Liquidity Mining/Yield Farming

Ever heard these words?

The two are synonymous and depict the same thing. This method is an extrapolation of decentralized Finance applications. It is going to be a wild ride, so buckle up and let's get into it..

Have you ever traded with borrowed money? This is probably equivalent to that experience. Reader be ware! The strategies following are very risky, convoluted and require experience. As always, play with what you can afford to lose.

Passive Income Protocols

Many of the largest institutions offer impressive and attractive return on investment via liquidity pools. Essentially it allows the operator to lend out funds to its users and offer interest on annual basis (APR). Now, the returns you get are not like commercial banking returns.. Here is a snapshot from Binance and their "crypto savings accounts"

There are a lot of different projects you can utilize, and they all have unique return rates. Further, some are "locked" for a time period you decide, and others are free to access.

Who is borrowing the money?

Good Question! The answer is interesting..

It is a mixture of two demographics. The first is the typical user who is margin trading, needs a short term loan, or looking to take advantage of that capital as an individual retail trader. The other population are "yield farmers" which are borrowing and cross leveraging their initial capital.

In some circumstance it might look something like.. Load 1 Bitcoin onto an exchange subject to 5% annual growth. Leverage that and withdraw 40 ETH, and deposit it into a platform offering 7% APY. This can be leveraged for higher amounts, and so on. 

Just how big is this bubble?

Good Question! The answer is interesting..

July 6th, reportedly was 1.8 Billion locked into DeFi:

August 16th, reportedly is currently 6 Billion in the system:

Growth of 3x in slightly more than a month. That is a rapidly expanding market cap, and definetley contributes to the recent growth of the DeFi coins as their cap increases exponentially with increased lending volume.

Quick Recap:

There are massive amounts of funds being leveraged and arbitraged across different crypto DeFi programs. These platforms allow for aggressive passive returns via crowd liquidity pools, where the same funds can act as collateral on a loan. This loan can be then used elsewhere.

Here is a list of the top 10 by market cap:

Personally, I am a friend of Curve and 0x when it comes to actually hosting. However, I am not taking part of the leverage nightmare currently occurring, rather capitalizing from the potential capital gains to be had via holding, and trading the assets in question.

I do not think that the current schematic of cross lending is sustainable, but it is the model that is pushing the Defi market cap to all time highs. Do what you will, but recognize your risk.

Thanks for your time,

Nathan


Leave a comment