Staking, Liquidity Providing & Yield Farming Explained
MetaMask, the decentralized finance sector’s most popular crypto wallet, now has over 10 million users as per August 2021 data. In contrast, it only had 545,000 active users in July 2020, right in the middle of the DeFi boom.
ConsenSys its parent company, points to booming activity in decentralized finance platforms as a cause of the uptake in their free crypto wallet application. This spike in active users is so grand that currently, DeFi platforms have over $90 billion locked in their smart contract protocols.
In contrast, at the height of the 2020 DeFi summer, DeFi protocols had $2 billion of value locked in them. Central to the ongoing decentralized finance expansion is growing interest in staking, yield farming, and liquidity provision in Decentralized exchanges (DEXs) and crypto lending and borrowing protocols.
As of July 2021, over 3 million crypto addresses had connected with a DeFi project. 2.5 million users’ addresses had interacted with UniSwap while over 325,000 of them had borrowed or lent their crypto assets from Compound’s protocols.
SushiSwap had 198,618 active addresses in touch with its liquidity pools while the 1inch Exchange, a crypto protocols aggregator, had 276,254 users.
So, what is staking, yield farming, and liquidity provision, and why are these DeFi activities bringing in so much value to the decentralized finance sector?
What is staking, liquidity providing, and yield farming so popular?
A general description of staking, yield farming, and liquidity provision is ‘investment’. They are cryptocurrency investment options that earn investors compensation for availing their assets for an economic function.
These protocols provide investors with a financial reward for their support. They are some of the most popular decentralized finance protocols because they level investment grounds. Any person who has an internet connection and a smartphone can invest in the high yield DeFi sector and generate a passive income.
In DeFi they can do away with the friction-filled centralized traditional finance system that has played a huge role in creating global financial inequality. Staking, yield farming, and liquidity provision protocols can help bridge the chasm that exists between great wealth and good governance.
Louis Brandeis said, “We can either have democracy in this country or we can have great wealth concentrated in the hands of a few, but we can’t have both”. Brandeis, known as the “People’s Lawyer,” was a member of the U.S. Supreme Court Justice between 1916 and 1939.
Like most decentralized finance enthusiasts, Brandeis was against the influence of large financial institutions and money trusts on the American economy. He spent his life fighting monopolies, mass consumerism, and the extreme inequality that is exacerbated by economic growth.
Brandeis’s stand and rhetoric were a fringe political concern in his day but are now a global concern. His unheeded warning culminated in the 2008 global financial crunch. The meltdown’s orchestrators went scot-free while the system abandoned ordinary citizens. They had to dig their way out of the financial mess.
This fiscal inequality now influences politics, giving the 1% a greater say in global economic and political issues. Fortunately, the 2008 financial meltdown brought to light the limitations of the current financial meltdown, becoming a launchpad for the Bitcoin blockchain, the decentralized payment network that inspired decentralized finance.
Christopher “Sandy” Jencks, an academician notes that “All the costs and risks of capitalism seem to have been shifted largely to those who work rather than those who invest.” DeFi staking, yield farming, and liquidity provision can counter the financial and political inequality created by an imbalance in the share of income gains.
The top 1% of earners have had their income gains double because of globalization and favorable regulations. Most of all, the top 1% freely speculate in the financial services sector, a wealth generation tool, that the 99% find difficult to access.
Staking, yield farming, and liquidity mining are enhancing income gains flow to all that support it. Here, anyone can create disparate revenue streams that will eventually lower the existing economic imbalance. Staking, yield farming, and liquidity provision could help the global citizens at the bottom improve their lot.
Tokens and their use in DeFi staking yield farming and liquidity mining
Decentralized finance users invest, borrow or lend money but never have to provide credit scores and other KYC data to creditors. No one needs to know your name, career, wages, geographical location, or race when investing on DeFi platforms.
All that you need is some cryptocurrency in your wallet as trust-creating collateral. Staking, yield farming, and liquidity provision might be experimental protocols in an immature technology, but their implications could turn the world of financial investments upside down.
To perform this disruptive agenda, the decentralized world needs liquidity. Staking, yield farming, and liquidity mining are DeFi’s major sources of liquidity. Those protocols will pool user crypto assets together and lock them in smart contracts.
