Yield farming is a popular topic in the DeFi space for some time now. We know you may have many questions regarding yield farming – What is it? Why is it generating so much buzz?
Let’s start with a simple statistic. In 2020, the DeFi space is so far growing at a rate of 150% in terms of total value locked (TVL) in dollars. In comparison, the crypto market capitalization has so far grown at a rate of only 37%.
Many experts give credit to yield farming for the astounding growth of the DeFi space this year. The progress is because of the concept of liquidity farming. It involves both investors and speculators as they supply liquidity to platforms providing lending and borrowing services. In return, the lending and borrowing platforms pay high-interest rates to them. They also receive a part of the platforms’ tokens as incentives.
The current stars of the DeFi space are the liquidity providers. They are referred to as yield farmers. Compound (COMP), Curve Finance (CRV), and Balancer (BAL) are among the leading names.
Compound: The First To Initialize the Liquidity Farming Craze
It all began with the live distribution of Compound’s COMP token on June 14th. COMP is the governance token of Compound. The live distribution of COMP token was very successful. It helped the platform reach $600 million in total value locked (TVL). It was the first time for any DeFi protocol to overtake MakerDAO on the leaderboard of DeFi Pulse.
The distribution of COMP was followed by that of Balancer’s BAL token. Balancer had launched its protocol rewards incentive program in May. They started the live distribution of their BAL token within a few days after COMP. It was also very successful. They were able to reach a figure of $70 million in TVL.
Even though the ongoing yield farming crazy began with COMP, this has been a part of DeFi even before that.
It was Synthetix that came up with the concept of protocol token rewards. Synthetix introduced the concept in July 2019. They were rewarding the users providing liquidity to sETH/ETH pool on Uniswap V1 with token rewards.
Yield Farming – The Answer for DeFi’s Liquidity Woes
What’s the primary concern in the DeFi space? The answer is liquidity. Now, you must be wondering why do the DeFi players need money? For the starters, banks also have a lot of money, and yet they borrow more to run their day-to-day operations, to invest, and so forth.
In DeFi, strangers on the internet provide the required liquidity. Hence, DeFi projects attract HODLers with idle assets through innovative strategies.
Another thing to consider is that some services require high liquidity to avoid serious price slippage and better overall trading experience. Decentralized exchanges (DEX) are a prime example.
Borrowing from users is proving to be quite a popular option. It may even rival the options of borrowing from debt investors and venture capitalists in the future.
So, What is Yield Farming?
To draw a comparison with legacy finance, yield farming could be described as depositing money in a bank. During the years, banks have traditionally paid out different interest rates to those who keep their money in deposits. In other words – you receive a certain annualized interest for keeping your money deposited in a bank.
Yield farming in the DeFi space is similar to this. Users lock their funds with a specific protocol (like Compound, Balancer, etc.), which then lends it to people who need to borrow at a certain interest rate. In return, the platform would give those who lock their funds rewards and sometimes also share a part of the fees with them for providing the loan.
The earnings that lenders receive through interest rates and fees are less significant. The units of new crypto tokens from the lending platform takes the cake when it comes to real payoff. When the crypto lender’s token value rises, the user will make a larger amount of profits.
What’s the Relationship Between Yield Farming and Liquidity Pools?
Uniswap and Balancer offer fees to liquidity providers. They offer it as a reward for adding liquidity to the pools. Both Uniswap and Balancer are DeFi’s largest liquidity pools, as of writing these lines.
In Uniswap’s liquidity pools, there is a 50-50 ratio among the two assets. On the other hand, the liquidity pools at Balancer allows up to eight assets. It also offers custom allocations.
The liquidity providers receive a share of the fee earned by the platform every time someone trades through the liquidity pool. The liquidity providers of Uniswap have seen excellent returns because of the recent increase in the DEX trading volumes.
Exploring Curve Finance: Complex Yield Farming Made Easy
Curve is one of the leading DEX liquidity pools. It was built to provide an efficient way of trading stablecoins. As of now, Curve supports USDT, USDC, TUSD, SUDS, BUSD, DAI, PAX, along with the BTC pairs. Curve leverages automated market makers to enable low slippage trades.
The automated market makers also help Curve in keeping the transaction fees low. It has been in the market for only a few months now. Yet, it is already ahead of many other leading exchanges when it comes to trading volume. The performance of iCurve has been stronger than some of the top names among the yield farming industry.
As of now, it is ahead of Balancer, Aave, and Compound Finance. Curve is the top choice amongst most of the arbitrage traders as it offers a lot of savings during the trades.
There is a difference between the algorithm of both Curve and Uniswap. Uniswap’s algorithm focuses on increasing the availability of liquidity. Whereas, the Curve’s focus is on enabling minimum slippage. Hence, Curve remains a top choice for the crypto traders with a high volume trading.
