What is DeFi Yield Farming, and how do people get 9000% gains?
What does it mean to be a degen in defi? (Rerun from February 2022)
TL;DR: DeFi Yield Farming = CrossFit of Crypto
Hi there!
Bringing back a topic I previously posted in February 2022, which is coincidentally my 3rd post I ever made, which is also single handedly the hardest thing I’ve learned in Crypto. DeFi Yield Investing. Are you ready for this ride?
As always, you can find TL;DRs and graphics as I explain what could potentially be a very absurd foreign set of concepts. Also I promise to cover other topics beyond Crypto!
In Case You Missed It
Sections You Can Skim To
WTF is DeFi Yield Farming?
WHAT are the gains?
WHAT are some ways to earn?
WHAT’s IMPOSSIBLY Absurd?
WHAT did I learn?
TL;DR: Investing on Steroids and Absurdity
DeFi Yield Farming - It is a way to make crypto investments using crypto beyond buying and holding a cryptocurrency. Breaking the phrase up in my terms:
DeFi is short for Decentralized Finance
Yield is the return on investment
Farming is the collective strategies and tactics employed to consistently getting returns through the management of different, um crops I guess
Putting it back together, DeFi Yield Farming is a cowboy-like-speculative-based discipline of investing that is about chasing maximum interest rewards - consistently getting returns, and growing those returns, using Crypto directly on Decentralized Finance protocols. Also, for now, Protocols = The Underlying Tech making this work.
TL;DR: The Power of Stock, Foreign Currency, Lending, and Borrowing, crashed into One.
Really important. Let’s preface this read with a couple of commonalities to help you connect the dots better. Crypto Investing takes four types of financial investing worlds and collides it together. Those worlds are:
Stock Investing, where you buy and sell stocks using your US Dollars (Or Yen, Hi Andy!).
Foreign Currency Exchange, where you can swap your USD for Euros, and take the Euros to swap for British Pounds. Etc. Changes in the currency could be a gain depending on when you make the trade and what the fees are.
Lending - Where you can lend cash and get paid interest for it
Borrowing - Where your crypto assets are used as collateral to secure a loan.
The twist? It’s happening really fast, without talking to any people, and across multiple decentralized...institutions? I’m referring to the Crypto equivalent of whatever we call banks, lenders, and stock exchanges.
TL;DR: 4 focus areas to maximize gains: Interests, fees, tokens, and appreciation
In the crypto investing world, specifically DeFi Yield Farming, there are four ways to earn gains that can underpin and drive your overall crypto gains. Certain outcomes are present depending on the strategy you use.
Types of Gain
Earn interest I earn income through interest on my principal balance.
Earn on fees I earn income through transaction fees.
Earn tokens I earn another Crypto Asset (a token).
Earn on Appreciation of Asset Value - I earn on the rising value of the asset
These are the primary ways to earn. But what are the strategies I can use?
TL;DR: 4 Strategies + 2 Crazy Things
TL;DR: Contribute sitting digital assets, get trade commissions and other incentives.
You can power crypto trading activity on decentralized exchanges by contributing crypto assets to a liquidity pool. You contribute your sitting assets to be used to facilitate trade on various Crypto decentralized exchanges (DEXs).
With a Liquidity Pool, you can earn:
Liquidity Pool Tokens - quite literally another Crypto asset unique from your contribution, Liquidity Pool Tokens, often called LP Tokens, represent a % of your ownership of a pool. The tokens themselves can have their own value and usage.
Trading Fees - as Buys / Swaps / Sells of Cryptocurrencies occurring on Decentralized Exchanges happen, you can earn a % of the trading fees, which is determined by a % of your ownership in the pool.
You can withdraw from the pool and get your contribution back at any time.
Note 1: DEXs, or Decentralized Exchanges, are exchanges without any brokers where traders can trade their Crypto assets directly with each other. For the introverts out there - no talking necessary.
Note 2: I have extra content on this. Don’t know what to do though…
TL;DR: Get rewarded for locking your Crypto.
You can earn interest (or another Crypto asset altogether) by staking your Crypto. Staking is when you lock your asset in a network, and the asset itself becomes a transaction validator. Can’t explain the technicality, just think of it as rewarded loyalty for promising to leaving your Crypto there.
The people who benefit from staking get this: Transactions getting confirmed (yay), and more certainty in available funds (you are locked from swapping your crypto out).
TL;DR: Contribute sitting assets to others, earn interests or any other incentives
That’s right, you can lend Crypto to others and you get paid back over time. Lending activities can be backed by another asset, or actual currency, depending on your lending protocol choice. You can also elect to give an unsecured loan lending, and require even higher interest terms.
TLDR: Get incentivized with different crypto asset rewards
I can borrow money by depositing another crypto asset. I can also borrow for another crypto asset altogether.
I would do this if I believe my original crypto asset will appreciate in value, but I don’t want to sell it. Instead, I use it as collateral for a loan, and get US Dollars or another crypto asset instead.
Nearest Mental Model: If you own a house, you can borrow against the equity of the house. Same with Crypto.
TL;DR: Get ready to say WTF.
TL;DR: Take the Liquidity Pool Tokens, and stake that for another Crypto Asset Reward.
Participation in a Liquidity Pools provide an LP Token. That token represents your ownership in a Liquidity Pool including the cash-flow from trading fees. You can redeem (cash out) at any time, or transfer it to someone, or stake it. You can stake it for additional interest on the LP Token, or another Crypto asset.
If I contributed two crypto assets (Let’s say LION Coin and CAT COIN) into a Liquidity Pool, I would get the LP token JAGUAR COIN.
I can take my LP Token, JAGUAR COIN, and stake it somewhere and get interest on JAGUAR COIN, or even get rewarded with another coin, PANTHER COIN.
This is on top of the trading fees, and the possible increase in asset value from just leaving my Crypto there.
TL;DR: Cheat code to turn $1 into $2.
Remember the part where you can borrow using Crypto and get US Dollars or other Crypto assets? Let’s focus on borrowing Crypto for another Crypto asset.
I can borrow a Crypto Asset, then using the borrowed amount I received, exchange it for my original Crypto Asset, and then borrow again. Actually, I can borrow a few more times. Here’s an example using two I swear they could be real Crypto coins.
1st Borrow Round
I have $100 in JASON Coin, deposited and borrow $60 DAVID Coin.
I go somewhere else, swap the $60 in DAVID Coin for $60 in Jason Coin.
2nd Borrow Round
I come back and deposit $60 JASON Coin and borrow $36 in DAVID Coin.
I go somewhere else, swap $36 DAVID Coin for $36 JASON Coin.
3rd Borrow Round
I come back again and deposit $36 JASON Coin and get $22 David Coin.
I do this X amount of times until I run out or hit a minimum.
By the time I’m at the 3rd Borrow Round, my Leverage Lending strategy has allowed me to extend $100 in JASON COIN into $196 worth of JASON COIN.
While I need to pay borrowing fees and interest, I am betting that the rising value of JASON COIN makes it too valuable for me to sell, so I used it as collateral for a crypto-based loan, and then continuously did that until I maxed out.
Mental Model: The closet thing I got is think of Inception with the multiple dream layers. It’s that, but investing.
TL;DR: It’s bonkers.
DeFi Yield Farming is when you serially rotate your crypto asset and rewards across various DeFi Protocols, chasing and betting on rewards. This is also an introvert / someone who doesn’t want to talk to people’s - heavenly dream as you can do all this with a few click of buttons. These are all extremely risky, and if the value of your Crypto Asset drops, good luck!
Shoutout to Peter Kim, Co-Founder of PolymerLabs, for introducing this topic.