From a game of chance to a game of strategy
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Decentralized Finance (DeFi) is on fire right now. It seems like everyone is talking about it and every blockchain developer seems to be working on a DeFi project. Meanwhile, investors are looking for every opportunity to make money on the DeFi platforms coming online.
Indeed, we may be on the verge of experiencing an investment craze similar to the ICO one. This is despite the current short term instability of the market. Nevertheless, nobody knows how exactly DeFi will turn out in the long term. What we can bet on, though, is that the innovations we see in the space are going to change for good how asset markets, in particular crypto markets, operate.
For example, a few years ago, hardly anyone would imagine that the order book model in exchanges could be replaced by a smart contract protocol that collects funds from individual investors (liquid providers) to facilitate transactions between buyers and sellers in the crypto market place.
The smart contract managed liquidity pool model was first introduced by the Bancor project. In the recent past, the projects implementing this model with the most success include the decentralized exchange Uniswap.
The biggest opportunity that the new space seems to offer investors comes in the form of yield farming.
What is Yield farming?
Yield farming is any activity an investor engages in on a decentralized finance ((DeFi) application that runs on a blockchain like Ethereum to increase their worth.
It includes lending, arbitraging, margin trading, and providing liquidity to markets. Some are old tricks implemented in new ways and others are completely new stuff.
Many things make yield farming different from crypto investment models we’ve seen in the past and in particular ICOs.
One that stands out is the opportunities for DeFi applications to be platforms where investors rely more on strategy than how the market reacts to grow their value.
We should point out that early DeFi investment opportunities have been at best minimum strategy-driven affairs. Investors have had little control over the variables that affect how they generate value for themselves.
To a large extent, they put their money into an asset or protocol and hope that the markets turn in their favor.
Of course, even if tools for creating nuanced strategies are made available, investors, especially those who are not very sophisticated, will always prefer throwing money at a project and then praying that they get good returns.
On the other hand, though, professional traders and investors need to feel a little more in control. They want to have as many levers as they can get to fine-tune or develop unique strategies that work for them in the marketplace.
The good news is that there is a fundamental development towards having a marketplace with so many nuanced variables that will turn yield farming in the DeFi marketplaces from being a game of chance to being a lot more a game of strategy.
This could happen at two levels. The first level involves merging the different opportunities that exist in the marketplace. The second level includes adding more flexibility in the way investors put their capital in protocols.
Today you can generate value on DeFi platform in various ways. For example, you may become a lender on Compound Finance, MakerDao, or Aave. You put in your tokens so that others can borrow them, and in return, you get part of the interest the borrowers pay.
There is also the option of becoming a liquidity provider on a decentralized exchange like Uniswap, which can earn you some fees. As a liquidity provider, you may also receive rewards from the project whose tokens you make available for making transactions — liquidity mining rewards.
Recently, token auctioning has started being a popular way to generate value within the DeFi space. Some platforms have created a model where a protocol mints tokens every day, and those tokens are then auctioned. After receiving their share of tokens, the investors can stake them and then get a share of the money raised during subsequent auctions. An example of such a project is DSP on the Tron Network.
Now, imagine all these options being available on a single platform. And then add more variables. For example, giving the investors the option of deciding how much to stake, where the protocols have staking as part of their model. Also, create more options in periods of staking, portfolio building, and even collateralization levels.
To make yield farming even more a strategy investment, the different DeFi applications may be interoperated. This could make the crop rotation (moving assets across different platforms depending on market status) that investors have adopted a lot easier to implement.
With so many variables accessible to the investors, Yield Farming can truly become a game of strategy. That means the more effort you put in, the higher the returns you are most likely to realize.