A new DeFi report by crypto services platform Crypto.com dove into yield farming opportunities and DeFi adoption across newer blockchains such as Binance Smart Chain, Polygon, and others.
The report, written by Crypto.com research manager Kevin Wang, concluded that the reasons for yield framing regaining popularity are the launch of new blockchains, layer 2 solutions on Ethereum, the evolution of autonomous market maker (AMM), and the development of yield aggregators.
Yield farming trends
Yield farming, also referred to as liquidity mining, is a way to generate passive rewards with cryptocurrency holdings. In May, Google Trends of DeFi peaked, and the TVL also tapped an all-time high of $86 billion.
In terms of Total Value Locked (TVL) — a metric for the total value of all cryptocurrencies locked in a particular protocol — Polygon and Binance Smart Chain emerged as the most popular solutions alongside Ethereum for DeFi applications and products.
The most popular layer 2 solution, on the other hand, was ZK-Rollups, a scaling solution designed with privacy and scalability in mind. Such solutions were designed to combat the inherent issues of high gas fees and network congestion on Ethereum; they submit aggregated data by batch to Ethereum’s mainnet instead of each piece of information.
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.
These, however, came with their set of issues. “AMMs are not exactly perfect solutions and do come with several limitations, such as low fund utilization, additional risk exposure, and the widely discussed issue of impermanent loss,” wrote Wang, adding:
“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.”
Meanwhile, the Crypto.com report stated that yield farming and AMMs had some inherent risks for users. “it is not a risk-free game and investors should bear in mind the potential risks, including impermanent loss and smart contract risk,” wrote Wang in the report.
Another issue cited was that of impermanent loss, or the loss due to the change of an underlying token’s prices in the AMM that lead to the tokens being less valuable than just holding. “No matter the rise or drop of price for the staking token, the impermanent loss always exists, unless the token’s price returns to the initial state,” Wang noted.
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