DeFi x NFT


<p>Liquidity mining, along with yield farming, is part of the crypto agricultural phenomenon which gained huge traction in 2020 with the rise of Decentralized Finance (DeFi).</p>



<p>In essence, liquidity mining is a network technique where users supply the capital to a project&#8217;s protocol in return for a reward of fees (Eth) and/or the project&#8217;s native token.</p>



<p>By adding the appropriate crypto to a designated pool, users increase the liquidity of that token on the market and users get rewards. Supplying liquidity in this manner allows projects to be supported and to distribute their tokens while liquidity providers can earn a substantial percentage in return for increasing the size of a particular token pool.</p>



<p>Being compensated for providing liquidity is not a new concept and has been commonplace within traditional financial and banking sectors for many years.</p>



<p>Liquidity Mining is akin to Automated Market Making (AMM) with traditional market makers being a key part of the trading pits. They have highly capitalized traders with high-capital availability or standards, who profit by providing liquidity to the rest of the market, buying wholesale, and selling for a slight profit. They thus ensured the players in the market could always buy and sell, basically acting as ‘market makers’.</p>



<p>Although the concept today is similar, the function is very different and computer systems run AMM algorithms for computerized traditional trading systems and also more recently in the world of decentralized finance.</p>



<h2><strong>2020: The &#8220;DeFi Summer&#8221;</strong></h2>



<p>DeFi exploded in 2020 as users participated in a protocol by locking in funds and in return, gaining the redistribution of the project&#8217;s native token which is seen by many as a fairer way to distribute governance tokens.</p>



<p>Liquidity farming in the cryptocurrency space has exploded in popularity with all the other crypto agricultural innovations such as the more complex <a href="https://nonfungible.com/academy/ecosystem/yield-farming" target="_blank" rel="noreferrer noopener">Yield Farming</a> which we discuss in the next chapter.&nbsp;</p>



<p>With the rise of DeFi and new ways of earning passive income from your crypto being experimented with, some projects are looking for a more gamified approach.&nbsp;</p>



<p><a href="https://aavegotchi.com/" target="_blank" rel="noreferrer noopener">Aavegotchi </a>is one such example that aims to bring the complexities of Defi and NFT trading into the framework of a user-friendly gaming environment. Playing the game enables participants to utilize NFTs to mine various cryptos with Aave liquidity protocol, a decentralized liquidity provider. These hybrid Defi/NFT innovations using a gamification technique have the potential for enabling people who are less ‘number-focused’ to be able to achieve a similar, if not better, return on investment through gaming than with more traditional methods.</p>



<p>Who knows exactly where these new financial instruments will take us? One thing is certain: the future is beginning to look like something our parents would find hard to believe could be true.</p>



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<p class="has-text-align-center">This work is licensed under a <a href="http://creativecommons.org/licenses/by/4.0/" target="_blank" rel="noreferrer noopener">Creative Commons Attribution 4.0 International License</a>.</p>


Liquidity mining is part of the crypto agricultural phenomenon which gained huge traction in 2020 with the rise of Decentralized Finance (DeFi).

Liquidity Mining


<p>Alongside liquidity mining, yield farming is a part of the crypto ‘agricultural’ revolution which has grown from the ecosystems of decentralized finance (DeFi) applications on Ethereum. Similar in some ways to traditional financial instruments that monetize funds, with loans, debts, and derivatives. However, with DeFi, there is a critical difference in that no central body is in charge and the cryptographic nature of the assets opens up entirely new realms.&nbsp;</p>



<p>DeFi’s explosive growth in 2020 from $100 Million to $10 Billion has been described as the new initial coin offering (ICO) bubble. For sure, it’s a new frontier with risks, but also an important exploration into what is possible regarding financial systems in a decentralized environment.</p>



<h2>Gamification of money?</h2>



<p>Yield farming and the other agricultural elements that make up this section of decentralized finance were first explored in the direct context of DeFi in 2019 by <a href="https://www.synthetix.io/" target="_blank" rel="noreferrer noopener">Synthetix</a>, where tokens could be deposited to their platform to earn crypto in return. For instance, <a href="https://currency.com/what-is-compound-comp-your-ultimate-guide" target="_blank" rel="noreferrer noopener">Compound started its yield farming by issuing its governance token COMP</a> to its platform users as a reward for depositing or ‘staking’ crypto funds. </p>



<p>From these beginnings, a whole world of crypto agriculture has developed including yield farming or liquidity mining? This lead to the creation &#8216;food-based&#8217; social money games such as <a href="https://yam.finance/#/" target="_blank" rel="noreferrer noopener">YAM</a>, <a href="https://www.coingecko.com/en/coins/shrimp-finance" target="_blank" rel="noreferrer noopener">SHRIMP</a>, <a href="https://pastafinance.com/" target="_blank" rel="noreferrer noopener">PASTA</a>, <a href="https://basedfinance.io/" target="_blank" rel="noreferrer noopener">BASED</a>, often forks of existing DeFi projects and stemming from <a href="https://yearn.finance/" target="_blank" rel="noreferrer noopener">Yearn.finance</a>.</p>



<h2>Annual Percentage Yields (APY)&nbsp;</h2>



<p>After Compound first began distributing their native governance token where investors earned over 100% Annual Percentage Yields (APY), many other DeFi decentralized apps in the ecosystem created their own system for harvesting and farming for the best yield returns.</p>



<p>Yield farming is generally where you are rewarded in interest payments through using certain DeFi Dapps. Often, this is in return for providing liquidity to a platform and returns are usually from exchange or platform fees as well as interest.</p>



<p>A more complex offering than Liquidity Mining in which participants lock in funds to a project&#8217;s liquidity pool and receive the project&#8217;s governance token in return. Yield farming is a process that enables an investor to maximize their investments by moving their liquidity to the most lucrative DeFi platform.  </p>


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<p class="has-text-align-center">This work is licensed under a <a href="http://creativecommons.org/licenses/by/4.0/" target="_blank" rel="noreferrer noopener">Creative Commons Attribution 4.0 International License</a>.</p>


Yield Farming and Liquidity Mining are part of the Crypto ‘agricultural’ revolution which have grown from the ecosystems of Decentralised Finance applications on Ethereum.

