss mechanics. I just want to convince you to start farming right now. There is no yield to farm with centralized custodians. The yield is with smart contracts my friend.
Yield farming is about allowing your assets to be used productively to make or gain new assets. This is fundamentally different than selecting some assets to hold for a set time and sell for a higher price. You should be doing both if you believe this space is set to expand. If you think scrotum token is undervalued buy the dang token. That’s investing or at least speculating. If you plan to hold the scrotum for a bit, why not put it to work in a money market or pool it with something and provide this pair to an AMM as an LP? That bit is yield farming. If you are investing in governance tokens on Coinbase, wtf man. They get to hold your voting power, not to mention all the airdrops. New defi protocols often airdrop tokens to users of similar products or users in their intended ecosystem. Every single exchange will let you know that they have all the defi. They defi the hardest.
On an individual project basis, one must make the decision to farm or buy the token based on many a thing and I hope to go into that on another article. Overall, though one must also decide if they want to involve themselves in decentralized finance or just gamble on its outcome with a centralized project. One good reason to get wallet deep in there is the airdrops. I received more money from defi protocol airdrops last year than I received from the federal government’s stimulus plan by at least an order of magnitude. Another reason is just the experience itself.
If you are actively farming, then you are using the products. This alone is invaluable. You pick Sushi Swap over Uniswap on Binance, but have you seen the dope graphics on the sushi website? Have you been made uncomfortable by the hentai? Do you know if they even have a product or if it works? Is it easy to provide liquidity? Is it worthwhile to provide liquidity? When you come across an issue, is there a way to get a hold of anyone to talk to? If you do not have a billion dollars to deploy, you need to be willing to do the nitty gritty research that billionaires won’t. If you’ve kept track of Mr. Cuban’s journey in to defi, then you realize the big money is digging in now. We must dig further than them. Using the available products, you may even have a neat idea of something that should be made. Or, if nothing else, when a product comes out, you should be able to tell if it makes sense in the broader ecosystem. you can decide whether this addresses a problem that exists in the market, or if it is just a word salad pitch to make someone else money.
With most of these protocols you are paid with the inflationary releasing or minting of the native governance token for the platform. Some farmers dump these for USD as soon as possible while others hold on to the governance tokens. Both are appropriate and there are several factors on how and when one should harvest and swap. These factors are unique to the farmer and the farm, so I will just broadly say, those with a longer view will hold on to governance tokens of strong protocols. What and where to farm are decisions that themselves have many factors. Time is one of the biggest contributors to safety in a farm in my eyes. Therefore, brand-new protocols that are not based on forks of known entities afford huge yields initially. Look for audits or other forms of social consensus.
Before selecting a farm to add resources too, perhaps first select a group of assets you would be happy holding for a while. In a bull market perhaps, you would like more exposure to crypto so should hold less stables. Then again, in bullish circumstances, demand for leverage is up and yields are higher for stables. Speaking of leverage, farming can be a way to put leverage on as well. Many farms will allow you to take a loan against your provided collateral, and depending on the incentives of the protocol, you may even be paid to borrow. In circumstances where this is the case, you can readd these credited funds to your collateral and take out more and more recursively. This is only the beginning of the sort of strategies to be explored. Yield farming is a broad term for a wildly customizable set of social and financial experiments.
In the normal world of traditional finance, there is a very clear path to turn influence into money or vice versa. We have lawyers and lobbyists who tell the lawmakers which laws work best for all our portfolios. In defi, the governance tokens are the way we make our whims into money. We can structure these products to do whatever we want and for value to flow where we see fit. In a philosophical mood, it makes sense for us to question whether we are remaking the problems of traditional finance. It seems we may be to an extent, but it’s not my place to tell everyone how to vote in their governance proposals. The pragmatist in me says, if we remake the system to be broken again at least this time I shall find myself in a higher caste. Economics are inherently political. In this way, having a stake in the governance of the future of economic actions worldwide could also give us a chance to enact great social and political change. Whether you want to use this power for good or evil, it’s hard to use what you do not have.
There are projects that do not have tokens that allow one to make yield by depositing your funds in to them for a period of time. This is also yield farming, it was just not the primary focus of this bit. This article is only barely scratching the surface. There are also increasingly abstract things to do with math and ideas that make money as well and these can be called yield farming. It’s a broad category alright. Just make something out of something else. Also, unless you are a Cronje level farmer and you are writing and deploying your own smart contracts, remember whose land you farm on. We are sharecroppers here folks.
I encourage everyone to experiment, but once you deploy funds out to this “dark forest” know that there are forces beyond your control at play. Shepherd your money wisely and do not get complacent on the land you work. Some protocols have funds locked today, then, it’s an MMMBop and they’re gone.
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