If you have been in the crypto space for some time, you might have come across the term yield farming. No, it has nothing to do with growing crops, but more with the growing of money or crypto assets to be precise. In this article we will take a closer look at yield farming, what it is all about and what are the risks involved.
The rise of DeFi
Just over the past year there has been a huge rise in the use of DeFi applications. This is clearly evident in the fast increasing Total Value Locked (TVL) in decentralized protocols. TVL basically represents the amount of assets currently being locked or staked in a liquidity pool. Liquidity pools are just a collection of funds locked in a smart contract and TVL is commonly used as a gauge on the health of the pool. It is a useful measure to compare between protocols as well as for the DeFi market as a whole.
A part of the rise in TVL in DeFi could be attributed to yield farming where it is not uncommon to hear of returns so far not achievable in traditional finance. In this low-interest rate environment, it has attracted people looking for a better return on their capital.
What exactly is yield farming?
In essence, yield farming is using crypto to earn more crypto. It is about putting your crypto assets to work and trying to maximise return on capital. It is typically done by staking or locking up your crypto in a smart contract which are used as liquidity pools, in return you will receive rewards in tokens.
This is just the basics as yield farming strategies can get complex very quickly. In order to get higher yields, experienced yield farmers typically leverage multiple platforms at one time, simultaneously lending and borrowing at the same time. These strategies are not static as the returns will fluctuate depending on several factors of the protocol. As returns diminish, they will have to move their funds around in order to continue enjoying high returns.
How does it work?
Depending on the protocol, the liquidity pools will be used for different services. The general idea is that for providing liquidity to the pool, liquidity providers will get a share of the fees generated by the usage of the underlying platform. Most common usage of liquidity pools are for lending and borrowing platforms as well as for decentralized exchanges (DEX).
On lending and borrowing platforms, the returns are generated by the higher interests borrowers are paying on their loans. This is analogous to banks’ savings and loans in traditional finance whereby the interest from depositing money comes from loaning out the deposits at a higher interest rate.
On DEXs, the traditional way of using the order book model to do trading of assets just breaks down in the decentralized world. In short, it relies on market makers to provide a good user experience, however this is not possible with the fees and speed of the underlying blockchain itself. Therefore liquidity pools are a necessity in decentralised finance. Automated Market Maker (AMM) was a significant innovation which allowed on-chain trading without the need for an order book. AMM uses the liquidity pool to swap a token for another, in the process it will take a fee from the user performing the swap and this is passed on to the liquidity providers of that pool.
The last way which greatly boosts the returns when yield farming is called Liquidity Mining. On top of the above-mentioned fees liquidity providers are earning, some protocols also give extra tokens to incentivise participation. This process of distributing tokens to liquidity providers is called liquidity mining.
How much can you make?
It really all depends on the strategy, Annual Percentage Yield (APY) ranges from single digit to even triple digits. Needless to say, achieving the higher bounds of APYs will definitely require you to take on higher levels of risk. An example would be depositing tokens as collateral to borrow another token. In turn using that token as collateral to borrow again. This could be repeated several times, essentially leveraging your position and having more risk.
Just looking at the returns, it might all look too good to be true. Well that is only one side of the story, as with any investment, the returns are the reward for taking on risk. Here are some of the common risks involved with yield farming.
When borrowing on a decentralized platform it is often overcollateralized, which means that you can only borrow up to a certain percentage of the value of collateral (tokens) you have deposited into the smart contract. After which the value of your collateral has to be kept a certain percentage above the loan amount at all times. There is significant liquidation risk for your collateral tokens as cryptocurrencies are highly volatile. Huge price drops in the market can cause your collateral value to fall below the liquidation threshold, resulting in the loss of all your collateral tokens.
On DEXs there is a risk of impermanent loss while providing liquidity. This happens when the value of the two assets provided appreciates or depreciates in relation to the other. Liquidity providers will only realize this loss the moment they withdraw their liquidity. The loss is a comparison between the total value they receive back and the total value of what they would have if they just held the tokens without providing liquidity.
Other risk comes in the form of the smart contracts, vulnerabilities and bugs not detected early might enable the protocol to be hacked and funds stolen.
All these risks form the basis of the lucrative high returns of yield farming.
Mars Panda Yield Farming
While chasing insane returns is the goal of yield farming, one should not turn a blind eye to the risks. Understanding the high risk involved in DeFi, Mars Panda aims to provide a safe and trusted platform for all your DeFi activities. Mars Panda is Headquartered in Singapore, and while trying to best comply to Singapore Regulations, has commissioned an entity that has obtained a regulatory exemption under the Payment Services Act (“PSA”) for digital payments token services, Legatus Global Pte Ltd to be issuing the Mars Panda Token (MPT) as well as doing the KYC/AML during the private sales and distribution of tokens to private investors. Users can now be rest assured of the security of Mars Panda’s DeFi platform. Moreover, our smart contracts will be audited by a reputable auditing firm specialized in smart contract security.
In the Mars Panda ecosystem, in-game virtual assets and items are priced in Mars Panda Credit (MPC). As MPC is not traded on the secondary market, Mars Panda Token (MPT) is a token that will facilitate the transfer of value in and out of the Mars Panda ecosystem.
Coming soon, Mars Panda will be having a liquidity mining program for users to provide liquidity in the AMM pool. In return they will be able to yield farm and earn MPT rewards. In the future, as the ecosystem matures further and more services are introduced, other yield farming opportunities will be introduced and used to bootstrap the community.
Why wait, come join us now in this brave new world of the future.
The future is now, and the future is Mars Panda.
About Mars Panda
Mars Panda is a complete eco-system which consists of:
• Games, Social Media and Ecommerce Aggregation
• Yield farming DeFi
• Mars Panda game with NFT game elements
• NFT Marketplace
We aim to fuse mainstream eCommerce and Gaming to the crypto world of NFTs and DeFi, on one seamless, unified platform.
Find us at:
Legatus Global Pte Ltd is an entity that has obtained a regulatory exemption under the Payment Services Act (“PSA”) for digital payments token services. Legatus Global is commissioned to handle the issuance of Mars Panda Token (MPT) as well as the KYC/AML during the private sales and distribution of tokens to private investors. Legatus Global is also handling the process for private sales and distribution.