The Yield Farming Craze Showcasing the DeFi Money Lego Nature

— August 11th, 2020 by TokenInsight Research



With the craze around incentivised liquidity mining (aka Yield farming), we analyzed the Balancer Protocol liquidity pools on July 30 and discovered that the YFI yield farming and other similar initiatives leveraging Balancer Protocol as the underlying liquidity pool truly represents DeFi money lego features in the industry.

Balancer Protocol played an important role in the YFI liquidity farming due to its automated market maker structure

Balancer Protocol belongs to the decentralized exchanges (DEXs) in the DeFi ecosystem and leverages an Automated Market Maker (AMM) structure called Constant Mean Market Maker as its underlying AMM system. There are different variations of AMMs in the DeFi ecosystem. The following table is a typical representation of the different subtypes of Constant Function Market Makers (CFMMs) AMM. The biggest difference between Balancer Protocol and Uniswap is that on Uniswap every liquidity pool has been restricted to only 2 assets with equal weighting, while Balancer Protocol allows for more than 2 assets in a single liquidity pool with unequal weighting. At present, a liquidity pool in Balancer Protocol can consist of up to 8 different assets.

Different types of CFMMs | TokenInsight
Different types of CFMMs, Source: TokenInsight

The popularity of YFI lies in the fact of high yield and the ability for users to choose different yield farming strategies by interacting with other DeFi projects such as Curve Finance and Balancer.

The YFI farming is essentially the “Derivatives Squared” which users can deposit stablecoins on Curve Finance to get yCRV token, deposit yCRV and YFI token on Balancer protocol to get BPT, deposit BPT on yearn finance to farm YFI token, and lastly deposit YFI token and meeting minimum requirements to get yCRV, which this structure has formed a closed loop in the Yearn finance system.

Yield farming strategy | TokenInsight
Yield farming strategy, Source: ChainLinkGod

The above yield farming strategy relies on DEXs and yearn.fnance protocol to achieve. Yearn.fnance’s main role is the yield aggregator, and DEX plays an important role in providing entering and exiting liquidity to these participants. Due to the different AMM structure and protocol rules, the creator of Yearn Finance decided to leverage the Balancer Protocol to create a 98–2 liquidity pool in order to minimise the liquidity providers’ impermanent loss.

Shared vs Private liquidity pools

We analyzed the overall balancer liquidity pool on July 30, 2020. The number of liquidity pools has exceeded 1,000, and the combined liquidity has exceeded $300 million. Balancer liquidity pool consists of private and shared liquidity pools. The shared liquidity pool allows any user to provide liquidity and trade corresponding tokens. The shared pool far exceeds the private type in terms of No. of liquidity pools and aggregate liquidity.

Balancer Liquidity Pools | TokenInsight
Balancer Liquidity Pools, Source: Balancer, TokenInsight

1. Private liquidity pools

There were only 23 private liquidity pools on July 30, and each liquidity pool consists of different types and various tokens. 5 private pools out of the 23 consists of only one type of token and one liquidity pool has up to 7 types of token assets. The majority of the liquidity pools only consist of two types of tokens, indicating that although the design of Balancer allows users to create a liquidity pool consists of more than 2 tokens, it is clear that the majority of the users still prefer liquidity pool with two types of tokens due to potential greater risk exposures on multiple tokens resulting in a greater impermanent loss.

Private Liquidity Pools | TokenInsight
Private Liquidity Pools, Source: Balancer, TokenInsight

The 24-hour total trading volume from the private liquidity pool is very small and only contributed by mainly 3 liquidity pools. The distribution of private liquidity pools is extremely unbalanced. Due to the whitelisting proposal from the Balancer Protocol community, many private liquidity pools were not been whitelisted, among 23 private liquidity pools, 17 liquidity pools have less than $500 liquidity, 2 have between $450,000 and $650,000 liquidity, and 4 have more than $1 million.

2. Shared liquidity pools

Shared liquidity pools | TokenInsight
Shared liquidity pools, Source: Balancer, TokenInsight

Balancer has a large number of shared liquidity pools, with a total of 999. Every liquidity pool currently consists of 2 to 8 tokens, and nearly 70% of the liquidity pools consist of two tokens. Unlike private liquidity pools, there is no shared liquidity pool consisting of only one token.

The number of liquidity pools consists of 2 types of tokens accounted for only 66%, contributing 88% of the 24h trading volume and 90% of the liquidity pool capacity. We have also discovered that 50% of the shared liquidity pools have zero liquidity and 67% of them have zero trading volume.

Balancer’s liquidity pools stats | TokenInsight
Balancer’s liquidity pools stats, Source: Balancer, TokenInsight

The YFI yield farming craze encouraged a substantial increase of the trading volume, No. of traders and liquidity providers in the Balancer ecosystem

Comparison of shared liquidity pools with and without YFI token | TokenInsight
Comparison of shared liquidity pools with and without YFI token, Source: Balancer, TokenInsight

On July 30 there were 24 individual liquidity pools which contributed YFI tokens for liquidity, and all of them in the shared liquidity pools. The total liquidity of these 24 liquidity pools reached nearly $12 million, and the 24h trading volume exceeded $1.2 million. The comparison of liquidity pool data with and without YFI token has shown below.

The Balancer Protocol saw an immediate jump in trading volume, No. of unique traders, and liquidity providers post-launch (July 17) of the YFI liquidity mining initiative. With the continuous YFI yield farming craze in late July, the number of liquidity pools containing YFI token accounts for 4% of the total shared pools, and the trading volume has reached 7% of the total Balancer trading volume on July 30. The average daily trading volume (~$54000) of the liquidity pools with YFI token on that day was 1.6 times the average daily trading volume of the liquidity pools without YFI token (~$33000). The YFI yield farming craze has brought a positive impact on the Balancer Protocol ecosystem.

Daily trading volume, unique traders and liquidity providers | TokenInsight
Daily trading volume, unique traders and liquidity providers, Source: Dune Analytics, TokenInsight

Final Thoughts

We believe yearn.fnance is one of the most successful projects in the DeFi space as for now. The DeFi experiment has demonstrated the composability of the DeFi money lego. Although it is undeniable that the benign interaction between the three platforms of Balancer, Curve and yearn.fnance has promoted the development of DeFi, its ultra-high returns have attracted a large influx of speculators and further pushed up speculative activities in the DeFi space. At the same time, the success of the Yearn Finance Protocol has set an example on how to bootstrap liquidity and different stakeholders’ interests by correctly providing the incentive.

About TokenInsight

Founded in 2017, TokenInsight is a Leading Data & Tech Driven Blockchain Financial Institution. TokenInsight pioneered a complete blockchain industry classification system, covering more than 1,600 projects, releasing more than 300 rating reports, and conducting in-depth studies into 10 major industries.

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The Yield Farming Craze Showcasing the DeFi Money Lego Nature was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.