Understanding the Risks of Yield Farming
There is a reasonable chance of losing your money in yield farming. For specific protocols such as Uniswap, automated market makers can be quite profitable. However, volatility can cause you to lose funds. Any adverse price change causes your stake to reduce in value, relative to holding the original assets.
The idea is simple, and it’s only possible when you’re staking tokens that aren’t stablecoins because this way, you are exposed to the volatility in their price. In other words, if you stake 50% ETH and 50% of a random stablecoin to farm a third token, if the price of ETH drops sharply, you might end up losing more money than you would have if you simply market bought the token that you are farming.
Example: You stake 1 ETH (priced at $400) and 400 USDT to farm YFI while its price is $13,000 (the example is not based on existing liquidity pools.) Your daily ROI is 1%, meaning that you should earn about $8 worth of YFI every day for your $800 initial investment. However, because of severe market volatility, the price of ETH drops to $360, and you’ve lost 10% of your ETH while earning, let’s say, $8 of YFI. If you had market bought $800 of YFI instead and its price didn’t move, you would have preserved your value.
The concept dubbed “Impermanent Loss” is explained at length in this article by Quantstamp.
Smart Contract Risks
Hackers can exploit smart contracts, and there are many examples of such cases this year. Curve, $1 million compromised in bZx, lendf.me are only a few examples.
The DeFi boom has led to an increase in the TVL of nascent DeFi protocols by millions of dollars. Hence, attackers are increasingly targeting DeFi protocols.
Risk Within the Protocol Design
Most of the DeFi protocols are at a nascent stage, and hence, there is a possibility of gaming the incentives. Take a look at the recent events of YAM Finance, where an error in the rebasing mechanism caused the project to lose over 90% of its dollar value in just a few hours. Although, the development team had clearly disclosed the dangers of using the unaudited protocol.
High Liquidation Risk
Your collateral is subject to the volatility associated with cryptocurrencies. The market swings can also put your debt positions at risk. Thus, it may become undercollateralized. You may also have to face further losses because of inefficient liquidation mechanisms.
DeFi Tokens are Subject to the Bubble Risk
The underlying tokens of yield farming protocols are reflexive. Their value may increase with an uptick in its usage. This reminds the early days of the 2017 ICO boom. We all know how it ended. The DeFi boom might be different; however, most of the projects enjoy the hype and not their utility in reaching higher than expected market caps.
It’s important to keep in mind that on platforms such as Uniswap, which is at the forefront of DeFi, anyone is free to pull their liquidity off the market at will unless it’s locked through a third-party mechanism.
Additionally, in a lot of the cases, if not in most of them, the developers are in charge of huge amounts of the underlying asset and they can easily dump these tokens on the market, leaving investors with a sour taste. The most recent example comes from what was touted as a promising project called Sushiswap where the lead developer dumped his tokens worth millions of ETH, crashing the price of SUSHI by more than 50% in an instant.
Yield Farming has become the latest trend among crypto enthusiasts. It is also attracting many new users to the world of DeFi.
Yet, one must not forget that there are serious risks associated with it. Impermanent loss, smart contract risks, and liquidation risks are a major concern to be accounted for.
Even though it might be particularly profitable, it’s important to consider these challenges and only use capital that you can afford to lose.
ETH Developers Calculated How To Defuse The Difficulty Bomb
ETH developers calculated how to defuse the difficulty bomb because if they leave it untreated, they will slow down the network as we can see more in our Ethereum news today.
Ethereum’s encoded difficulty bomb is set to explode this summer and James Hancock as well as Tim beiko said that the ETH developers calculated the time needed to delay the bomb and this could the last time the developers need to take that action. Ethereum developers agreed on Friday how to delay the difficulty bomb ad if that is left untreated, the entire network could be slowed down. The difficulty bomb is an old piece of code that makes mining on ETH slower and less profitable over time by increasing the lag between the production of blocks.
We just wrapped up #AllCoreDevs 113 😁
Recap below 👇🏻 https://t.co/wDU2vlNnBS
— Tim Beiko | timbeiko.eth 🦇🔊 (@TimBeiko) May 14, 2021
Ethereum 2.0 switches the network from proof of work as a way of validating transactions with powerful mining computers to Proo of Stake which rewards the ones that pledge the coins to the network. It takes an average of 13 seconds to mine a block on ETH right now and without delaying the bomb, it could take more than 20 seconds to validate the block by the end of the year. Ethereum developers agreed on how many blocks were quite necessary to delay the bomb until December. The calculation for the delay was proposed by the ETH core developers James Hancock as he said:
“The bomb’s always there, and we defuse it by turning the blocktime back just for the bomb.”
