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Chyna Qu is the co-founder and chief operating officer of DeFiner, a decentralized financial network for cryptocurrency savings, loans and payments.
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Yield farming has evolved as a mainstream DeFi (decentralized finance) practice, involving investors or liquidity providers, putting cryptocurrencies to work across the numerous DeFi applications. Yield growers leverage smart contracts and protocols to get the most out of their capital (token); they move their assets using different strategies that involve offering liquidity and lending. Although productive agriculture is a simple cycle of supply and demand, farmers face some considerable risks such as smart contract bugs, sudden liquidation, or token devaluation.
Much like the 2017 Initial Coin Offering (ICO) boom that garnered media attention and increased adoption of blockchain technology, there is no doubt that DeFi has become the leading crypto trend in this pandemic year. This is reflected in the total value locked in DeFi contracts which went from just $ 1 billion in February 2020 to $ 10 billion by September 2020, with most of the growth recorded this year.
There are, however, a number of important differences between the current rise in DeFi and the previous ICO boom, which indicate that DeFi has reached a more sustainable market than the 2017 ICO golden age. For starters , the market is more mature, with savvy investors getting involved through thoughtful strategies. Second, the level of temperature rise around yield agriculture is significantly lower than what we saw in 2017 and 2018 with ICOs. This begs the question: How will DeFi evolve to capture a more sustainable financial ecosystem?
How sustainable is the increase in agricultural production?
June 2020 marked the resurgence of income farming and its main introduction when Compound began distributing their new token, COMP. Mining liquidity soon helped propel COMP to become the DeFi token leader in weeks. Compound allowed users to earn COMP simply by borrowing and lending the governance token. Some farmers have taken out leveraged loans to borrow the highest COMP yielding tokens, yielding very high returns. This liquidity mining model was soon replicated on other DeFi projects and quickly became standard DeFi industry practice.
Now, there are many open source projects and applications involved in liquidity mining and yield farming protocols. At the time of this writing, top projects like MakerDAO, Uniswap, is Aave now brings DeFi space into total locked value.
The Sushiwap The scandal that rocked the DeFi space in September highlighted the risks of devaluation, after the founder of Sushiswap had converted all of his 2.5 million Sushiswap tokens into ethereum (ETH). Initially considered a cryptocurrency exit scam by many, devaluation has now become one of the most feared risks to yield farming. The Sushiswap saga has left behind a trail of questions, the most significant of which is: how sustainable is the rise in popularity of agricultural agriculture?
For traditional finance pundits and even blockchain enthusiasts, yield farming and DeFi seemed too much of a risk: exit scams, crazy APYs (annual percentage returns) and failed projects are just some of the reasons why some critics and media have tipped the crop to fail in the long run. However, we must remember that, just like cryptocurrencies, excessive media and narrative frenzy is expected with each new decentralized financial concept.
While I agree that platforms that leverage future earnings to reward users with excessive APYs may not be sustainable in the medium to long term, the increase in the number of new projects and products powered by yield agriculture will ultimately constitute a precedent for the longevity of decentralized finance. As many DeFi products thrive on large quantities and increased liquidity, most of its sustainability is tied to agricultural production and the prosperity of new products.
Downsizing and regulation are the next steps for DeFi’s long-term sustainability
These innovations have the potential to transform the face of finance and spur mainstream adoption of cryptocurrencies and other similar assets.
On the other hand, as crop farming continues to grow and increase recognition for DeFi, it now faces Bitcoin’s age-old problem: scalability. The Ethereum network’s ability to handle multiple transactions is increasingly threatened, with network congestion leading to slower transaction times and ultimately higher gas (transaction) fees.
ETH commission chart:
Whenever I think of agriculture and open finance, I go back to the history of Bitcoin and reflect on how far the space of cryptocurrencies and digital assets has come. Over the next couple of months, other failed projects, especially those with unrealistic APYs, could put the negative spotlight on the DeFi world. But for the many DeFi projects that remain, agricultural production will become an industry standard that will transcend DeFi and become an innovative financial solution for many.
With the imminent launch of Ethereum 2.0, which is expected to improve DeFi’s quality of service by easing congestion on Ethereum and thereby provide faster and cheaper transactions, the immediate future looks bright for DeFi. As DeFi assets under management accelerate, yield farming should offer practices that lay the foundation for a sustainable decentralized economy.
Yield farming has proven hugely popular for market participants looking to profit from the many emerging DeFi projects. But as the DeFi ecosystem moves to the next level of development, yield farmers should consider how their practices can evolve for the benefit of the broader decentralized economy. Only then will we have a truly scalable and transformative ecosystem capable of attracting the mass adoption that early DeFi market makers initially thought possible.
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To know more:
DeFi Won “Bullish” Fans, But Ethereum’s “Crown” Is In Danger – Poll
Get Ready For Crypto Banking, DEFI & CBDC Surprises – Venture Capitalist
No DeFi bubbles, just ‘a Blip’
The 4 main risks faced by DeFi investors
The DeFi industry is breaking the law: it’s time to act
