Yield Farming 💰

Yield Farming is a colloquial term in DeFi that refers to the practice of staking
cryptocurrency in order to generate returns/rewards in the form of additional
cryptocurrency.

Types of staking activities within yield farming can be categorized into:

Deposits
Simple staking provided by a protocol with varying reward incentives

Staking the native token for protocol revenue sharing in the case of $LOOKS

For high APY% in the case of $OHM

Users are incentivized to hold the native tokens instead of selling, which in
theory can help reduce circulating supply and sell pressure

Lending & Borrowing

Depositing into lending protocols that match borrowers vs lenders such as AAVE &
Compound. Interest rates vary between assets and fluctuate according to their
supply & demand.

Lending: user deposits assets to be loaned out to borrowers and earn interest.
Essentially being a liquidity provider to the lending protocol.

Borrowing: after depositing, user can take a loan against their asset.

All loans in DeFi are overcollateralized

Different assets have different collateral factor values, which are decided by
the protocol to account for risk. Collateral factor is also called maximum
loan-to-value ratio or LTV.

Liquidation price = value of collateral x collateral factor

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 If price of collateral drops below the liquidation price, then collateral will be
liquidated up to the borrowed value.

Liquidations are carried out by 3rd party liquidators incentivized to buy

liquidated collaterals at a discount.

Dex Liquidity Provision

Being a liquidity provider in DEXes such as uniswap (as opposed to lending
protocols)

Uniswap v2 = providing liquidity to both sides of a trading pair

Being an LP allows user to capture all of transaction fees generated from a

particular trading pair, prorated according to their share of the pair’s liquidity
pool, as shown in their pool token:

Value of 1 LP Token = Total Value of Liquidity Pool / Circulating Supply of

LP Tokens

Positions are tokenized as tradeable ERC-20 LP tokens.

Uniswap v3 = same as v2 but with concentrated, rangebound liquidity

Liquidity is deployed only within a user specified range along the price
curve of a trading pair. Meaning LP would earn more fees if the price range

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 is hit, or 0 fees if price trades outside of chosen range.

Positions are tokenized as tradeable NFTs:

There are risks involved such as impermanent loss.

Since AMMs like Uniswap don't use order books, prices are maintained by
the ratios between assets inside liquidity pools. Therefore, if you deposit
two assets and the price of one or both changes, you might withdraw less of
your assets than deposited.

When this happens, it is advantageous to hold the original tokens rather

than being an LP (opportunity cost).

If price stays or returns back to original price when minting the LP tokens,
then there are no losses. Hence the term 'impermanent'

Liquidity Mining
Locking liquidity into a protocol or yield farm to earn tokens.

Invented by Compound when they released their COMP token

Could only be 'mined' by being a lender or borrower in Compound and

receiving COMP in return. Effectively incentivizing users and raising
protocol TVL

Many degen farms would later follow COMP’s strategy and give out their
own native tokens but at extremely high APYs to lure in degens. Usually to
the detriment of their own token price after only a short while.

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 Sushiswap is a great example of using liquidity mining to bootstrap their own
liquidity

Sushiswap = a fork of Uniswap with additional features

Users are incentivized to deposit Uniswap LP tokens for specific trading

pairs into Sushiswap. The Uniswap LP stakers in Sushiswap gets 1000
SUSHI tokens (pro-rated) per ethereum block

After a certain period Sushiswap executed their Masterchef smart contract

which migrated all of their Uniswap LPs into Sushiswap LPs. Effectively
bootstrapping $810mn of liquidity within a couple of weeks.

After migration, SUSHI emission was cut down to 100/block, but gave users
who stake their SUSHI tokens can earn a portion of Sushiswap’s trading
fees.

Other Types:

Automated investment strategy: e.g. Yearn Finance

Because DeFi protocols are interoperable yield farmers can hop and chain
around different protocols to earn the best yield. Yearn.finance automates
this process:

User deposits asset

Yearn automatically invests the asset to into different defi protocols

depending on the strategies (Vaults) picked

Transactions executed in a socialized manner to save on gas fees

Another example is DeFi lottery such as Pooltogether, which has yield farming
elements in the backend.

People stake assets into pooltogether

The staked assets are put into other yield generating protocols

Generated yield over some periods of time are raffled to stakers in

pooltogether

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 Chance of winning is dependent upon each user's % of value staked in the
specific pool

Lending & Borrowing ⚖💰

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