This liquidity will enhance the protocol user experience and functionality and reward investors with returns as yield or governance tokens. To this end, tokens are a prominent feature in staking, yield farming, and liquidity mining.
These crypto-assets represent protocol support and ownership of tokens in a crypto asset pool. DeFi protocols leverage utility, governance tokens, and stablecoins in their operations. Utility tokens have monetary value and their holders use them as money within some DeFi applications.
Governance tokens, on the other hand, function like certificates of ownership. Their holders can vote on protocol changes.
Utility tokens are incredibly volatile. Their monetary value can rise or dip instantaneously. These drastic changes in value could wipe out all yields that an investor may gain in yield farming, liquidity mining, and staking protocols.
For this reason, the DeFi world has embraced the use of stablecoins such as Mimo Protocol’s PAR. PAR is a decentralized euro-pegged stablecoin. Stablecoins such as PAR gives DeFi investments a fiat money kind of stability.
Stablecoins keep DeFi protocols yields free of crypto volatility, giving investors more yield than they would find in traditional investments. Most stablecoins are digital USD pegged or backed. PAR is a rising stablecoin algorithmically pegged to the Euro that brings price stability to DeFi protocols.
It gives its users access to the global economy and integrates them into an efficient financial market. Like the Euro, PAR is a symbol of economic growth and price stability. Stablecoin use in DeFi is growing at such high speeds that it has crossed the $65 billion mark in the first quarter of 2021, facilitating a transaction volume worth $1 trillion as per Messari data.
What is yield farming?
Yield farming is one of the most popular passive income generation protocols in DeFi. Farming yields lock cryptocurrencies in liquidity pools. Liquidity pools function pretty much like traditional bank accounts.
The fundamental difference between a liquidity pool and a bank account is that smart contracts manage pools. Financial sector middlemen manage bank accounts taking a huge cut off the profit that these accounts generate. The yield farmer’s crypto assets will supply a DeFi pool with much-needed liquidity.
Other users can borrow these assets for activities such as margin trading, then pay interest for access to credit. The yield farmer will earn a portion of this interest as a reward, increasing their crypto asset holdings.
Yield farmer crypto assets also provide liquidity in automated market maker decentralized exchanges. When yield farmers provide liquidity to a liquidity pool, they become liquidity providers. Liquidity providers often deposit two tokens into a liquidity pool.
The first token is either a utility token or a stablecoin, such as PAR. The liquidity provider will earn a percentage of the fees generated by the liquidity pool. Yield farming is a very lucrative DeFi protocol. It has returns as high as high-yield bonds or paying stocks in TradFi. Yield farming could provide 30% to 50% in annualized returns.
That said, yield farming has its risks. Placing your crypto assets in liquidity pools is akin to investing in unsecured bonds. You could lose your money to smart contract hackers and fraud such as rug pulls.
One other yield farming disadvantage is impermanent loss. Bi-token liquidity pools will lose a minute fraction of their initial crypto-asset investment as the pool’s algorithms adjust the token ratio to maintain a constant balance of tokens in the pool.
When a liquidity provider withdraws their assets from a liquidity pool, they will notice a loss in the volume of tokens. That said, the yield that they earn from liquidity pools could help offset impermanent losses.
What is liquidity mining?
Liquidity mining is a yield farming process. The crucial difference between a liquidity miner and a yield farmer is that the liquidity miner earns platform or governance tokens for providing liquidity to liquidity pools.
Liquidity mining was first introduced by Compound. Compound decided to award its liquidity providers with COMP, its governance token in 2020. On top of this, Compound would reward crypto-asset borrowers with COMP as well, enabling them to earn yield for taking out credit. Never before has this happened in the world of finance.
By motivating liquidity providers with liquidity provider tokens, liquidity miners can offset their impermanent loss risks. Liquidity mining stimulates the use of decentralized finance protocols since the liquidity provider token value will rise as platform usage increases. For this reason, liquidity mining amplifies yield farming benefits.
What is staking?
Staking in the crypto circles is a pledge. Stakers deposit their crypto assets to PoS (Proof of Stake) blockchain networks as collateral and then work as PoS transactions validators. They will earn staking rewards for their effort.
