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What Is Yield Farming? DeFi’s Hottest Trend Explained

Yield farming is undoubtedly the hottest topic within the cryptocurrency community as the DeFi craze continues with full force. Here’s an in-depth take on it.

The post What Is Yield Farming? DeFi’s Hottest Trend Explained appeared first on CryptoPotato.

Republished by Plato

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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.

Balancer
Comp, Curve, and Balancer

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.

yield_farming
Yield farming

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

Impermanent Loss

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.

tvl_sep20
Total value locked in DeFi, including yield farming as of September 8th, 2020.Source: Defi Pulse

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.

Rug Pulls

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.

Conclusion

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.

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Source: https://cryptopotato.com/what-is-yield-farming-defis-hottest-trend-explained/

Blockchain

CoinShares Launches a $75 Million Physically-Backed Ethereum (ETH) ETP

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A month after launching a Bitcoin ETP on Switzerland’s SIX Exchange, CoinShares has released a physically-backed exchange-traded product following the performance of the second-largest cryptocurrency – Ethereum. 

  • Describing itself as “Europe’s largest digital asset investment house,” CoinShares is a cryptocurrency-oriented manager with over $4 billion in AUM. The company, headquartered in London, announced the launch of its latest crypto product – a new physically-backed ETP tracking the performance of Ethereum. 
  • Called CoinShares Physical Ethereum, the product is already listed on the regulated SIX Swiss Exchange under the ticker ETHE and has a base fee of 1.25%. According to the company, the cost is “lower than the industry standard” of 2%. 
  • The statement explained that each unit of ETHE is backed with 0.03 Ether tokens at launch. Thus, it provides investors with “passive exposure to Ethereum’s native asset with the convenience of an ETP.” 
  • “In the early days of 2021, we have seen a continuation of last year’s demand in digital assets from institutions. We have also seen an increase in investor interest in Ethereum. We are encouraged by our client’s trust in our team to guide them in their journey through the digital asset ecosystem, and for many, Ethereum is an important part of that journey.” – commented Chief Revenue Officer Frank Spiteri. 

  • It’s worth noting that this is the company’s second similar product tracking the performance of a crypto asset launched this year. Somewhat expectedly, the first one, released in mid-January, follows the largest digital asset by market cap – Bitcoin. 
  • CryptoPotato reported upon its launch that it started with AUM of $200 million, and each unit is backed by 0.001 BTC. 
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Source: https://cryptopotato.com/coinshares-launches-a-75-million-physically-backed-ethereum-etp/

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Blockchain

Chainlink Price Analysis: 27 February

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Disclaimer: The findings of the following analysis are the sole opinions of the writer and should not be taken as investment advice

Bearish sentiment has been the norm over the past few days, with the same being the case at press time for altcoins such as Chainlink. LINK has seen its price hike by around 164 percent since the start of the year. Over the last 7 days, however, with sellers dominating the market, LINK lost close to 28 percent of its value. While there have been some signs of recovery on the price charts, traders cannot discount the possibility of a further dip soon.

At the time of writing, LINK was trading at $25.5 with a market cap of close to $10.5 billion, making it the ninth-largest cryptocurrency according to CoinMarketCap’s list.

Chainlink 1-day Chart

Source: LINK/USD, TradingView

Chainlink’s price surged within an ascending channel formation over the last two months and as expected, the breakout was bearish for the coin. Additionally, Bitcoin also fell over the past week, adding to LINK’s price woes.

At press time, while LINK had strong resistance around the $35.1-price range, it was testing the support at $23.9, just like it has over the past few days. If this support level fails, it is quite likely that LINK will head towards the next support at $19, creating an opportunity for traders to open short positions.

Rationale

The technical indicators for LINK were quite bearish at press time and one can expect a further price drop for the coin in the coming days. At the time, the RSI indicator was quite far away from the overbought zone and was close to the oversold zone, indicating the absence of a buyer-dominated market.

If the RSI drops even further, LINK’s downtrend will continue. The MACD indicator also painted a similar picture after having seen the Signal line go past the MACD line, resulting in a bearish crossover.

Important levels to watch out for 

Resistance: $35.1

Support: $23.9, $19

Entry: $24.7

Take Profit: $19.4

Stop Loss: $34.4

Risk/Reward: 0.56

Conclusion

Chainlink saw its price surge on the charts over the past two months. However, the sentiment has since changed quite significantly and the coin seemed to be firmly in the grip of the bears. The altcoin may see a further price drop in the coming week if the press time support level fails. Such a scenario will result in LINK’s price going below the $20-mark, presenting an opportunity for short positions in the market.


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Source: https://ambcrypto.com/chainlink-price-analysis-27-february

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Bitcoin Cash, Huobi Token, Zcash Price Analysis: 27 February

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Bitcoin Cash retained the 10th spot on the crypto-rankings, despite being severely impacted by the recent correction in the broader market. Huobi Token flashed bullish signals, but a break above its press time resistance was unlikely. Finally, Zcash was projected to trade within a fixed channel since volatility was low in the market.

Bitcoin Cash [BCH]

Source: BCH/USD, TradingView

Weekly losses on Bitcoin Cash‘s charts amounted to 34% as a correction in the broader market had a negative effect on the crypto-asset. This period also saw $3 billion erode from BCH’s total value as it held on to the number 10th spot in the crypto-rankings by a bare margin, with a market cap of $9.18 billion. At the time of writing, BCH’s price was floating just above its $464-support, while the indicators gave mixed signals on BCH’s future trajectory.

The RSI pointed lower from under the 40-mark and reflected the weakness in price. On the other hand, the MACD moved above the Signal line while the histogram registered rising bullish momentum. With the crypto-market awaiting strong cues, we can expect BCH to remain above its press time support level. If the aforementioned level fails, the next line of defense would be at $421.5.

Huobi Token [HT]

Source: HT/USD, TradingView

The ADX indicator showed that Huobi Token’s uptrend was weakening after the price snapped an all-time high exactly a week ago. In fact, the losses amounted to over 30% following the broader sell-off in the crypto-market. At the time of writing, the altcoin’s price had bounced back from the $15.4-support after the bulls stepped in.

The MACD closed in on a bullish crossover, while the red bars on the histogram moved towards the half-line on the histogram. Either way, its gains would be capped at the immediate resistance and a hike to record levels seemed unlikely over the coming trading sessions.

Zcash [ZEC]

Source: ZEC/USD, TradingView

The Bollinger Bands on Zcash’s hourly charts were compressed as volatility remained low after the price bounced back from its $114.7-support. Weak trading volumes and buying pressure worked against a bullish outcome even though the price looked to breach the $124.75-resistance.

The Awesome Oscillator switched to red from green as momentum moved back and forth over the last few sessions. Moving forward, expect Zcash to remain within its current channel as it awaits stronger signals from the broader market for a definitive move on the charts.


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Source: https://ambcrypto.com/bitcoin-cash-huobi-token-zcash-price-analysis-27-february

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