- Yield Farming is a modern alternative to money lending.
- Thanks to its decentralized nature, it replaces the middleman in the money lending process.
- The best places to start, include Free TON, Aave, Compound, and Balancer.
The world of traditional finance is feeling outdated. We’re seeing crypto holders increase their investments way beyond the point banking could. Yield Farming alone is accomplishing much of this. It offers a new way for crypto holders to make money on their existing investments.
What is Yield Farming?
Yield farming is similar to a concept in traditional banking — that of lending money. In the world of fiat, banks use funds held in savings accounts to lend out to borrowers. Those borrowers pay back loans with interest, and some of that interest rate carries over to the lenders.
However, banks take up the majority of the return, which is unfair considering lenders are the fund-providers, here. This is where yield farming comes into play.
Yield farming takes the lending and borrowing concept and decentralizes it, hence the decentralized finance (DeFi) moniker the term falls under. Platforms and protocols take the place of banks. They are, however, autonomously run. There’s no middle-man taking a massive cut of the fees, meaning lenders get significantly more from their contributions.
Lenders receive interest in the form of a platform’s token. By using the platform, that token’s value should go up in value and increase a lender’s overall yield. The concept is still in its early stages, but many protocols are already harnessing yield farming to great effect. Let’s look at a few.
On June 29th, Free TON began its first yield farming program on its TON Swap decentralized exchange powered by Broxus, a laboratory for blockchain solutions and a member of the Free TON DeFi. In just four hours after its launch, the network saw a total locked value (TLV) of $20 million. It has also launched with various liquidity pairs with its own token, WTON, and assets like Tether (USDT), Wrapped Bitcoin (WBTC), and the USDC stablecoin. The program is going to be held for two years.
The platform plans to commit $1 billion in liquidity by year’s end, hoping to bring in other DeFi protocols to expand its offerings. TON is also targeting liquidity from the Ethereum 1.0 network before it moves to 2.0. Rewards will be released within two months of the platform’s launch.
Otherwise, lenders can create pools with any two of the supported trading pairs. What’s neat, though, is the platform’s “relic” system. If your wallet holds outdated versions of tokens, TON will notify you and even offer to upgrade them. This ensures you’re constantly using the latest and greatest tokens every time you connect to the platform.
Finally, the Free TON DeFi Alliance has partnered with the FRAX and STASIS protocols, the former of which has a trading pair. The partners are intent on bringing TON’s dynamic sharding technology and other benefits to the rest of the world, providing scalable and cheap digital currencies.
Lending and borrowing cryptocurrencies on Aave provides users with staked Aave (stkAAVE) — an asset equal in value to the traditional AAVE governance token. This yield farming program is only a few months old. Presently, users are testing the platform. It works on top of the platform’s already existing liquidity-providing solution. Lenders use it to earn by simply staking assets.
As of this writing, Aave users will earn an average of 2.46% APR for lending USDT, for example. Borrowers, however, will pay a rate of 2.93% APR on the same asset. These rates will fluctuate based on the crypto market’s performance.
The platform’s goal with this new program is to bring liquidity from Aave v1 to v2, as much is still trapped in the original platform. Come July 15, users can vote to keep the yield farming platform alive on the protocol or to not move forward with the project.
Compound is one of the first platforms to offer yield farming. Lenders earn cTokens equal to their stake, essentially Compound versions of whatever token they choose. These providers also earn the protocol’s COMP token for their contributions, which doubles as a governance token as well.
The platform offers various trading pairs like the DAI stablecoin, Ether (ETH), and ChainLink (LINK). As of this writing, annual percentage rates range from 0.15% to 2.5%, depending on the token.
COMP is a capped token with only 10 million due for supply. Around 3/4 of those tokens will cover governance. The rest will go to the development team.
Balancer is a yield farming protocol that’s also considered an automated market maker (AMM). AMM uses an algorithm to set asset values within pools. This is different from a traditional liquidity pool, which runs on bid orders like a cryptocurrency exchange.
It works with various pool types — Private, Shared, and Smart. Private pools are entirely customizable by the creator, meaning they can set minimum swap fees for cheaper transactions. Shared pools are traditional liquidity pools that any lender can contribute to. Then there are the smart pools, which are backed by a smart contract and have particular parameters.
What’s especially interesting, however, is balancer pools, a fourth type of liquidity holding. These pools can have up to eight assets at once — a far cry from the traditional two assets in most pools. Whenever a trade occurs, the pool is automatically rebalanced, hence, the name. All pools take advantage of Balancer’s ordering system as well, which automatically finds the best prices from all pool types, depending on the selected token.
Contributors earn the BAL token for their efforts, which is a governance asset similar to Aave’s. Users don’t have to create an account, either. They can utilize the protocol entirely anonymously.
Now you’re aware of how yield farming works, as well as the best places to do it. The concept is still early, but it’s one that millions of dollars are pouring into every day. If you’re a crypto holder looking to make money off of your funds, you can start on platforms like TON.