Yield Farming in DeFi — How can Protocols Automate the Process

DeFi’s market cap is over $38 billion as of November 2022, with a total trading volume of more than $3.8 billion in the past 24 hours.

Despite the “bottom” that has rocked the crypto market so far this year, the numbers show that DeFi is still thriving — a large number of traders are executing trades and closing deals in the market.

And the fact that DeFi connects lenders and borrowers in a “trustless” peer-to-peer manner without the mediation of a third party, such as a bank, makes it even more appealing to people willing to deposit funds in liquidity pools for profit.

This explains why yield-farming is becoming increasingly popular in the DeFi ecosystem.

Where Does Yield-farming, the New Way of Making Money, Fit in the Defi Ecosystem?

Yield-farming (or liquidity mining) is a type of investment in the DeFi ecosystem in which you, the farmer, provide liquidity (or deposit fund) to a DeFi protocol and then have it locked up for a reward. It is a novel way that allows you to provide liquidity to a specific DeFi protocol while rewarding the gesture with the protocol’s native token, incentives, interest, or additional cryptocurrency.

Yield farming is powered by blockchain-based smart contracts that provide decentralized financial services to both the ecosystem’s borrowers and lenders. This is one of DeFi’s unique trends that has piqued the interest of crypto enthusiasts: it is a new way of earning rewards through cryptocurrency holding using permissionless liquidity protocols.

You can use it to stake and lend crypto assets within DeFi protocols.

Although yield-farming was originally intended to be a source of passive income for interested crypto investors, with the emergence of a large number of blockchains and platforms for various strategies, it has become a routine operation for many people.

While yield-farming represents the future of decentralized finance, current cross-chain farming is complex and limited by the capabilities of existing cross-chain protocols; they place the burden of yield-farming on the farmers themselves who may not have the time to:

• provide liquidity to a blockchain that is best for their farming desires,
• navigate different blockchains in order to maximize profit,
• learn how to choose from numerous pools, and identify which is the best pool to provide liquidity to,
• monitor their liquidity and manually calculate their returns on investment, or
• manually transfer their liquidity to another DeFi protocol when there is a better offer or a drop in profitability.

But What If There Is an Automatic Yield-Generating Protocol That Can Simplify Yield-farming And Guarantee Stable Returns?

Protocols that support automatic yield generation would allow users to provide liquidity from any place of their choice in whatever token. This eliminates the issue of worrying which blockchain to farm on that will yield good rewards. Automatic yield protocols would take care of this problem and at the same time find the best place to invest users’ assets in order to generate maximum profits. Moreover, if the yield in profit falls in one blockchain, the automatic yield protocol would be able to move the assets to another more suitable blockchain. In short, automatic yield protocols would take care of the complex farming strategies associated with cross-chain farming.

Similarly to other lending services, lending protocols require the user to deposit collateral. When the liquidation threshold is reached, the user runs the risk of having the collateral sold off at an unfavorable price. For this reason, only people who have lots of capital (the whales) are the ones who profit from yield-farming. However, automatic yield protocols allow the user to sell part of the collateral that is necessary to cover the drawdown in exchange rate difference when the liquidation threshold is reached, while the user keeps the remaining assets.

This will ensure that not only the whales who have lots of capital to deploy can benefit from yield-farming — but everybody, because everybody would be in control of their investment, while the automatic yield protocol does the farming for them. In essence, automatic yield protocols:

• allow yield-farmers to farm easily on multiple blockchains,
• have a single protocol to which the farmers can deposit their liquidity in one place,
• incorporate liquidity pairs that are monitored, and
• perform all the complex operations that the farmers have to do manually.

Sikka Protocol Integrates Polygon Chain and Cross-chain Liquid StakingSikka Protocol operates at the cutting edge of decentralized finance. Part of that role is to function as a liquidity provider to MATIC and the Polygon chain, and to keep users’ assets liquid and accessible at all times via ankrMATIC liquid staking tokens.

To accomplish this, Sikka allows users who stake their MATIC through the protocol to take out a loan in a USD-pegged stable asset — SIKKA — and earn passive income against it in GIKKA governance tokens. DeFi is all about enhanced utility and Sikka multiplies yield generation against a single position.

Sikka builds on Polygon not only because the chain and its ecosystem has enjoyed considerable growth this year, but because that growth is presenting innumerable new yield farming opportunities. There has been a proliferation of liquidity mines, staking options, and yield farms on Polygon and cross-chain DEXs and staking pools, with PancakeSwap and UniSwap among the leading exchanges.

The open-source nature of Sikka allows DeFi projects to build on top of it and uncover DeFi composability potential, allowing SIKKA stakeholders to increase their returns. Providing a cross-chain layer for developers and users to securely join the multi-chain DeFi ecosystem with ease.