In decentralized finance, staking is also a method of staking your reputation on a DeFi protocol. When you stake your tokens on a DeFi platform, you will profit or make losses from its performance. Staking reward protocols will pay incentives to users that stake their crypto assets in them. Additionally, there are DeFi protocols that grant stakers protocol governance rights.
Liquidity mining and yield farming on Mimo
The Parallel Protocol’s PAR stable coin is a gateway to DeFi’s liquidity mining, staking, and yield farming protocols. PAR is collateralized by cryptocurrencies, such as volatile ETH or wBTC. So, investors only need to bring their crypto assets to the Mimo protocol vaults and mint PAR. PAR is a euro-pegged stablecoin. It follows then that one PAR has the value of one EUR.
Yield farmers that create PAR by locking their ERC 20 tokens in Mimo’s vaults earn a 2% yield rate on their PAR tokens. Yield farmers can generate more passive income by farming yield in Balancer pools. Balancer is a portfolio management protocol that has liquidity mining features.
PAR holders that deposit their PAR or MIMO tokens in Balancer pools not only earn more yield from its pools but can mint Balancer liquidity provider (BPT) tokens that they can stake in the Mimo protocol.
By staking their Balancer liquidity provider tokens in Mimo, they will earn MIMO tokens that give them a stake in Mimo’s governance system. MIMO holders will earn newly minted Mimo tokens.
How to Open a Mimo Vault
- To open a Mimo vault, head to https://mimo.capital and connect your wallet.
- Click the ‘Connect Wallet’ tab placed on the page’s right corner.
- Mimo is an Ethereum based protocol, so you will need an Ethereum wallet such as MetaMask.
- The Mimo protocol has a clean, attractive, and intuitive user interface. Creating PAR is therefore easy. To create PAR, you only need to click the Mint PAR tab on the left of your Mimo Protocol interface dashboard.
- Choose the amount of PAR that you would like to create to farm yield in Mimo liquidity pools.
- Mimo has several types of vaults. They include the ETH, WETH, WBTC, USDC vaults. To farm yield in any of these vaults, click on any of them and study their data first. Mimo provides the vault’s liquidation ratio, price, and the current value of the collateral token on the dashboard.
- Choose your vault and mint your PAR.
- Vault creation takes some time, so give it a few minutes.
- Once the process is complete, you will have created a Mimo vault and minted PAR tokens.
Mimo will display the amount of PAR that you own, the collateral token locked values locked in Mimo vaults, and their EUR market price. Mimo’s dashboard also displays your vault’s collateralization ratio and liquidation price. Mimo’s vaults allow collateralization of up to 150% for vault safety.
How to earn more interest from Mimo Vaults using Polygon
Mimo now integrates with Polygon. Polygon is a layer 2 scaling solution that enhances Ethereum based platforms’ composability while solving some scalability challenges. Polygon users have access to all Ethereum based platforms and enjoy lower fee charges and faster transactions.
Mimo users that use the Polygon network will have less transaction complexity. On top of this, they will steer clear of Ethereum’s congestion difficulties. They will pay less to farm yield, mine liquidity, or stake in Mimo.
PAR token holders will have access to more utility, mining, and minting PAR faster via the Polygon network. On top of this, they will incur lower transaction charges on Polygon. It follows then, that creating Mimo vaults now has a lower barrier of entry. MATIC holders can open vaults using their MATIC tokens.
“Users have been asking for this for months and we’re excited to see how the community takes advantage of this. With lower fees, anyone can get started with Mimo much easier and leverage our protocol. Once adoption spreads, we’ll be much more poised to start announcing even more improvements to the community,” says Nick Calabro, Mimo’s Growth Manager
Mason Nystrom, a research analyst at Messari, notes that the DeFi user base is happening quicker than ever. Pointing out the sector’s faster growth intervals, he says that while it took these protocols 142 days to move from a one million to a two million user base, the jump to the 3 million mark took 78 days.
And while some users might hold multiple addresses, bloating this figure, it is an undeniable fact that the future of finance is indeed decentralized. Join the Mimo Protocol and farm yield or mine liquidity in its vaults, and be part of the change. Mimo’s accessible passive income generation will change the world by lowering access to financial investment vehicles, enhancing financial equity.