Title: “Inside Yield Farming 2020: What’s the trend?”
Original Source: Hackernoon Translation: 0x13
In 2020, the rise of liquid mining quickly swept the cryptocurrency industry, becoming the cornerstone concept of DeFi in 2020, and may go far beyond this range. This boom started with Compound, which was the first project to launch such an investment mechanism in June 2020. Although liquid mining is still a fairly niche strategy, its popularity is accelerating.
Experts from Platinum Software Development Company have analyzed the current status of liquid mining. The following is the compilation of the report by Rhythm BlockBeats:
What is liquidity mining?
Liquid mining is a new way for users to earn passive income in the DeFi ecosystem. It basically uses their existing cryptocurrency to create more cryptocurrencies.
How does liquid mining work? First, among the participants of liquidity mining, the user is called a liquidity provider (Liquidity Provider, LP), and adds his or her cryptocurrency assets to the smart contract (liquidity pool) of a certain DeFi platform. For this, they will receive rewards in the form of tokens.
Currently, liquidity mining is usually implemented on the Ethereum blockchain and its ERC-20 standard, because rewards usually also belong to the Ethereum ecosystem. However, as the demand for liquid mining increases, this situation may change in the future. At some point, this liquidity mining trend will shift to other blockchains and will be supported by other types of blockchains.
Liquidity mining as an investment strategy started with the Compound platform and their COMP governance token distribution system, which provides compound lenders and liquidity providers with high interest rates. Before the plan goes live in June 2020, Compound Energy is the second largest DeFi application locked in its smart contract. Within a day after starting mining, Compound surpassed Maker DAO, and COMP token became the largest market value of DeFi token.
Many DeFi protocols follow the example of Compound, introducing yield agricultural activities into their own ecosystems. Such as Year.Finance, Curve.Finance, Synthetix, Balancer and Sushi.
Unlike the usual DeFi deposit strategy, which only provides 10% of the output per year, users participating in liquid mining expect higher returns. At the beginning, most liquid mining users were promised APY as high as 100% . However, there are many complexities and huge risks behind liquid mining. In order to find ultra-high returns, users usually need to frequently transfer their funds from one DeFi protocol to another DeFi protocol. In turn, this requires deep analytical skills, continuous monitoring and rapid response to any changes in the market (even the smallest changes).
After analyzing multiple sources of cryptocurrency and DeFi markets, Platinum describes the key characteristics of liquid mining—production and APY, behavior patterns of major participants, prominent trends, and necessary signals that require attention.
Overview of the liquid mining market
According to CoinMarketCap’s data, as of October 3, 2020, the total lock-up value of the liquidity pool of liquid mining projects exceeds US$4.9 billion. The total locked value of the entire DeFi market is US$10.94 billion. This means that nearly half of the output locked in DeFi is related to liquidity mining.
Revenue ranking of liquid mining platforms
At the time of writing, the five major liquid mining platforms are as follows:
Uniswap: Total value locked (TVL) reached 1.7 billion US dollars. Depending on the pool and cryptocurrency pairs, APY ranges from 23.82% (ETH / WBTC) to 33.85% (ETH / DAI). However, the impermanence loss is high.
Curve: The total amount locked in the pool also exceeds $1 billion. Curve’s APY is significantly lower than Uniswap’s, dropping from 5.80% per year to 15.99%.
Sushi: The valuation of TVL is close to US$310 million, while the valuation range of APY ranges from 17.07% to an incredible 109.24% (for the YAMv2-ETH portfolio). Like Uniswap, impermanence losses are also high.
Yearn.Finance: Its total value is almost one-third of Curve and Uniswap, about 300 million US dollars. Yearn.Finance users’ annual returns range from 0.05% (aLINK token) to 13.29% (TrueUSD stablecoin).
Harvest: The total locked value of this pool of funds is $170 million. The annual return rate is 23.04%-106.82%.
Popularity of liquid mining
According to a liquid mining survey conducted by Coingecko from August to September 2020, 23% of respondents have participated in liquid mining in the past 60 days (from July to August). This is a clear proof of the shift of liquidity mining from a niche phenomenon to a stable investment strategy widely adopted by cryptocurrency users.
Geographically, most participants are from Europe (31%), Asia (28%) and North America (18%). This distribution is very reasonable, because these specific regions are the main drivers of the cryptocurrency and DeFi movement.
The motivation and strategy of liquidity mining are obvious, and the governance tokens provided for liquidity mining protocols. Governance tokens are coins that give holders the power to influence decisions about protocols, product development and roadmaps, and affect basic changes in governance parameters. However, Coingecko’s research shows that most liquid mining users are not interested in governance or the project itself-their main concern is their assets and profits.
As shown in the figure, the vast majority of respondents believe that their interests are the main motivation for participating in high-yield liquidity mining; 54% of users intend to use long-term holdings; and 32% are income and sale. Only 11% are interested in governance opportunities.