He later said that the proposal will delay the bomb by 9,700,000 blocks. Tim Beiko, the ETH core developer also said that the developers dismissed a proposal to delay the bomb next spring but that won’t be necessary. The developers expected that by December, the network will update to allow the ETH 1.0 the network that relies on PoW to communicate with ETH 2.0 as the new network relies on PoS and this is known as the Merge:
“If the Merge is ready by December, we won’t need to do anything about the bomb because we will move away from mining entirely.”
If the merge plans remain unimplemented, the Shanghai fork is expected to go live and will delay the bomb once again. The Bomb has been delayed three times so far.
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VeChain price prediction: VeChain prepares to move higher?
TL;DR Breakdown VET retests 0.618 Fib retracement level. Closest major resistance at $0.22. Closest support at $0.16. Today’s VeChain price prediction is bullish as the market continues setting higher lows over the past days in preparation for a push to the upside next week. The overall market trades in the red today as Bitcoin has […]
- VET retests 0.618 Fib retracement level.
- Closest major resistance at $0.22.
- Closest support at $0.16.
Today’s VeChain price prediction is bullish as the market continues setting higher lows over the past days in preparation for a push to the upside next week.
The overall market trades in the red today as Bitcoin has lost almost 2 percent, while Ethereum trades with a 5 percent loss. Solana (SOL) is one of the best performers as it trades with a gain of 15 percent. Alternatively, Polkadot (DOT) is among the worst performers, with a loss of almost 9 percent over the last 24 hours.
VET/USD opened at $0.172 today after a bearish push yesterday. Over the past hours, VET/USD retested the local high at $0.19, from which the market moved lower once again and currently looks to set another higher low.
VeChain price movement in the last 24 hours
The VET/USD price moved in a range of $0.1701 – $0.1925, indicating a moderate amount of volatility. 24 hour trading volume has increased by 9.5 percent, totaling $1.7 billion. The total market cap trades around $15.5 billion, resulting in a market rank of 17th.
VET/USD 4-hour chart – VET consolidates in an increasingly tighter range over the past days
On the 4-hour chart, we can see bulls picking up any further selling pressure around the $0.175 mark, indicating that another slightly higher low will be set.
Overall the market continues retracing from the $0.25 swing high set on the 7th of May. A total loss of 35 percent was seen over several days, indicating that further selling pressure is likely exhausted.
Currently, the VeChain price action builds a base from which to move higher over the next week. Both a higher low and a lower high were established over the past 24 hours, indicating an increasingly tighter range. Therefore, once VET/USD breaks above the $0.19-$0.195 mark, we expect the market to rapidly move forwards to the next major resistance target around $0.215 – $0.22. From there, bulls will likely pick up momentum and push the market towards the current all-time high resistance around $0.27-$0.28.
Alternatively, Vechain cannot move any higher and breaks below the current local swing lows around $0.17, we should see another push lower over the next 24 hours. In this scenario, VET/USD will likely continue moving lower next week towards the next major support area around $0.12-$0.13.
VeChain Price Prediction: Conclusion
VeChain price prediction is bullish as the market continues to consolidate in an increasingly tighter range after a sharp drop earlier this week. Therefore, we expect VET/USD to push higher early next week to regain some of the loss.
Disclaimer. The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decisions.
Bitcoin Price Analysis: BTC Breaks Long Term Trend As Tesla Ditches It
Bitcoin has broken out of a long 3 month range of $10,000. After Elon Musk announced Tesla will no longer be accepting BTC due to environmental reasons, BTC broke its major support of $55,000 and quickly fell over 15%. BTC is now is now in scary waters.
While looking at the chart, BTC has broken a long term trend that has been held for nearly 6 months. This is not a good sign as there is much FUD spreading about Bitcoins environmental impact. BTC must hold major support range of $46,500-$48,000 or we can experience a large fall to $40,000. As of now, the 150MA has held the price of BTC as it touched this moving average for the first time in 6 months.
Bitcoin Price Analysis: BTC/USDT 1 Day Chart
If BTC can break above $48,000 and hold, there will be a decent revival to $51,400. In the case that BTC holds this resistance, next up is $54,400. BTC has grown over 1000% in a year. With this being said, there is a good chance more downside might occur before BTC resumes a bullish uptrend.
While looking at the Stochastic RSI, we can see that strength has reset to oversold levels. If the strength can bound above 30, expect a revival to minimum $51,400. The regular RSI also confirms a small bullish upswing as it has printed a bullish divergence. This occurs when price makes a Lowe low but RSI makes a higher low.
BTC intraday levels
- Spot rate: $48,100
- Trend: Bearish
- Volatility: High
- Support: $46,400
- Resistance: $48,000
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