Yield Farming


<p>Indeed, the game <a href="https://chainguardians.io/" target="_blank" rel="noreferrer noopener">ChainGuardians</a> were ahead of their time in many ways, yielding passive income from deploying rare and popular NFTs to earn $CGC, the in-game currency. By simply showing proof of membership of an NFT in your wallet, it is possible to have a chance of receiving an in-game block reward.</p>



<p>At the end of 2020, <a href="https://rplanet.io/" target="_blank" rel="noreferrer noopener">Rplanet</a> used roughly the same principle, but with a big difference. The game requires the player to mix items together to create new ones (<a href="https://doodlegoduniverse.com/" target="_blank" rel="noreferrer noopener">DoodleGod</a> also uses the same concept). The first items can be purchased with Aether which can be obtained by storing NFTs from partner projects with Rplanet.</p>



<p>While ChainGuardians only checks for proof that you actually hold NFTs, those staked in Rplanet are frozen in the project until they are unstaked.</p>



<h2>Mining NFTs by Playing</h2>



<p>By asking the user to actively participate in the project, he is rewarded in the form of NFT, tokens or even cryptos and this acts as time-stamped proof of his investment in the project. It is therefore possible to publicly check whether the information coming from a user is reliable based on their experience in the project.</p>



<p>The most telling example is that of blockchain games, which is sometimes referred to as &#8216;Proof of Gameplay&#8217; since depending on the level of decentralization of the game, a greater or lesser number of actions will be recorded on the blockchain.</p>



<p>Some examples of video games using NFTs as the pivotal elements of this use:</p>



<ul><li><a href="https://portal.neondistrict.io/" target="_blank" rel="noreferrer noopener">Neon District</a> where your team (each character is an NFT) allows you to collect $NEON, the in-game currency of the game.</li><li><a href="https://alienworlds.io/" target="_blank" rel="noreferrer noopener">Alien worlds</a> uses NFTs as the main element of the gameplay: all assets are in the game. Mining lands with your equipment not only gives you some $TLM (the fungible token of the game), but also a chance to find new pieces of equipment.</li></ul>



<p>The challenge for the developers of these games is to find a balance between a &#8216;pay to win&#8217; game model and a fair reward for the ‘early adopters&#8217; of the game so that everyone can have a chance to advance in the game without having to spend a fortune to catch up with the first who arrived.</p>



<p>We will come back to the concepts of ‘Play to Earn’, ‘Blockchain and Crypto Gaming’ in more detail in other chapters.</p>



<p>Apart from video games, other industries have considered another way to use NFTs: to certify that a task has been completed, a skill acquired or a goal achieved.</p>



<p>Here are a few examples:</p>



<ul><li>It is possible to take courses on <a href="https://gitcoin.co/" target="_blank" rel="noreferrer noopener">Gitcoin</a> and once the final exercises have been passed and validated, the user obtains an NFT which acts as a certificate.</li><li>There is also the <a href="https://docs.microsoft.com/en-us/learn/certifications/browse/" target="_blank" rel="noreferrer noopener">Microsoft Azure Certification</a> program which was designed in partnership with Enjin in 2019</li></ul>



<p>Because of their form of standard on the blockchain, these certifications can be obtained in a secondary market and one would think that this facilitates fraud. But since the only way to get them initially is to work hard, recruiters who want to verify the origin of the certificate will only have to take a quick glance at the blockchain!</p>



<h2>Non-Fungible Tokens and Decentralized Finance&nbsp;</h2>



<p>These two are obvious bed mates, as financial services require collateral to secure loans and other financial derivatives. NFTs are perfect collateral items as they are digital assets with assessable value and can ultimately back any real asset as well as digital. It’s clear that DeFi can make NFTs more liquid, for example your Crypto Art NFT could one day back a home loan with this set up.</p>



<p>Not just this but the possibilities for DeFi and NFT intersection are enormous, with a world of traditional finance saturated with derivatives, options and bonds, the nature of NFTs offers the potential for digital versions but in a decentralized system, not controlled by a bank or centralized body.&nbsp;</p>



<p>With various layer 2 projects coming into maturity during 2021, it&#8217;s likely we will see even more interesting ways to use NFTs within the DeFi infrastructure.</p>



<p>As an example, the Polygon team recently suggested the possibility of being able to yield farm NFTs to earn NFT rewards, it&#8217;s sure we will see much more complex ways to utilize NFTs within DeFi than with simply being used as collateral alone.</p>


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<p class="has-text-align-center">This work is licensed under a <a href="http://creativecommons.org/licenses/by/4.0/" target="_blank" rel="noreferrer noopener">Creative Commons Attribution 4.0 International License</a>.</p>


One way to mine that appeared in 2019 is to use NFTs as ‘Proof of Collateral’. Meaning you're using an NFT you own as a collateral to earn other NFTs or tokens.

NFT, DeFi and Video Games

Navigating through the NFT ecosystem requires separating signals from noise. Established in 2018, NonFungible.com has been a key stakeholder in the NFT industry since its infancy. Over time, we have developed a solid understanding of the way the NFT community works, backed by our trusted data &amp; experience.

DeFi x NFT

Yield Farming

Gamification of money?

Annual Percentage Yields (APY)

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