Blockchain innovations are coming up and the globe is embracing well. among the other amazing innovation and decentralised finance has become the centre of that world. The benefits are endless and two of the main benefits of this Defi ecosystem are Yield farming and NFT farming. Let us discuss the yield farming definition with the defi governance models.
Introduction to Defi
Blockchain has become a separate world where innovation seems to have no bounds and Decentralised Finance has become the centre of that world. With numerous applications, Decentralised Finance or DeFi is in pursuit of revolutionizing the existing financial structure but it has a long way to go before this revolution can be complete.
For instance, DeFi has been constantly evolving to fulfil the ever-changing needs of society and the crux of this evolution has been the different governance models.
With a vision to disrupt financial intermediaries such as banks, Decentralized Finance (Defi) shifts the focus from traditional financial services to the unprecedented use of Blockchain or cryptocurrency.
The benefits are endless – it offers decentralized exchanges, insurance companies, money markets, and that’s just the beginning. To provide a new economic system that is open to everyone and removes intermediaries is DeFi’s vision. Two of the main benefits of this Defi ecosystem are Yield farming and NFT farming.
Yield Farming definition
One blockchain term that has been picking up spotlight is Yield farming- a buzz word for the practice of lending cryptocurrencies in return for interest. It has gained ubiquity as liquidity mining- a framework where the funds are held in liquidity pools that are managed by liquidity providers (LP).
But, what are these liquidity pools? These are the essence of DeFi as they have smart contracts with funds from where users can borrow, lend, or exchange tokens. To reap high returns, yield farmers effectively move their funds among different protocols.
If you are borrowing assets, you need to put up collateral to cover it. In simple terms, think of a situation where you borrow money from the bank, and you put gold, property, or any such item as collateral. DeFi platforms also require such collateralization.
Have you heard about CryptoKitties, Blockade games, and Decentraland? If you are still not acquainted, let us walk you through Non-Fungible Tokens (NFTs) that have taken the finance market by a storm with revenue of more than 2 million.
NFTs are an exceedingly promising aspect of crypto. As the name suggests, they are recalled as the tokenized representation of an asset. They are like brethren to stablecoins that are assets such as collectibles, real estate, artwork, and others.
The cryptographic gaming sector is a large hub that has fostered the use of NFTs as they help in bringing collectibles to the virtual world. These NFTs are already catching the eye of investors and entrepreneurs with the emergence of governance tokens. They help in easy transfer and proof of ownership. We have already started seeing the introduction of yield farming into NFT.
What part does governance play in DeFi projects?
At its core, DeFi is a financial system which is governed by the code rather than any organisation. This piece of code is called a smart contract which ensures that the members of the DeFi ecosystem abide by certain rules so that the system works successfully.
In other words, it enforces agreements and obligations. But what mechanism this code follows and what standards have been included in this code are what decide the working of this ecosystem. This is where the DeFi governance model comes into the picture.
With every new DApp, the ethereum network gets strained; there is a decline in the transaction speed and a boom in the transaction fee. Therefore, this calls for a dire need of a framework with rules and policies for decentralized governance to manage all the network participants. It is pertinent to do it on-chain so that there is no central organization or person in charge. To be able to make decisions without stalling, the favoured approach is to become a token holder and then engage in the network for governance.
Different governance models
To begin with, the majority of the DeFi projects are controlled by the founders. They share a resemblance with the early age startups in their infancy. This can result in faster growth of the organization since the decisions are taken solely by an individual.
As the name signifies, the power rests with a group of people who devise strategies and lay roadmaps. Bitcoin and Ethereum are noteworthy examples of this type of governance where the core developers are the council.
Proclaimed as an explicit representative, this model allows the representatives to be elected by vote. Also known as delegated or proxy voting, this mechanism follows parallelism with the method followed by corporate, where dignitaries and stakeholders vote. Every network that follows this governance has a minimum requirement for getting a right to vote. For instance, you must have a minimum of 1% of the tokens in that network to partake in voting. These tokens are generally known as Governance tokens.
They reserve the right to participate in all the decisions regarding changes in the protocol. It allows for on-chain governance and has demonstrated to give strong returns. Typically each token is equal to one vote. Therefore, if you have more token, you have more votes. The investors are also more intrigued in making huge investments in DeFi projects managed by governance protocols.
Popular DeFi platforms
A popular decentralized organization that allows loaning and acquiring of cryptocurrencies, MakerDAO is built on Ethereum regulating two cryptocurrencies DAI and MKR. It has pulled in a significant 2% share of the total ether supply. It offers a protocol where anyone with ETH and Metamask wallet can lend money in the form of a stablecoin DAI.
The smart contracts built on Ethereum act as an agreement between both the parties. DAI is an ERC20 token that has a stable value of 1 USD. The primary purpose of MKR is to support stability when the threat of liquidation is high. It is available in major decentralized cryptocurrency exchanges such as OKEx, Kyber Network, and others.
Compound is a decentralized lending platform built on Ethereum. At the outset, it was centralized, later transforming to a decentralized autonomous organization after its governance token COMP. You can lend and borrow nine Ethereum based assets such as Basic Attention Token (BAT), Wrapped BTC (wBTC), 0x (ZRX), and others.
They have pools for every asset. You can borrow only 60% of the collateral. This also depends upon the liquidity and market cap of the collateral. Like its cognates, COMP also provides governance over the protocol. Talking about it’s working, it’s a cinch – You must have at least 1% of the total COMP supply on hand or delegate from other users for proposing. You don’t need keed KYC or credit records to do transactions, and you can withdraw your assets at any time.
With an exponential growth curve and megabucks of $25m, Curve- an ethereum powered decentralized autonomous organization (DAO) that came into existence in January 2020 is topping the charts. It has its native token, widely known as Curve DAO token (CRV). It is non-custodial, restricting the developers to access the tokens.
The platform has a large liquidity pool allowing direct token trades, unlike other decentralized exchanges. This helps the users to save a lot of trading fees. The currency charges 0.04% of the transaction. They give importance to minimizing the slippage by accommodating a variety of curves. Therefore, it attracts a large volume and high-frequency trades.
With over 6000 liquidity pools and 400 active trading pairs, Uniswap is another automated token decentralized exchange built on Ethereum. There is no need for KYC to trade. It allows users to swap tokens without relying on buyers and sellers. It uses a constant equation x*y=k where x and y are ETH and ER20 tokens, respectively.
This equation is used to balance supply and demand. It charges 0.30% of fees per trade. Their smart contracts have been audited by Consensys. Any token can be added to Uniswap by funding an equivalent value of ETH and the ERC20 TOKEN. Recently it has been the talk of the tech world, with the launch of version 2 that offers ERC20 to ERC20 token pools, flash swaps, and native price oracles.
In essence, these popular DeFi platforms are the epitome of the tremendous potential of DeFi. A DeFi application has no bounds when it comes to the potential benefits or returns, subject to the governance model most suitable for a particular use-case. The extensive expertise in the DeFi space, we at Quillhash can help your DeFi idea in harnessing its true potential.
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