“Bet on a faster horse to beat inflation.”
Note: This is not financial advice. This is an educational resource that should not be interpreted as an endorsement to buy any assets mentioned.
💎 Why it Matters
When you change friction, you change everything.
Reducing financial friction unlocks a new form factor. Yield farming.
Protocols want to build networks.
Yield farmers want to maximize yield.
True believers want to own a part of the networks they build.
Most networks subsidize early activity to build network effects.
Once networks reach liquidity, subsidies are removed as the “flywheel” takes over.
PayPal, Robinhood and Lyft subsidize networks with sign up bonuses and referral programs. Protocols subsidize networks with tokens representing governance and/or ownership stakes.
Web2 networks rarely offered ownership. Uber offered early drivers cell phones. Not stock. Web3 is the era of user-owned networks.
- Aave • Open-source liquidity protocol
- Compound • Interest-bearing lending pools
- Sushiswap • Platform to swap, lend and borrow
- Balancer • Automated portfolio manager
- Curve • Liquidity pool for stablecoin trading
- Synthetix • Liquidity protocol for derivatives
- Yearn.finance • Yield optimizer governed by the YFI token.
- Harvest Finance • Yield optimizer with an interest-bearing token, iFarm.
- Yak • An autocompounder on Avalanche.
- Zapper • Dashboard for DeFi.
- Zerion • Build and manage a DeFi portfolio.
- DeBank • Track portfolios, compare rates and analyze risk.
- Aggregators will extract more value than exchanges. SushiSwap and Uniswap are aggregated by Matcha. Commoditization makes it hard to capture value. Tokens incentivize loyalty. To some degree. If a loyal Delta Airlines customer can fly the same route at 10% of the price on American Airlines. They will. Zapper is the DeFi equivalent of Google Flights. Aggregating exchanges and airlines is the same game.
- NFT Farming will thrive. See ZooKeeper and CyberKongz. NFTs are shifting from status symbols to revenue-generating assets. A Genesis Kong yields 10 $BANANA a day. After 60 days, you can make a Baby Kong for 600 tokens. Currently valued at $67,000 USD.
- Use apps such as Zapper and Zerion to track and manage assets. The DeFi space is fragmented. These are user-friendly command centers for your assets.
- Learn on Layer 2. Layer 2s has lower transaction fees than Layer 1. Allowing you to get more reps in, iterate and learn faster. The tradeoff is centralization. Centralization can be an acceptable tradeoff when experimenting. Layer 1 can be used as a settlement layer.
- Build a media brand around yield farming. See curators like DeFi Pulse, podcasts like Bankless and YouTube channels like Finematics.
- Smart Contract Risk • Bugs in smart contracts. The DAO was hit by this.
- Poor Mechanism Design • A subset of smart contract risk. Iron Bank was hacked by manipulating the value of a “stablecoin.”
- Oracle Risk • Hacking a dependency of a protocol. An oracle that Synthetix depends on was manipulated to drain 37 million sETH.
- Rug Pulls • When protocol teams steal from stakeholders. See 12 rug pulls.
“Protocols want network adoption but some yield farmers immediately flip protocol tokens… Aren’t these incentives misaligned?”
Yes. This is hard to prevent. If protocols want to offer an opportunity to own part of a network. Ownership means the freedom to sell. Which some do. Then jump to networks where rewards are more attractive.
“Are these the new ICOs?”
These networks have utility. So I think it’s unfair to compare them to ICOs. Which lacked this attribute. They had whitepapers. We have working apps.
“Where’s the moat here?”
Code can be copied but teams can’t. This may be the last moat.
🔑 Key Lessons
- Less financial fiction makes yield farming possible. Strategies can be deployed, switched and money automatically moved to chase the highest yields.
- Protocols subsidize networks with rewards. Lyft, PayPal and Robinhood subsidize with rewards and referral programs. DeFi protocols subsidize with governance and ownership tokens. These can be held or sold. The goal is the same. Boost network adoption.
- Traditional networks offer subsidies until they reach liquidity. Then extract monopolistic margins. Vampire attacks control this rent seeking behavior.
- Who should I talk to about yield farming? • The tweet behind this report.
- Why Decentralization Matters • Chris Dixon on web2 and web3 networks. The former extracts monopolistic margins once network effects are established. The latter can’t.
- DeFi Orientation • An introduction course to DeFi from Nat Eliason.
📁 Related Reports
- DeFi • Yield farming is a branch of DeFi.
- DAOs • Some protocols act as DAOs with governance tokens.
- Ecosystems • Protocols are ecosystems.
- Gamification • Learn to design incentives.
- NFTs • NFT farming brings yield farming and NFTs together.
Thanks to Stewart Townsend (Channel as a Service), Rahul Prakash (Unlocking Blockchain), Jeremy Abraham (Spiffy), Rick Segal (CRAAG Angel Group), Nat Eliason (DeFi Orientation), Sean Hua, Edward Mcenrue (True Fit), Vajresh Balaji (SuperLayer Labs) and Aadil Razvi (Demand Curve). We had a great time jamming on this report.
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With Trends Pro you’ll learn:
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- (📈 Pro) What’s systemic risk?
- (📈 Pro) How to avoid auto-liquidation?
- (📈 Pro) How does yield farming work in a web2 world?
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- (📈 Pro) What have been the biggest DeFi hacks?
- (📈 Pro) How do NFT owners generate and share revenue?