Decentralized Finance (DeFi) has been a trending topic during the last two years, responsible for revolutionizing the manner in which an entire generation approaches financial services in an internet-embedded society. During this time this one branch of the cryptocurrency industry has grown tremendously, drawing capital from traditional finance to such an extent that, by November of 2021, the total value held in DeFi platforms has exceeded $275 billion USD . The new concept of yield farming is a major contributor to this explosion in popularity, arguably a result of the practice effectively upending the status quo of sub-1% interest rates offered by the established banking sector of late. Here we look at the concept itself, as well as a new platform embracing it as a stimulus for its own growth across multiple blockchains.
Yield farming, also known as liquidity farming, refers to depositing cryptocurrencies into the smart contracts of various DeFi platforms in return for high returns paid out as share of fees or interest it generates, as well as, on occasion, the platform’s own token. For example, an investor might deposit a dollar-pegged stablecoin (a cryptocurrency that tracks the price of the US dollar) into a lending protocol that then makes these available to borrowers. Other investors can then borrow these to purchase other assets they think will increase in value at a faster rate than USD, paying a considerable amount as interest for doing so. These returns, calculated as an annual percentage yield (APY), are often supplemented by a so-called “governance token,” an asset which is used to control the decentralized platform (dApp) and qualify for the receipt of a portion of protocol fees paid by borrowers but not granted to those initial depositors. With governance tokens often being seen as potentially valuable assets due to their role in managing and profiting from a dApp, farmers can often earn APYs in triple digits. Furthermore, protocol tokens farmed prior to an explosion in a dApps popularity will effectively boost received APYs further, leading to recursive effect in which more investors join in search of high APYs and allocate their funds in a manner that generates yet more protocol fees, thus making the governance token more attractive and highly valued.
Advantages and Disadvantages of Yield farming
Yield Farming has drawn the attention of investors because it provides huge underlying returns when compared to traditional financial institutions, combined with the notable advantage of yet higher returns when the price of the protocol’s own token appreciates, but like all good things, Yield Farming is not without shortcomings.
There is the ever-present danger of protocol security (or lack there-of) and investors who choose to leverage their positions to farm with greater capital have to worry about the risk of liquidation when the price of their collateralized tokens drops unexpectedly due to the highly volatile nature of cryptocurrency markets.
Another downside is that the most effective yield farming strategies possess considerable complexity, locking out those who do not completely comprehend the mechanics of the processes involved. This, however, has not hindered developers from creating better, more intuitive platforms that seek to reduce the shortcomings of yield farming while providing more advantages to their users.
Introducing Hundred Finance
Hundred Finance is a decentralized application created to allow the lending and borrowing of cryptocurrencies. A multi-chain protocol, meaning it is deployed and integrated with multiple complementary and competing blockchains rather than favoring any one chain, it integrates with Chainlink oracles to ensure the health and stability of its markets delivered to a growing number of users in a trustless and secure manner. The goal of Hundred Finance is to expand its multi-chain offering to deliver its trustless and economically efficient financial services as widely as possible.
The protocol is currently implemented on several chains, with plans to deploy to more soon. It has been soft launched on the Ethereum mainnet, and fully deployed on the Arbitrum layer two scaling solution and the Fantom Opera Layer 2 scaling solution. These latter two have incentivized liquidity programs currently active, with the HND governance token being emitted to those who supply select USD-pegged stablecoins.
What sets the platform apart from others in the market is its contributions to the cryptocurrency industry through its development of a multi-chain ecosystem. Assets can be moved across chains to where they are in most demand, and thus where they receive the greatest APY for supplying them. What is more, the goal is to facilitate in the future a functionality where supplying assets on one chain makes them available on another. This would be a major innovation as one would be able to maintain a supply of collateral on the Ethereum mainnet and then borrow against it elsewhere. This would remove the necessity of using token bridges, infrastructure that it costs fees and time to use.
Currently, Hundred Finance is porting its dApp to new chains and engaging in a marketing campaign to increase its user base. The protocol hopes to provide the foundation for the implementation of a first-of-its-kind multichain lending and borrowing ecosystem with a governance system open to the participation of all.