Today's most popular buzzword in cryptography is "yield farming," which enables people to gain a fixed or variable interest by investing cryptocurrency into the DeFi market. Investing in ETH is not yield farming; ETH loaning on Aave is yield farming for a return above ETH's price appreciation. Crypto investors need to consider what it's all about and how it operates.
Different DeFi Money Market Protocols
Compound
Compound creates money markets for Ethereum assets. The money market has interest rates which are dictated supply and demand market forces. Users can supply money market tokens to gain interest, without having to trust a centralized custodian. Users can borrow a token (to use, sell or re-lend) using the protocol's balances as Securities.
Interest rates for the various coins and tokens have decreased. Some coins like BAT reached an APY of 25%, but this has since decreased and stabilized. This tool is very useful in calculating your annual APY and COMP compensation. Using 1000 DAI as an example, the total annual token distribution is:
The Compound token (COMP) price has stabilized since its metaphorical rise last month where it reached an all-time high of $327.
Aave
To offer high liquidity, the Aave protocol relies on a lending pool model. Loans are backed up by collateral and represented by aTokens and these tokens accrue interest. Aave strengthens the existing DeFi offering by introducing two main inventions:
Stable rates to facilitate financial planning for lenders
Flash loans to borrow for a single transaction without collateral
The Aave token (LEND) is nearing its previous all-time high price of $0.394217 which is promising to see.
But before going into depth, it's important to remember that yield farming would result in a net loss given the degree the high gas prices. Yield farming is only lucrative if you're willing to put a large amount of money into it. It won’t profitable if you are experimenting with small amounts. Also, as there are new platforms and new protocols, you need to be comfortable with the risks associated with these highly liquid and volatile protocols. Please do your own research before diving in with money you can’t afford to lose. Lets not all forget the 2017/18 ICO craze.
Thank you for learning with me and hope you have a good rest of the day!
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