2020 has indeed been an encouraging and landmark year for the crypto industry. It must go down in history as a period when the De-Fi sector started booming. The tide of innovation sweeping our world has opened up tremendous new avenues of opportunity. Establishing different types of financial instruments allows borrowing without regard for credit history from anywhere in the world. Hence, it would be interesting to lay out a balanced overview of the benefits of a comparatively young, yet rapidly growing sphere. Let’s get started.
As a matter of first importance, you require some fundamental comprehension of DeFi. To give you a very wide, non-generalized definition, one of the biggest buzzwords in technology right now is all about decentralized exchange platforms and lending protocols. Simply put, wherever there are smart contracts and a lack of centralization (a hot wallet, a single server, etc.), in all likelihood, there is De-Fi.
As an alternative financial instrument, cryptocurrencies open up possibilities of additional pay for users. On the decentralized finance market, players decided to immediately exploit this opportunity. They started a movement called yield farming. Participants strive to receive a better return on their investments using DeFi protocols. The explanation for the name may lie in the area of work of crypto farmers — they “grow” their income from previously “sown” investments.
In order to meet the target, investors adopt different strategies, including those described below:
- Earning on rewards and loan interest. To do this, a farmer needs to register in a DeFi project that issues loans.
- Liquidity mining. Users get rewarded for dealing with a specific protocol. They serve as liquidity providers, popularizing the project. In most cases, a startup distributes a certain number of digital assets between participants on a daily basis.
- Swaps. This is the exchange of tokens of one protocol for coins of another. Continuing market research with a view to reaching alternative strategies would be an important component of yield farming.
Why Are DeFi and Yield Farming So Hyped Up?
We know what you think: Why has DeFi become so popular in 2020, right? From the user point of view, the idea behind an open financial ecosystem is something pretty simple. People bring the liquidity that the smart contract architecture uses in a specific way. For example, it lends out at interest or runs liquidity pools to charge fees. Both the DeFi team and the liquidity provider benefit from the situation.
The total number of assets brought in this way to DeFi has grown 16 fold this year. In December 2019, the figure was bleeding below $700 million roughly. Now, it is almost $12 billion. But why now, here, suddenly? We actually had a big problem trying to answer a simple question like that. There is rarely a single, isolated reason for this. Any event of significance is almost always a set of causes. Probably, the cryptocurrency business model is beginning to reach its limits. The model where the team of a service X is trying to take all the profit, kind of the “decentralization for the rich” is being slowly abandoned.
At the same time, people seem to have a lot of pent up aggression toward centralized services because of never-ending hacks, exit scams, the mounting pressure of regulators. So, the liquidity has started to flow toward the decentralized segment. In any case, this process has only started; it is not yet completed.
The main benefits relating to decentralized finance are as follows:
- If Bitcoin is a peer-to-peer electronic cash system, then DeFi is a peer-to-peer system of electronic financial instruments. The hidden power of its ecosystem can maintain unrestricted access to any type of traditional financial services besides relieving the need for intermediaries, and decreasing entry barriers.
- DeFi applications are potentially useful for the residents of countries with a relatively poor or fragile economy.
- Such services also figure more prominently in the demand of developed countries, especially in credit facilities, in the investment environment, and the development of new revenue generation models.
- Another plus is anonymity, which is highly valued in the crypto community. It should also be remembered that you are the boss of your own finances. That means you and you alone decide how to manage them. In this sense, centralized platforms are losing the war, since they store all user funds in cold and hot wallets.
- The source code of DeFi applications is open for audit. Well, we think you know what this means to the user. Anyone can understand the functionality of the contract or identify bugs. All transactional activity is public.
- The transborder nature. Most of these blockchain-based applications are available to any Internet user.
Although the idea of investment income is nothing new and has often produced positive results, the concept of yield farming is at the origin of the DeFi sector. Its popularity is now in line with the ICO craze in 2017 thanks to the rule of supply and demand. So, what is so special about the main driver of decentralized finance growth?
- The advantages of the popular investment strategy are obvious — profits. Farmers who have immediately begun introducing a new project can receive a reward in the form of tokens which may gain in value speedily. If you sell these tokens at the right time, you can make substantial profits. These revenues can be reinvested in other DeFi projects to find better income opportunities.
- Liquidity pools have better returns than financial markets.
- This multi-stage capital management algorithm is a brilliant idea of passive income with cryptocurrency.
- This is a promising high-tech sphere with huge potential.
- The yield is significantly higher than in banks. There is a large selection of DeFi products with different features.
- You reap what you sow, end of the story.
We hope you are now convinced that DeFi is not a regular hype in the crypto universe. Taking a walk down memory lane, the market of magic internet money was something unthinkable only five years ago. A similar statement could be made about decentralized finance. From the very beginning, the sphere was exclusively for geeks and programmers. In 2017, it seized the attention of the international community and was discussed with the seriousness it deserved.
And now, in 2020, DeFi has blossomed into an astonishingly fruitful area, which led to the fact that the crypto market became traditional in comparison to it. The grand takeaway here? Whether you like it or not, one day you will just wake up and DeFi is something different and altogether traditional. Even though decentralized finance and yield farming are very promising, there are several major hurdles that need to be overcome before they can reach a broader audience. It’s just a matter of time, anyway.
Yield farming is most likely just beginning to evolve and hence lose its controversial status. At least the growth of the number of opportunities for passive earnings for users will continue unabated. This potential is relevant not only for experienced enthusiasts but also for newbies in the world of DeFi. At the same time, people should bear in mind the explosive nature of new technology and the serious risks in general. Believe us, because we know.
Everyone knows. We just thought you’d like to know, too. So, decide ahead how much money you are ready to spend, a sum you wouldn’t miss much.