Why does yield farming drive massive DeFi growth?
The beginning is always the hardest
Back In 2017 and 18, ICOs were the most happening thing in the crypto ecosystem. And in 2020, ICOs were matured as STO’s, IEO’s and DEX offerings.
In parallel, The DeFi market picked up its pace rapidly in the second quarter of 2020 during the COVID-19 pandemic.
The total value locked in DeFi protocols surged to over $40.23B as of 6th March 2021.
Reflecting on the TVL, the DeFi user base also is on the same trend showing an increase in adoption.
Among all the use cases of DeFi, yield farming or more colloquially liquidity mining can be quoted as one of the reasons for the increase in the adoption rate.
Followed by the release of the $COMP token by the Compound team, Yield farming emerged as a new concept in Q3 2020. It can be described as a way of drawing the most reward for putting various crypto assets to work. With individual strategies and degrees of success, $BAL, $CRV, $UNI, $YFI, and others are currently leading the market.
Yield farming derives high-yield interest income in which users deposited cryptocurrency to earn a high rate of returns. Returns, in some cases, were often up to 100 times higher than the % offered by a traditional savings account.
How Yield farming platforms and protocols are doing now:
Yield farming strategies may change every hour and then. Each yield farming platform and strategy will have its own rules and risks based on which farmers manage their flow of funds. Let’s have a look at three major platforms in terms of their total value locked in the last 90 days.
Due to yield farming and also from another set of use cases in DeFi, the respective platforms namely, compound, Aave, and Maker witnessed a steady increase in the total value locked on their platforms over the last 90 days. The TVL chart is reflecting an almost identical growth in value locked along with the corrections in the market.
An analysis by consensys , identified that, due to yield farming, 88% of Compound’s, 28% of Curve’s, and 63% of Balancer’s new users were entirely new to DeFi between the May to Aug months of 2020.
This confirms yield farming is one of the motives why new users were into DeFi space.
Reasons why yield farming drives massive DeFi growth:
Yield farming is the growth catalyst of DeFi:
Upon catching up to the hype, Yield farmers moved lots of liquidity into different pools to earn yield. A strong speculative DeFi bull market then acted as a catalyst and generated more demand for new types of governance tokens which led to an increase of gas costs of ethereum to all-time highs.
This series of events followed the entry of new DeFi companies into the market, which attracted liquidity and created wider scope for the growth of the DeFi ecosystem.
Rewarding nature attracts newbie investors
Yield farming has considerably reduced the barriers to entry for many investors into DeFi. The compounding nature of rewards and the interest in the liquidity provided to the respective pools were so attractive. One more reason to attract the newbie investor is that yield farming was popularized with the intent of generating passive income for the people which in reality may be more than passive income.
The IPY(interest per year), i.e the speed at which interest is accruing in DeFi reached ~ $780M in Feb ’21, and currently, it stands at $512.8M as of 6th March 2021.
Increased Accessibility:
Its basic rule with crypto and DeFi is that anyone with internet and capital can be a participant and reap the benefits. With the growing demand, there has been an enormous increase in the number of platforms and service providers with advanced tech capabilities and security.
Implying increased competitiveness and more users which led to more investments that are providing liquidity by farmers, led to the growth of DeFi.
We can expect to reach a truly decentralized financial reality where the traditional finance market is interoperating with digital assets and blockchain.
Innovation:
The only way to keep the value and growth is to innovate in all terms that contribute to the growth of DeFi through yield farming. Innovation for yield farming might be all about bringing in more advanced protocols having improved staking mechanisms and rewards distribution and are scalable, compatible, and flexible to the all-time high levels of volume.
A segment of yield farmers may be focussing on short terms gains leading to the temporary volumes of higher liquidity. There is innovation in terms of introducing certain Lock-in periods focussed on long-term durations and also in fixing the complexities in the systems by the aggregators for easier usability.
Yield farming is the liquidity backbone of DeFi:
The growth of DeFi is being led by many other factors including yield farming. Undoubtedly yield farming has been the major source that ignited the flow of liquidity into the pools which in turn led to the increase of adoption and awareness of DeFi use cases.
