What "Yield Farming" Needs to Take DeFi Mainstream | Hacker Noon

Following the crypto hype-cycle of 2017–18, it’s safe to say that the industry has made some progress. There is now a spectrum of crypto-enabled financial services available; from stable coins, synthetic assets, peer-to-peer insurance, and peer-to-peer borrowing and lending, to name a few.

Crypto-enabled financial applications — coined Decentralised Finance (DeFi) — are challenging the established order of centralised financial services in ways that unlock new income-generating opportunities that are more open and accessible to everyone.

At its core, financial services are multi-sided marketplaces that are typically coordinated by banking intermediaries. ‘Financial assets’ typically make up the supply-side and ‘buyers’ or ‘borrowers’ form the demand side.

In today’s low-interest-rate environment, ordinary people who deposit their money in a bank account no longer can make any money on their savings; especially when you have to also take into consideration the intermediary fees needed to keep the banks afloat as well as inflation.

Through removal of rent-seeking banking intermediaries thanks to crypto-economic game theory, DeFi aims to offer a silver lining.

DeFi is making it incredibly easier for anyone in the world to access the financial services industry in a permissionless way and reap the benefits as either or supply-side and demand-side contributor to its full extent.

Income-generating opportunities for supply-side participants can be more fruitful in comparison to the legacy system since less of the available margin is used to cover the costs of paper-based settlement processes and remunerating profit-seeking intermediaries.

However, the buck doesn’t stop there. More recently, these income-generating opportunities have risen far greater than just a few basis points better than the legacy financial industry.

DeFi service providers — that exist as protocols residing on the Ethereum blockchain — have begun issuing their own digital tokens and gifting them to their existing and new users to entice growth. These “governance tokens”, typically have the nominal purpose of giving owners a say in how the specific DeFi service is run. Since these tokens have real utility (with very similar qualities to holding shares in a company), they can be considered valuable, on a case-by-case basis.

The introduction of these application-specific governance tokens has, therefore, catapulted the income-generating opportunities available in crypto to new all-time highs. Resultantly, this has triggered a hot new trend, termed “yield farming,” which is shorthand for creative strategies where users of these protocols participate in inventive ways to earn as many of these tokens as they possibly can and maximise their dollar-denominated returns.

Upwards of 1000% APR in some cases sounds like spellbinding stuff. But, how many people do you actually know who are taking advantage of yield farming that DeFi have to offer?

According to a study by Cambridge University, less than 1% of the world’s population own cryptocurrency at all. And despite rapid growth, only 0.0024% of global wealth is collateralised in Decentralised Finance (DeFi) services.

So, if DeFi is our financial future, then why still are so few of us taking part?

Where DeFi and Yield Farming Falls Short

To change an individual’s financial habits, it would be prudent to assume that any new proposition should either be more rewarding and/or less risky than the status quo.

When we consider how rewarding some of these new yield farming opportunities are, at first glance, the rates appear rather compelling.

However, when you consider the time investment for an average DeFi novice in education, trial and error as well as the risks involved with moving their wealth into a smart contract that they do not understand how to assess, the reward is simply not big enough.

Even the crypto-veterans are struggling to keep up.

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What "Yield Farming" Needs to Take DeFi Mainstream | Hacker Noon

Mitchel Carter

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