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Yield farming -
What is yield farming?
Yield farming is a process that allows cryptocurrency holders to earn rewards on their
holdings. With yield farming, an investor deposits units of a cryptocurrency into a lending
protocol to earn interest from trading fees. Some users are also rewarded with additional
yields from the protocol’s governance token.
Yield farming works in a similar way to bank loans. When the bank loans you money, you
pay back the loan with interest. Yield farming does the same, but this time, the banks are
crypto holders like yourself. Yield farming uses “idle cryptos” that would have otherwise been
wasting away in an exchange or hot wallet to provide liquidity in DeFi protocols like Uniswap
in exchange for returns.
In some sense, yield farming can be paralleled with staking. However, there’s a lot of
complexity going on in the background. In many cases, it works with users called liquidity
providers (LP) that add funds to liquidity pools.
Yield farming works with a liquidity provider and a liquidity pool (a smart contract filled with
cash) that powers a DeFi market. A liquidity provider is an investor who deposits funds into a
smart contract. The liquidity pool is a smart contract filled with cash. Yield farming functions
based on the automated market maker (AMM) model.
This model is popular on decentralized exchanges. AMM eliminates the conventional order
book, which contains all “buy” and “sell” orders on a cryptocurrency exchange. Instead of
stating the price that an asset is set to trade at, an AMM creates liquidity pools using smart
contracts. These pools execute trades based on predetermined algorithms.
The AMM model relies heavily on liquidity providers (LPs), who deposit funds into liquidity
pools. These pools are the bedrock of most DeFi marketplaces where users borrow, lend
and swap tokens. DeFi users pay trading fees to the marketplace; the marketplace shares
the fees with LPs based on their share of the pool’s liquidity.
Take Compound, for instance. The protocol provides liquidity to borrowers who want to
borrow funds in cryptocurrencies. The Compound Finance system does this using smart
contracts on the Ethereum blockchain. LPs deposit funds into the liquidity pools. These
contracts serve as the matching engine for market participants.
Once an interest rate for the loan has been agreed upon, the borrower gets the funds. In
exchange for their funds, LPs get Compound Finance’s native COMP tokens. They also get
a cut of the interest that the borrowers pay. Some of the most common DeFi-related
stablecoins include USDT, DAI, USDC and BUSD. Some protocols can also mint tokens,
which represent your deposited coins in the system. For instance, if you deposit ETH into
Compound Finance, you get cETH. If you deposit DAI, you get cDAI.
Yield Farming
1. Pancake Swap (CAKE):
PancakeSwap is a decentralized exchange for swapping BEP20 tokens on Binance Smart
Chain. PancakeSwap uses an automated market maker (AMM) model where users trade
against a liquidity pool. Such pools are filled with users’ funds. They deposit them into the
pool, receiving liquidity provider (or LP) tokens in return. They can use those tokens to
reclaim their share, plus a portion of the trading fees.
The LP tokens are called FLIP tokens. PancakeSwap also allows users to farm additional
tokens – CAKE and SYRUP. On the farm, users can deposit LP tokens, locking them up in a
process that rewards users with CAKE. Users can stake CAKE tokens to receive SYRUP,
which will have further functionality as governance tokens (and as tickets in a lotteries).
2. Aave:
Aave is an open source and non-custodial protocol enabling the creation of money markets.
Depositors can earn interest on deposits and borrow assets. Aave Protocol supports more
than 15 different assets, with a large selection of stablecoins.
Aave (which means “ghost” in Finnish) was originally known as ETHLend when it launched
in November 2017, but rebranded now to Aave. The migration from LEND to AAVE is the
first step in the Aavenomics. Migrating from LEND to AAVE token allows the users to
participate actively on the Aave Protocol governance and stake within the protocol Safety
Module.
3. Compound (COMP):
Compound (COMP) is an ERC-20 asset that powers the community governance of the
Compound protocol; COMP token-holders and their delegates debate, propose, and vote on
changes to the protocol.
By placing COMP directly into the hands of users and applications, an increasingly large
ecosystem will be able to upgrade the protocol, and will be incentivized to collectively
steward the protocol into the future with good governance.
