DeFi Yield Farming 101 - But Why Though?
Part 2 of the multi-part series on DeFi Yield Farming, the discipline of maximizing your rate of returns on your Crypto investments. And you thought NFTs were crazy.
TL;DR: Because of Crypto and Decentralized Finance, it’s possible to do more financial-things for a lot less. And you can rotate through many options.
As much as I appreciate the technology behind blockchain, it’s important to understand what human behavior the technology is helping to solve. My exposure to all emerging and recurring technologies, the human problems they address are always the same. So let’s talk about that for a moment, shall we?
As always, you can find TL;DRs and graphics as I explain what is genuinely overwhelming absurd fascinating set of concepts.
I promise to cover other topics beyond Crypto!
In Case You Missed It
DeFi Yield Farming 100 - It’s CrossFit but for Crypto [Investing]
Sections You Can Skim To
WHY … does it exist?
HOW is this all possible?
WHAT is the impact?
TL;DR: People that want to earn faster and clever people figured out a cluster of tech to make it possible.
The world of DeFi Yield Farming, or CrossFit Style Crypto Investing, exist now because of how ridiculously easy and fast it is to move assets around to get gains build wealth.
Let’s table technology-first thinking, and pivot on over to human-centered design. If we think about what the human challenge and aspiration here is, we can attempt to reduce it to this core essence:
Step 1: How do I build wealth so that I can be <insert your problems here>?
Step 2: Okay, how do I do the other above, but faster?
Step 3: Okay, I did the above, but how do I do it all, but even faster?
You can see where I’m going with this. Solving impatience for all. Questions around trust, barriers of entry, etc get solved - but those are tactical questions. The big aspiration: “How do I build wealth faster”.
And that’s how DeFi Yield Farming rose.
The DeFi world allows me to only buy “stock” (I mean coins), but now I can lend it and get interest back. I can also stake it and get interest back. I can also borrow against it, and then invest with it, and earn more than my debt. And I can do all this at a few clicks and considerably fast turn around. And if I rotate through each of these strategies, I can “farm” for better yields, or results.
Now that we know we can, you can then ask the question: How?
TL;DR: Technology meets open-access principles resulting in creative thinking across finance. Alternatively, someone open-sourced my excel workbook and made better macros.
I can’t get into the mechanical How’s, at least not yet. But I’ll tell you a perspective based on my reading on how this has all emerged.
The concept thing possibility practice of DeFi Yield Farming and all the possible strategies to get the return you want are now possible because of magic. I kid, but something what is complex, nebulous, and impactful can be perceived magic.
From a tech perspective - the underlying capabilities:
Blockchain stuff - like the public ledgers and irrefutable records
Smart Contracts - Automated contracts that can be programmed and executed without direct human operation. Think of it as “If This, then That”.
Tokens - Tokens are a way to create representations of assets such as IOUs or Shares of a Company. I don’t own 5 ETH of a company, I own 10 Tokens of a company that’s worth 15 ETH, as written in the smart contract. You get what I mean?
Now Ethereum happened to be the first blockchain to have the above properties and benefits from first mover advantage. But the tech capabilities alone aren’t the only driving factor for its growth and adoption.
The non-technical perspective
Everyone Can Build - It’s all open sourced. Everyone can see the code, can use the code, and can build things on-top of the code. That means I can built applications, often referred to as dApps or decentralized Apps, on top of it to perform certain functions. The platform of Ethereum itself gets becomes attractive for developers to continuous build on top of because of the common approach and framework Ethereum is providing.
Lots of Apps - There are a lot of apps build on top of Ethereum that certain a specific niche within the finance world. From apps focused on lending, to borrow, to swapping, etc. There are a lot of choices, and with people developed dApps to mimic financial processes of all kinds, you will notice that this ecosystem has a lot of options.
What’s beautiful about the internet, about people, and about how information flows is that while you and I can come up with a concept, and someone else will see that concept and come up with something impossible beyond our current imagination, and bring it to life. And that’s what is happening now in DeFi.
I didn’t think I could earn interest on being a direct lender, and if I did, it sounded like a giant pain. Now? Well now it seems easier now doesn’t it?
TL;DR: More investment options because financially creative people created ways to easily access more options than you could in the past. And everyone can get in around the world.
Let’s talk about the impact of Blockchain and Crypto tech on Crypto Investments, and how the many options lead to DeFi Yield Farming. The gains and losses are vanity metrics and not really a sign of impact in this case.
From an Operations POV
Operationally speaking, crypto tech (also can be referred to as blockchain tech) has had the following benefits:
No time wasted - with blockchain we’re not waiting a month, week, or even a day for a transaction to go post and be reported. It’s happening now not later. This extends to interest and earnings, which can be realized daily as opposed to monthly.
24/7 Access - I can access my stuff, swap for other stuff, and basically do the financial management stuff I tend to do at banks including payments and even take out a loan, 24/7. Good bye 9-5. Heck, I did it at 1:17 a.m.
Bye Bye Middleman - Every convenient transaction you’ve ever had can be peeled like an onion, with each layer being a different company. There’s far less brokers and middlemen involved, meaning a lot less fees.
All Transactions are Treated the Same - Whether it is 10 cents, $2 dollars, or $1 billion dollars of bitcoin or your choice of crypto, it’s all treated the same. Meaning
nanomicro transactions in the fraction of a penny can happen.
The operational benefits are signs of a technology proving itself to be viable mechanically.
But the bigger societal result because of it all:
It’s really easy for anyone to get in.
It’s easy because the average citizen on Earth with internet can participate and benefit. You can be in the Philippines and use an Exchange such as Pdax to trade pesos for any cryptocurrency (like Bitcoin or Eth), and do with it as you please. (It’s not financial advice, but I’d be swapping my pesos for BTC if I was earning in peso.)
Often times, when something with hard barriers gets easier for the masses, this is referred to as democratization. It’s easy for someone with an internet connection to make a trade. It’s easy for someone to build and app. And it’s easy for someone to invest and earn returns.
It’s easy for me to convert fiat money (US Dollar for example) for money assets stored value Crypto from an Exchange, and then go do whatever I need to do with it (Coinbase | Crypto.com)
SWAP: It’s easy for me to swap my crypto assets for other crypto assets (Balancer | Bancor)
LEND: It’s easy for me to lend and get a return. (BlockFi - Note look for “BIA, BlockFi Interest Account”)
COLLATERALIZE: It’s easy for me to lend and borrow using Crypto as collateral. (AAVE | Compound | Nexo)
STAKE: It’s easy for me to stake it and get interest. (Nafter | Binance | or on your own)
LIQUIDITY POOL: It’s easy for me to invest it to a liquidity pool and get trading fees. (Balancer | Uniswap | Compound)
RUN FROM MY COUNTRY’S CURRENCY: It’s easy to buy an asset that holds a predictable value aka stablecoins - for those living in countries with volatile currency (Circle)
Yeah, there’s a lot. Stick around for Subscriber-First content this Friday.
PSA don’t store your crypto in Metamask.
Note:
I mention it’s easy but that is relative to a traditional financial process.
Also your risk and experience will vary, with some things being riskier than others.
Catch Up on My Other Stuff
Cryptomining 100 - What is it all about?
Cryptomining 200 - How I started in 15 minutes
DeFi Yield Farming 100 - It’s CrossFit but for Crypto [Investing]