Crypto.com has released a new DeFi report that explores yield farming opportunities as well as DeFi adoption across more recent blockchains like Polygon and Binance Smart Chain.
Kevin Wang, Crypto.com’s research manager, wrote the report. He concluded that new blockchains, layer two solutions on Ethereum, evolution of the autonomous market maker (AMM), as well as the development of yield-aggregators are some of the reasons why yield framing is gaining popularity.
Yield Farming Trends
Yield farming is also known as liquidity mining. It allows you to earn passive profits from your cryptocurrency holdings. DeFi peaked, and the TVL also tapped an all-time high of $86 billion.
The most popular solutions for DeFi products and applications were Polygon and Binance Smart Chain in terms of Total Value Locked (TVL), which is a measure of the total value of all crypto currencies locked in a specific protocol.
ZK-Rollups was the most popular layer 2, a scaling solution that is designed to provide privacy and scalability. These solutions were created to address the inherent problems of high gas fees on Ethereum and network congestion. They submit aggregated data per batch to Ethereum’s mainnet, instead of each piece.
AMMs and Yield Farm Risks
Automated market makers (AMMs) — smart contract-based exchanges that match trades using liquidity pools — were highlighted as the ‘poster child’ for DEXs and liquidity in the DeFi market.
However, these came with their own set of problems.
Wang added that AMMs were not perfect solutions and have limitations such as low fund utilization and increased risk exposure and the much-discussed issue of permanent loss.
“During the development last year, new market maker algorithms appeared to solve the traditional AMMs issues such as DODO’s PMM, Bancor v2, Balancer v2, and Uniswap v3.”
The Crypto.com report also stated that AMMs and yield farming had inherent risks. Wang stated that AMMs and yield farming are not risk-free and that investors should be aware of the possible risks.
Impermanent loss is the loss caused by the change in an underlying to token’s values in the AMM. This can lead to tokens being less value than holding them.
Wang stated that regardless of the price rise or fall for the staking token the impermanent losses always exist, unless the token’s initial price returns to its original state.