4. SushiSwap (SUSHI):
SushiSwap is an automated market-making (AMM) decentralized exchange (DEX) currently
on the Ethereum blockchain. We are soon expanding our offerings with the BentoBox
lending platform.
SushiSwap is a community-run project, governed by the community vote for all major
changes to the protocol. Day-to-day operations, rebalancing of pools and ratios, business
strategy, and overall development is ultimately decided on by our Sushi Chef 0xMaki.
5. Curve DAO Token (CRV):
CRV is a governance token on the Curve platform with time-weighted voting and value
accrual mechanisms.
6. Synthetix Network Token (SNX):
Synthetix, formerly Havven, is a cryptoasset-backed network that enables the creation of on-
chain synthetic assets. The Synthetix platform enables the creation of on-chain synthetic
assets (Synths) that track the value of assets in the real world. Some examples of assets
that the platform supports are synthetic fiat currencies (sUSD, sAUD, sKRW, etc.), synthetic
commodities such as gold (sXAU), as well as more complex assets such as equity indices.
7. Bitcoin Standard Hashrate Token (BTCST):
Bitcoin Standard Hashrate Token aims to bring exchange-grade liquidity to Bitcoin mining
and solve the current problem of a limited number of exit options while participating in the
mining process.
Each BTCST is collateralized by 0.1 terahash per second of Bitcoin mining power. Users are
able to stake their BTCSTs and by doing so they can receive daily Bitcoin distributions
corresponding to the amount of mining power staked. No upper limit and no KYC required.
8. Reef:
Reef is a smart liquidity aggregator and yield engine that enables trading with access to
liquidity from both CEXs and DEXs while offering smart lending, borrowing, staking, mining
through AI driven personalized Reef Yield Engine.
What can you do with the Reef token?
Governance: vote on different proposals such as releasing new features and re-adjusting
certain parameters in the system
Protocol fees: pay fees for operations such as entering/exiting a the basket, reallocation,
rebalancing and other activities
Staking: stake into various pools to earn interests with preferred APR;
Yield Distribution: choose the payout ratio of the profit generated by the activities in your
basket
Why did Reef build on Polkadot?
Polkadot’s interoperability layer allows us to communicate with all the blockchains and still
achieve high throughput. Additionally, we inherit their security model, which means we get to
be highly resilient, can do forkless upgrades while still being able to maintain stable on-chain
governance.
We are fully compatible with Ethereum and the current DeFi ecosystem, but we believe in
order to innovate and take the landscape to the next level, we have to take it cross-chain,
and through Polkadot we are able to achieve that.
Besides this, Polkadot’s parachain communication (XCMP) and bridging mechanism,
combined with the possibility to run solidity code on parachains such as Plasm and
Moonbeam, use native Ethereum addresses and huge ecosystem support (Web3, Parity)
were the reasons why we chose to build on Polkadot. Reef being cross-chain gives us
flexibility, which means we are able to shift our product and features based on where the
users are and what the users want/need in the future.
Where does the APY from staking into the Reef pool come from?
The APY generated by the Reef pool comes from the income streams generated by the
Reef’s ecosystem. We currently have 3 income streams: Basket engine, protocol fees and
interest paid by power users who borrow tokens from the Reef pool in order to increase their
voting power.
All the 3 income streams are currently flowing in the Reef pool. In the future, through voting,
we plan to introduce Reef Treasury which will be the recipient of the income streams, and
the DAO can further decide how to allocate the funds (eg: grants, buybacks, etc.)
Besides the APY from the Reef Pool, the users will earn yields generated by the smart yield
farming engine which gives them exposure to different DeFi activities and tokens from
multiple ecosystems.
9. Badger DAO (BADGER):
Badger is a decentralized autonomous organization (DAO) with a single purpose: build the
products and infrastructure necessary to accelerate Bitcoin as collateral across other
blockchains.
10. Rari Governance Token (RGT):
The Rari Governance Token is the native token behind Rari Capital. Rari Capital is a non-
custodial DeFi robo-advisor that autonomously earns users yield.
