As Decentralized Finance protocols continue to grow on all fronts, their infrastructure grows alongside them.
While the total value of USD locked in DeFi recently hit a new all-time high at $4.23 billion, liquidity issues have also been a challenge and this led to the creation of decentralized liquidity pools like Uniswap and Balancer. These pools provide liquidity to DeFi platforms through smart contracts and offer interest to the liquidity providers.
The latest DeFi boom is partially driven by the addition of reward incentives in lending and the rapidly increasing popularity of yield farming. The process involves users gaming the protocol to “mine” reward tokens by moving from one asset to whichever one is the most profitable.
This appears to have been kicked off by lending and credit protocols like Compound rewarding lenders with COMP tokens, along with the base interest rate in an effort to improve liquidity.
In July, a new liquidity pool called Yearn Finance took the mainstage as 30,000 Yearn (YFI) tokens were minted and distributed to users, according to Flipside Crypto.
YFI Distribution. Source: Flipside Crypto
Decentralized governance and fair distribution comes to DeFi
In an effort to automate the process of yield farming, Yearn.Finance launched a set of smart contracts that maximize earning by automatically changing liquidity pools according to who the highest payer is. Through a multi-token staking mechanism, users of the Yearn.Finance protocol can also receive YFI, a governance token.
Governance tokens don’t give access to dividends or any other monetary incentive. Instead, they are used as voting chips that allow users to collectively decide the platform’s trajectory, thus making it truly decentralized.
On July, 17, Yearn.Finance founder, Andre Cronje, distributed the entire initial supply of YFI to users of the protocol in three separate liquidity pools. Yes, this is correct. The entire supply of YFI was distributed and the team kept none for themselves.
According to the team behind YFI the distribution was carried out in an effort to:
“Give up this control (mostly because we are lazy and don’t want to do it), we have released YFI, a completely valueless 0 supply token. We reiterate, it has 0 financial value. There is no pre-mine, there is no sale, no you cannot buy it, no, it won’t be on uniswap, no, there won’t be an auction. We don’t have any of it.”
Ultimately, the intention of the distribution was to delegate governance rights (and responsibilities) to the community in a decentralized and fair manner, something which remains fairly revolutionary for the post-ICO crypto space.
Is DeFi maturing or in a bubble phase?
Since being listed on Uniswap, YFI’s price rallied by more than 4,000% in a single day and currently sits at $3,674. Cronje previously told Cointelegraph he has “no clue” why the token price grew so much since he only wanted to “distribute voting rights”.
As such, the current DeFi and yield farming mania is somewhat reminiscent of the 2017 ICO craze when tokens with no value were pumped for no apparent reason and even projects with names like “Useless Ethereum Token” were able to raise considerable sums of money.
Some may conclude that rampant speculation is taking over the sector and that the latest yield farming craze will eventually have an outsized negative impact on the entire DeFi ecosystem.
For example, in mid-July, Compound’s reward mechanism propelled Basic Attention Token (BAT) price to unreasonable heights before COMP altered their reward mechanism.
While this is a valid concern, liquidity pools appear to be adding value and increased utility to numerous DeFi platforms.
The fact that YFI and an increasing number of governance tokens are fully operated by their repsective communities is inarguably a positive step forward as this will further democratize the crypto space and preserve the decentralized ideas the entire sector was built upon.