An overview of what is happening in the crypto markets, summarised daily by Crypto Finance AG Senior Trader Patrick Heusser in the market commentary.
Today, I would like to shed some light on the DeFi sector, yield farming in particular, and the token LINK. It might sound confusing to some of you who have not been that deep into DeFi. Please do not hesitate to get in touch with us if you need more information.
In DeFi you can wrap tokens together like legos, which may have led to the expression "lego money". To do this, you need to tokenise user deposits.
Different forms of LINK
There's a great deal being built using both collateral and price feeds, but let's start at the beginning. First, we have a wrapped interest bearing version of LINK on Fulcrum.
Then, a synthetic form of LINK from Synthetix, on an overcollaterlised basis. Confusingly, there's also an inverse synth from Synthetix, a short position, very different from Fulcrum. Then we have a wrapped interest bearing version of LINK on AaveAave. It was just those for a while, but now we're seeing a new wave, which is an interest bearing version of LINK on Yearn.Finance (yVaults), but essentially it's a wrapper created for depositing Aave's into Yearn.Finance. Yearn.Finance contracts use this as collateral in a loan on AaveAave to borrow stablecoins (USDC/DAI/USDT/TUSD).
These stablecoins are then deposited back into Yearn.Finance yVaults to yield farm. The most profitable strategy for this is farming (and not outright buying the token).
So, first the borrowed stablecoins are deposited into the Curve.Finance Y pool to get a tokenised liquidity pool share of Curve, which is a stablecoin AMM DEX. You earn trading fees anytime the pool is used. But the magic doesn't stop there: the underlying stablecoins within the Y pool are then deposited back into Yearn.Finance yVaults to earn the best interest rates across DeFi. Usually those funds get lent on AaveAave as the tokenised Y pool shares I described above are then being deposited on Yearn.Finance to farm the governance token of Curve.
It is then sold for stablecoins, and then deposited back into the Y pool to compound returns for more.
Still following me?
Okay, let's zoom back out to the profits (AMM fees + lending interest + CRV farming) generated from the use of market buy on Uniswap compounding returns.
Essentially, what this means is that you can put your $LINK in AaveAave first to get $aLINK and then AaveAave will get you $yaLINK, which enables you to earn more over time from the best yields across DeFi.
There is a 0.5% withdrawal fee and a 5% fee of the GAS spent by AaveAave, but at currently ~100% APY (annual percentage yield - including the compounding effect) this hardly matters in the long run.
But things don't stop here either. Those yield earning tokens can then be deposited into food tokens such as SpaghettiMoney to earn PASTA tokens.
Does this sound too good to be true? I agree: this is not sustainable at those very high APYs. But it is a good way to distribute tokens in a fair way and to bootstrap liquidity (and also to inflate the TVL (total value locked) amount.
And do not forget, the risks are very high when playing the "farming game". You are exposed to the following:
- Technological risks (smart contracts)
- Economic risks (nonsense concepts)
- Centralisation risks (governance tokens being held in large amounts by the treasury of the foundation)
- Regulatory risks (projects getting shut down by regulators)
And one last piece of advice: take profit regularly when you yield farm.