The return of yield farming as DeFi expands beyond Ethereum

During the warmly-lit months of 2020’s “DeFi summer”, yield farming on Ethereum was relatively new, and very big news. Back then, Ethereum was alive with innovative and accessible opportunities for users to get involved in all areas of the DeFi ecosystem in return for a yield, often paid in native tokens that could then be put to work elsewhere to earn more.

These endless “farming” opportunities were a key attraction for many entering Ethereum’s new financial ecosystem. Indeed, yield farming became the driving force behind the explosion of DeFi that has seen its total value rise from less than $1 billion early last year to more than $117 billion today across all blockchains.

Access to yield farming began to narrow in late 2020, though, as the annual percentage yields (APYs) available at some of the more established farming protocols began to fall while “gas” fees for transacting on Ethereum began to rise. The latter was perhaps most painful for farmers, with gas soaring to levels that effectively made any transaction below $2,000 unviable — locking out smaller value users.

These twin issues meant that, only a few months ago, industry insiders had declared yield farming “dead” — at least for the average users that had participated in early 2020. That was, however, before Binance Smart Chain (BSC). Built to be fully compatible with Ethereum Virtual Machine (EVM) programming, BSC was launched to rival Ethereum in the DeFi stakes, and its fast speeds and low fees meant it did very well, very quickly.

In short shrift BSC’s main exchange, Pancakeswap, rose up the DeFi ranks to rival Ethereum’s biggest decentralized platforms. This includes its biggest decentralized exchange (DEX), Uniswap, which Pancake swap now exceeds both in terms of total value locked ($7.8 billion vs $5.7 billion) and daily trading volume ($787 million vs. $712 million as of 3 June).

BSC’s biggest dedicated yield farming protocols, Pancake Bunny and Autofarm, have also proven popular, with each boasting around $1 billion of total value locked, placing them in the top 30 of all DeFi protocols across all chains. These two are by no means BTC’s only farming options, however, with the relatively new chain now hosting close to 300 different protocols for yield farming.

Solana, Binance Smart Chain and Polygon are hosting growing numbers of new yield farms

Perhaps even more of a runaway success than BSC — at least in terms of the pace of its adoption — is Ethereum layer 2 solution Polygon (formerly Matic), whose main DEX Quickswap recently surpassed $1 billion in total value locked. Launched in India in 2017, Polygon has become a favorite of Ethereum users thanks to its easy-to-use “bridge” that allows for fast and cheap movement of assets from the Ethereum chain.

Polygon and Quickswap’s popularity have seen their native tokens, Matic and Quick respectively, catapult in value over the past two months, while the number of places to yield farm on the network has ballooned to over 60.

Marketed as “the internet of finance”, Avalanche is another chain aimed squarely at the DeFi crowd. Launched in September 2020, Avalanche (AVAX) claims to have achieved speeds of 6,500 transactions per second compared to Ethereum’s average of 15. This and its low fees has propelled the popularity of its main exchange and farming protocol, Pangolin, which now ranks in the top 50 of all DeFi protocols for TVL while AVAX hosts a further 13 protocols for yield farming.

BSC, Polygon and AVAX currently dominate the alternative yield farming scene, though they are by no means alone. The easy application of the EVM combined with the growing utility of network bridges means that new chains and solutions for yield farming are popping up almost daily. New entrants include new blockchain favorite Solana with its DEX Raydium, as well as Heco, Fantom, Harmony, Fuse, ThunderCore and Seigniorage.

Across all of these chains, farmers can find sky-high APYs for their assets, typically in the three-figure range, and sometimes more. With such huge returns, however, comes some equally large risks. Brand new, untested and frequently launched with little more information than a name and logo, the provenance and intention of many of these newer and smaller yield farming platforms may be questionable.

The risks of farming with a brand new token are also high. While no area of the crypto market is without volatility — particularly in recent weeks — down in the depths of the new yield farming world tokens can plunge to sub-zero in no time at all. This can be financially devastating for farmers using said token to earn their yield, creating an impermanent loss that may never be regained.

Then, of course, there are security risks. With many of these new protocols not audited, few can be sure how robust their smart contracts are. As was seen in the DeFi summer of 2020, it might not take long for canny hackers to find loopholes through which to drain these new farms and their users of all their liquidity.

Those nostalgic for the early yield farming days of 2020 will view the latest developments on a growing number of blockchains as a happy occasion. Indeed, the fact of them is to be celebrated, demonstrating as it does the growing interoperability of blockchains that will inevitably strengthen and grow the entire crypto ecosystem.

There are, however, unquestionable dangers attached to using many of the smaller farms and, as ever, users would be well advised to do their own research before dabbling — and a lot of it.

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