Between 2020 and 2021, there will be a large increase in the number of people using yield farming, which is one of the most well-liked methods for earning returns through decentralized finance. Despite this, will the system continue to be profitable for investors in 2022?
Let’s look at DeFi yield farming, how it works, and whether or not it’s a viable option for Defi users, given the present state of the market.
What id DeFi Yield Farming?
The technique of creating income on your coin through decentralized finance (Defi) applications is known as yield farming. This method is also commonly referred to as liquidity mining. Staking is a form of yield farming involving depositing and locking tokens in a smart contract across several platforms and protocols. Farmers can take part in this process in a variety of different ways, including the following:
- Adding tokens to a liquidity pool and supplying liquidity through lending and borrowing platforms in order to enhance leverage through lending or earning interest
- By engaging in arbitrage, you can make a profit from the differences in interest rates offered by various loan platforms.
- Staking their tokens through methods offering a high annual percentage yield
They are utilizing high-yielding coin-staking strategies (often, more recent projects that will benefit from a larger number of users staking their tokens to protect the network). These methods can be employed alone or in combination to maximize an investor’s profits.
As an illustration, a user may borrow funds using a lending protocol and then use those funds to give liquidity while receiving interest on the transaction.
Yield Farming has gained a lot of popularity due to the growing number of innovative businesses that require liquidity so that their customers can participate in their ecosystems. These projects either establish their protocols or use protocols that already exist to entice liquidity providers (LPs) by offering high annual percentage yields on their farms.
An LP can use these technologies to its advantage to deposit a certain amount of tokens and earn interest in exchange for providing liquidity to the network.
Annual Percentage Yields (APYs)
On the other hand, high annual percentage yields (APYs) come with a greater risk for investors due to the increased volatility of the projects in which they participate. The concept of potential reward relative to possible loss is relevant here.
The Total Value Invested (TVL) statistic is a tool for estimating the amount of money that is locked into various farming systems. The term “total value locked” (TVL) refers to the monetary value of the tokens (stablecoins, crypto, reward tokens, farm tokens, etc.) that are staked or “locked” in the protocol.
The yearly rate of return is used in calculating returns, which estimates how much one would receive if one froze their tokens for a full year.
The annual percentage yield (APY) considers compound interest when calculating your returns. This distinction is extremely important because compounding programs, such as Beefy Finance, have recently gained more traction among Defi yield farming for investors.
A second factor to consider is that annual percentage rates (APR) and annual percentage yields (APY) are subject to consistent shifts over time. This is primarily because more customers are opting to engage in practices that lower the rate of return.
This is why farmers are flocking to newer methods and leaving yield farming as new investors comprehend the approach and join the industry.
Is DeFi Yield Farming is Valuable in 2022?
Despite its many benefits, yield farming presents several challenges for participants in the ecosystem of decentralized financial systems. For instance, Bitcoin (BTC) and Ethereum (ETH), in addition to the rest of the cryptocurrency market, have been subject to considerable price shifts throughout this year.
Users who have invested in protocols that use these coins and the assets that underlie them are influenced by the market’s volatility.
Another issue is that Bitcoin and Ethereum significantly correlate with the prices of other cryptocurrencies. This means that the costs of different crypto coins frequently reflect Bitcoin and Ethereum’s price movements.
There are several situations in which the charts display patterns that are similar to one another.
For example, high liquidations in BTC and ETH manifest as severe losses in multiple crypto charts, which reveal steep dips and recoveries over the same periods. These charts also show that these declines and recoveries can occur simultaneously.
Additional challenges include the possibility of a decline in asset value and the restricted ability to generate revenue from high-quality assets such as Bitcoin and Ethereum.
When it comes to the case of low returns being developed, blue-chip investments offer less volatility than new projects, even though they are still risky. Consequently, there is less incentive to implement processes that create bigger returns because investors are exposed to less risk.
In pursuing higher returns, investors may invest in riskier assets and explore more complex investment strategies.
Users have the potential to benefit from using platforms in the current market situation. Despite a recent downturn in the cryptocurrency market, InvestDEFY’s weekly market-neutral yield harvesting program, SYGMA, performed quite well.
Stats
In the period beginning on January 21st, 2022, and ending on July 1st, 2022, the SYGMA BTC portfolio generated a return of 8.52% with 8.63 volatility, while the SYGMA ETH portfolio generated a return of -4.01% with 14.6 volatility.
During the same period, the return on investment for BTC was -50 percent with a volatility of 72, while the return on investment for ETH was -62% with a volatility of 90. Even if the markets go down over the week, SYGMA will still produce a yield in the form of premiums and deliver returns that are within a protection threshold that has been established.
The total weekly returns are put back into the investment, which results in a compounding effect throughout the investment’s existence.
Users can participate in the protocol since the platform’s custodian controls the collateral assets. This eliminates the need for users to move their assets through several counterparties. As a direct result, users are put in less unnecessary danger.
Conclusion
Since its debut, yield farming has been one of the most popular ways for investors to earn interest in the decentralized financial ecosystem. A significant number of users have joined the multiple protocols in operation in the Defi yield farming domain due to the diverse collection of tools and techniques it offers.
Despite the increased volatility in 2002, yield farming is still a feasible strategy for investors to profit from their bitcoin holdings. This is even though volatility increased in 2002.
