Automated Yield Farming
How Dot Finance Makes Farming Easy
I know — DeFi has so many protocols it’s sometimes hard to keep track. It’s stressful to try to understand different instruments but end up even more confused. It’s worse when you see all the whales minting money, and you’re left with just scraps from the table.
I’ve been in your shoes.
That is why I’m telling you — it is worth your time to plough through this. According to defipulse.com, $61 billion is already locked up in yield farming at the time of writing. There is money to be had if you know where to look.
But first, let’s learn about yield farming.
Yield farming builds on the concept of traditional investment instruments, such as borrowing and lending, but in crypto. You “lock” up your funds for rewards, usually in the form of native tokens or a part of the transaction fees. It incentivizes participation and helps provide liquidity to the entire chain.
You’re making your money work for you, using your crypto to earn more crypto.
Forbes has reported people getting an insane 100%+ annualized return from yield farming.
But what’s the catch? Is it as simple as people make it out to be? Well, yes and no. The current ecosystem of yield farming leaves a lot to be desired — let me show you how.
Pain Points of Yield Farming
• High gas fees on the Ethereum network
ETH’s gas fees are known for going insanely high when there is huge demand. Since the volume of transactions is high in yield farming, you run a very high risk of gas fees eating into your profits.
• High level of monitoring
Yield farming can sometimes feel like day trading. In day trading, you’re dealing with one volatile asset. Here, you’re dealing with two volatile assets, and you have to be extremely careful if you’re trying to gain maximum returns. Let’s see why that happens.
Your investment provides liquidity for the assets in which you’ve invested. So, the APRs fluctuate wildly across different farms because of the tokens’ volatility, market rate, and amount of liquidity moving in and out of the pools. As a result, you have to keep a close eye on all your assets manually.
Tracking APRs and gas fees, moving tokens from farm to farm, swapping to other tokens, manually compounding your interest, all of that equates to hours spent staring at the computer. And if you miss the optimal compounding times or make multiple high gas transactions, your projected return drops significantly.
• Liquidation risk
Liquidation risk is a significant drawback of a common yield farming strategy called leverage — borrowing tokens against your initial investment to buy more tokens.
When you’re borrowing tokens in DeFi, you have to provide collateral. In the real world, that could be your car, real estate, or other property. In DeFi, it’s your ‘supply’ crypto token, i.e., the amount you initially invest in the DeFi protocol.
The aim is always to have the collateral above the minimum LTV (Loan to Value) ratio; otherwise, the DApp’s smart contract will automatically liquidate your initial investment to repay your debt.
The problem with cryptocurrency is that since prices fluctuate, people can lose their collateral even when they don’t necessarily take a huge risk.
A simpler way to put this would be: If you had $200 in ETH, and your LTV ratio was 60%, you’d have $120 in ETH to borrow other tokens. But if ETH’s value falls, then you’re borrowing more than you can secure with the dollar value of your collateral. So, in that case, the protocol liquidates your initial investment.
• Liquidity risk
Now, to repay your loan, you need the equivalent of the token you borrowed. For example, if you used your $120 in ETH to buy BAT token, you must pay back the loan in BAT token.
The problem here is: if there are no sellers for the BAT token in the market, you don’t have a way to pay it back. It’s the basic supply-demand gap that usually happens when many traders hold similar positions and start exiting them at the same time.
So, if you’re at a loss, your position will be liquidated, and you’ll lose out on the initial investment.
To avoid these scenarios, you need to watch out for market fluctuations regularly.
• Rug Pulls/Exploits
We’ve all heard of crypto projects going south when the developers abandon the project after a pump and dump scheme or hackers exploit the code. Unfortunately, that’s even more common in DeFi due to decentralized exchanges listing tokens without auditing.
So, how do you avoid falling prey to this? First, and most importantly, you look into the authenticity of the product and team. Next, you check the liquidity in the pool and if there’s a lock on the token’s pool. If a dev team has a solid reputation and decent liquidity is locked up, there’s less of a chance to be a problem.
Even though Yield Farming is a huge market, the risks and the inherent complexity make new investors shy away.
But what if there was a solution? A solution where you didn’t have to watch your investments like a hawk? A solution where you could have high returns but not necessarily take part every day? A solution where you do not have to worry about rug pulls happening right under your nose?
Enter Dot Finance
Dot Finance breaks the Ethereum monopoly and introduces faster, efficient transactions which are easier on your pocket. They end the need for constant screen watching and manual compounding through automation. They optimize returns with auto-compounding algorithms and batched transactions.
Best of all, the Dot Finance team has the expertise and a reputation you can trust since many are well known as former Bancor developers. No need to worry about rug pulls.
Let’s see how they make the world of yield farming much more accessible for new crypto traders.
How is Dot Finance Simplifying Yield Farming?
• Yield Aggregator
The Dot Finance platform will seamlessly integrate with multiple blockchains once it migrates to the Polkadot blockchain.
That means your investment will be resistant to the crashes and burns of specific exchanges. Instead, their yield aggregator tool will find the best APR farms to deposit your tokens. It’s like an inverse Amazon price tracker. Instead of finding the best deals, it finds the best yields.
• Binance Smart Chain
Since Dapps will run on the BSC network, gas fees are low, and transactions are much faster than their Ethereum counterparts. Once the parachains on Polkadot are active, the Dot Finance platform will migrate over, and we will see even more improvement.
• Auto-Compounding
You don’t have to sit for hours staring at the computer to catch the best time to re-invest your interest. Dot Finance automates this, and it’s the first ‘set and forget’ yield farming system for Polkadot. The platform will automatically compound your investment at the optimal rate to increase the projected rate of return. Multiple compounding transactions will also be batched into single transactions to keep the already low fees even lower.
Maximize Your Yields With Dot Finance
Now, I am particularly excited about this project because I can see it spur the adoption of Polkadot and revolutionize the DeFi space. I mean, look at eToro with their’ set it and forget it’ copy trading solution and the strides they’ve made. Dot Finance has the same concept, not to mention developers who were part of the original eToro, Bancor, and Poolz teams.
It addresses true gaps in the market and can bring more investors to the entire ecosystem, which is something I actively look for when I analyze tokens. With the growing participation in yield farming, it is inevitable for the yields to drop. So, I’d get in as soon as you can and farm the profits while the sun shines. And if you play your cards right, Dot Finance just might be your next crypto success.
Written by Lipsa Das
About Grow Events
Grow is a full-stack marketing and incubation service helping crypto start-ups bridge the knowledge gap and communicate with the world. Their team of writers, designers, editors, and marketers operate at the intersection of innovation and storytelling to propel projects to new heights.
Find out more at:
