Yield farming, or liquidity mining, is an investment approach in decentralized finance (DeFi) that involves providing liquidity to DeFi platforms in exchange for rewards, typically in the form of the platform’s native tokens. Yield farming is akin to earning interest on your crypto.
Fueling DeFi Growth Through Yield Farming
Just as depositing your dollars in a savings account provides banks the capital to make loans, staking your crypto in yield-bearing “accounts” provides DeFi platforms the capital to operate their “businesses” and a myriad of other benefits.
Yield farming draws capital to fuel the growth and expansion of the DeFi ecosystem and generates network effects that boost the demand for platform tokens, increasing their value. Hence, another way of investing in farming is purchasing and holding the tokens of top yield-farming platforms.
As you’ll observe in our updated yield farming sector article, yield farming presents the potential for high returns, maintains the DeFi sector dynamic and competitive, encourages continuous innovation, and attracts even more ecosystem participants.
Yield Farming 2024 Key takeaways
Yield farming is experiencing a revival in 2024 as the DeFi ecosystem witnesses heightened adoption. However, by engaging in yield farming, you can utilize your idle crypto to generate yield. Not only that, the leading yield farming protocols also enable you to purchase and hold their tokens, investing in this burgeoning sector.
The Demand for Yield Farming
As long as investors hold crypto, there will be a demand to earn interest. Many investors desire to put their crypto to work, akin to putting their money to work in a traditional savings account. Meanwhile, the yield farming platforms allows to borrow money from individual liquidity providers (LPs), who provide the capital to make their products function.
While becoming an LP is one strategy to earn money through yield farming, and there are many others, we believe the most straightforward investing approach is to buy and hold the tokens of top yield farming platforms. We’re bullish on crypto yield as an asset class because it brings a lot to the table that speaks to our core investing values:
The Promise of High APY
Yield farming rewards can sometimes reach absurd levels, exceeding as high as 3,000% APY. This is a major factor that draws in many investors despite the steep risks involved in staking funds across highly volatile cryptos and other derivatives. (Our rule of thumb: seek out reasonable returns from trustworthy projects. if an APY appears too good to be true, it usually is.)
Efficient Utilization of Idle Capital
At the VR Soldier, our experts advocate for a long-term, buy-and-hold approach. Yield farming enables investors to utilize their crypto rather than letting it sit idle in a cold wallet. The DeFi marketplace offers higher- and lower-risk staking options, allowing you to select opportunities that match your risk tolerance.
The Perks of Holding Governance Tokens
Most DeFi protocols reward LPs with their tokens. Some of these “governance tokens” come with special perks and additional benefits. For a well-established company with high TVL, governance rights can grant access to additional revenues from trading fees. Voting rights also grant you the power to have a say in the company’s future trajectory.
Diversification and Market Exposure
Diversification and risk mitigation are equally crucial in traditional and cryptocurrency investing. Yield farming enhances your exposure to exciting new DeFi projects and tokens. It could provide early access to an innovative new company and unlock massive ROI. Spreading funds across multiple companies and farming pools is also a great way to diversify.
A Potential Hedge Against Market Volatility
DeFi protocols have demonstrated remarkable resilience, even during crypto winters. Even when centralized exchanges collapsed, DEXs continued smooth operations with minimal hiccups. Many yield farming platforms offer APYs well above those in traditional savings accounts and treasury bonds. Yield farming presents an intelligent way for investors to navigate the crypto markets and combat high inflation.
The State of Yield Farming
Yield farming has historically provided high returns at a time when traditional banks offered meager interest rates. The crypto market downturn in 2022 resulted in losses totaling over $150 billion, a decline of more than 76%. However, since the conclusion of 2023, investor interest in crypto has surged due to Ethereum’s successful transition to PoS, the emergence of liquid staking protocols, and the SEC’s approval for Bitcoin spot futures.
According to DefiLlama, the TVL in DeFi was trending positively at $65 billion on December 31st, 2023, a 44% increase year-over-year. Barely three months later, in March 2024, the value had nearly doubled to $115 billion.