Risk awareness of liquidity mining users
Liquid mining provides high interest rates, which makes this investment strategy profitable for investors and speculators alike. At the same time, this approach also has huge risks, which are very similar to the risks during the IC0 boom in 2017.
Common types of concentration risks in liquid mining
Protocol attack. The asset loaned by the holder is “stored” in the agreement (smart contract), which is a piece of software. Hackers are always looking for new ways to exploit vulnerabilities in the code and steal cryptocurrency.
Crypto market manipulation. When users lend cryptocurrency by adding it to any protocol and then borrow it back, basically, they will expand the demand for such tokens and increase their prices.
Complex strategy. We have outlined that in order to maximize revenue, liquid mining users often transfer their assets from one DeFi application to another. Any mistake may cause the user to lose all the profits gained so far.
System regulations. Security tokens, DeFi and cryptocurrencies are the subject of endless debate between governments and financial institutions. Their position and policies can determine the success or failure of liquid mining and even the crypto market.
What is worrying is that despite a generally cautious approach, a large proportion of users do not understand the risks associated with liquid mining. They value high returns above all else. In particular, 40% of respondents did not know how to check for security breaches or fraudulent signals in smart contracts, and nearly one-third (33%) did not know what impermanent loss means.
Users plan to continue liquid mining
High returns are a key incentive for investors and speculators to enter the liquid mining market. At the same time, the high gas fees and multiple risks in the Ethereum network may discourage small players or inexperienced players. Is this assumption correct?
According to the survey results, despite the many troubles and potential dangers, most DeFi participants (70% of respondents) strongly want to continue mining, while 25% are still skeptical. This means that only 5% of participants clearly stated that they plan to stop participating in liquidity mining.
DeFi venture capital
Liquid mining is expected to become a glimmer of hope in the DeFi field, expanding the scale of the industry and attracting financial capital and new players to enter the field. Venture capitalists from Silicon Valley have expressed their interest.
To cite a few examples, Framework Ventures co-founder Michael Anderson (Michael Anderson) invested in Chainlink (as an angel investor in 2017) and Synthetix (with an investment of $3.8 million in 2019 and the purchase of 5 million SNX tokens).
ParaFi Capital is a Silicon Valley VCl fund that focuses on decentralized financing and blockchain by investing $4.5 million in the open source lending agreement Aave. As of today, Aave is one of the world’s leading DeFi loan agreements. The most important and innovative feature of the platform is its “Flash Loan”, which allows users to borrow money quickly and conveniently without any guarantee. Aave also integrated with Uniswap, becoming the first DeFi protocol to support Tether.
There are many other agreements that received investment from 2019 to 2020, including the Injective agreement, which raised US$2.8 million; FinNexus raised an undisclosed amount; Hedget raised US$0.5 million; Alpha5 raised US$1.5 million; Serum raised $1 million… Wait, there are countless financing cases.
DeFi software development status
As DeFi becomes more and more popular (increased by 10,000% from the second quarter of 2019 to the third quarter of 2020), more and more financial service companies hope to embrace blockchain and shift from traditional financial architecture to decentralization Ecological system. In turn, this has created a high demand for such service and platform providers-outsourcing IT companies can build and deliver complex enterprise-level DeFi solutions.
The DeFi development market is not yet mature, and the reasons are easy to explain. Blockchain companies need to build decentralized exchanges and DApps
He has deep knowledge and expertise in products, tokenization, deployment of non-custodial agreements, and DeFi asset management.
Now you may think that it is impossible to find a partner who can build a DeFi solution. However, such suppliers are still possible. Antier Solutions, DeFi Solutions, Technoloader, and of course Platinum Software Development Company.
to sum up
Let’s outline the main points:
Liquidity mining is a high-return investment strategy (APY up to 100%), and it has experienced extreme hype after the COMP governance token started this method. In a way, the popularity of liquid mining is similar to the 2017 IC0 frenzy.
The total locked-in value of the liquidity pool in liquid mining projects has almost exceeded US$5 billion, so liquid mining may increase further. Currently, the mainstream platforms for liquidity mining include Uniswap, Curve, Sushi, Year.Finance and Harvest.
Liquid mining is no longer a phenomenon known to only a small number of users. It is gradually becoming an investment strategy widely adopted by cryptocurrency holders. Most farmers come from Europe, Asia and North America.
Although liquidity mining usually involves governance tokens, users are less interested in governance and voting. High returns are still the main reason they are engaged in liquid mining.
Liquid mining brings huge risks, involving the overall complexity of hacking, regulation and strategy. It requires users who provide liquidity to be experienced, responsive, and sensitive to any changes. However, a large number of users still know little about the risks involved.
The yield framework will continue to exist. In order to find huge profit potential, most users do not plan to give up liquidity mining in the future.
The increasing demand for liquidity mining has attracted venture capitalists to invest in DeFi platforms. Companies such as Synthetix, Chainlink, Aave, and Injective Protocol have all received venture capital.
The market for DeFi software development companies has not yet formed, although strong competitors already exist.
