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.
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.
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 Synthetix, where tokens could be deposited to their platform to earn crypto in return. For instance, Compound started its yield farming by issuing its governance token COMP to its platform users as a reward for depositing or ‘staking’ crypto funds.
From these beginnings, a whole world of crypto agriculture has developed including yield farming or liquidity mining? This lead to the creation ‘food-based’ social money games such as YAM, SHRIMP, PASTA, BASED, often forks of existing DeFi projects and stemming from Yearn.finance.
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.
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.
A more complex offering than Liquidity Mining in which participants lock in funds to a project’s liquidity pool and receive the project’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.