[Ko Ran] Why try yield farming?
[Ko Ran] A hot-button issue in the 2020 cryptocurrency market is the concept of decentralized finance or DeFi. There are a great deal of anecdotes where investors managed to gain significantly. So, this reporter and Kim Yoon-ho, a crypto expert, are here to suggest yield farming, a term referring to a clever strategy of generating returns through investment in cryptocurrencies. Q>What is DeFi? “DeFi is short for decentralized finance, which means a financial system leveraging a decentralized ledger system or blockchain.” Q>Traditional banks pursue profitability on net interest margins. What enables banks to take a profit from net interest margin is its banking license. Under the DeFi system, players don’t hold such licenses, but instead, they try to bring back the profit they get from expanded lending platforms to both lenders and borrowers. The participants will receive digital tokens like COMP in reward. Is this correct? “In the DeFi world, there was no such thing as returning profit back originally. Starting with COMP, operators are rewarding investors with tokens, but the practice started less than 10 years ago. The number of coins and distribution periods are predetermined, so now they are used as a promotional item to increase their total value locked (TVL). But what differentiates DeFi players from established financial institutions is that they give the so-called governance tokens to the users, allowing them to become both participants and owners of the DeFi system.” Q>To scale up the lending platform, there should be a large base of borrowers and lenders. To attract more lenders, lending interest rates should be higher whereas the rates should be low to bring in more borrowers. How are the interest rates with DeFi. The rates are higher than those from conventional financial institutions, but why are people using the DeFi platform? “We need to divide between eras before and after the distribution of COMP governance token. Before the distribution, DeFi operators took ethereum that supports DAI stable coin. It is like entering a leveraged investment using DeFi. But after the COMP distribution, people can receive COMP in reward for borrowing DAI. As the value of COMP is higher than the interest rate that comes with the borrowing of DAI, the TVL also surges. But it is noteworthy that the number of users of COMP, one of the largest tokens, remains small. As of July 29, the suppliers of COMP total 33,000, while borrowers are merely 4,742. This number of borrowers can be much smaller given that a user could borrow using multiple wallets.” Q>“As mentioned, people turn to DeFi because the rewarded token prices are higher than the lending interest. But is this structure sustainable?” “It is not sustainable. The COMP distribution will end in four years. But it can be said that the existence of such tokens paved the way for DeFi companies to survive.” Q>Doubts exist when it comes to DeFi. How can people raise profits from interest rates by holding ethereum that they don’t intend to sell? “The yield farming that I can recommend is to borrow DAI by deposting ethereum to COMP tokens, then transfer the DAI to the ethereum wallet to re-deposit COMP.”