[Parker] Getting to grips with yield farming
[Parker's Crypto Story] Decentralized Finance (DeFi) has become one of the hottest issues in the cryptocurrency market these days. The market value of the DeFi ecosystem surpassed $1 billion in June, but its total value locked (TVL) has surpassed $9 billion. Some say a new era of DeFi has arrived, while others say bubbles are being formed just like the initial coin offering craze. But since DeFi isn’t easy for most people to approach, most evaluate it based on what’s happening superficially. I learned about DeFi by asking experts about the extortion cases earlier this year. But as DeFi has rapidly become more diversified recently, I think it is no longer possible to understand DeFi just based on theories. So I personally tried DeFi services centering on Yield Farming — one of the hottest issues these days. #First step: Selecting liquidity pool The most basic way to directly engage in the DeFi ecosystem, apart from developing, is to become a liquidity provider. Liquidity providers have to choose the most reasonable liquidity pool, taking into consideration numerous variables that could happen within DeFi. Two representative indicators are annual percentage yield (APY) and annual percentage rate (APR). Before the so-called governance token appeared, DeFi was largely based on utility tokens and yield was not that important. But following the yield farming from governance tokens, annual yield became the key indicator for liquidity providers. Liquidity pools with high APR can be checked on Yield Farming Tools website. #Second step: Connecting wallet, token swap, providing liquidity After selecting the liquidity pool, a wallet needs to be connected to that pool for one’s assets to be deposited. There are several options for selecting the wallet, but the most prevalently used is MetaMask. It can be downloaded on Chrome. But MetaMask is used for preserving tokens that are based on Ethereum. I decided to supply liquidity for a month on Curve, an exchange liquidity pool on Ethereum, so I connected MetaMask to Curve. Next, I added tokens to the liquidity pool. Those who already had tokens can just send it straight to the liquidity pool. But sometimes tokens need to be swapped if certain tokens are tokenized to liquidity pools. I used the representative Aggregator service 1inch exchange to swap ETH with DAI and USDC, which were required for the Curve compound pool. Using DeFi Aggregator, user don’t have to search every protocol to find the optimal swap conditions. Commission fees for token swaps cost 60,000 won ($50.56). Another 37,000 won commission fee is incurred for depositing the swapped token to the Curve compound pool to provide liquidity. #Third step: Applying benefits provided by the liquidity pool In the beginning of the yield farming, I expected to earn a lot of tokens once I’ve gone through the second step. But the ecosystem DeFi continues to change, as new models appear everyday. So DeFi service operators are providing additional benefits to the liquidity pool. Considering the variables, finding a reasonable service that suits themselves is important. It cost me an 82,000 won commission fee while applying for the benefits provided. Once done through here, preparation for yield farming is complete.