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Putting Pension Funds into DeFi Yield Farming – In the Right Direction?


cryptoknowmics.com 10 May 2022 21:43, UTC
Reading time: ~4 m

Before establishing the effects of putting pension funds into DeFi Yield farming, it is also necessary to explicitly explain its connotes. In its simplest DeFinition, yield farming is an option that allows crypto investors to lock their holdings to reap the rewards later on. It is also a process that offers you an opportunity to earn a fixed or variable interest by investing crypto in a DeFi Market. Yield farming involves the lending of cryptocurrency through the Ethereum network. When banks offer loans via fiat money, they expect lenders to pay back the amount they lend out with a certain percentage of interest. It also follows this concept. It lends out a  cryptocurrency that should be stored in a wallet following the DeFi protocols to get a return. DeFi Yield farming is carried out using ERC-20 tokens on Ethereum. The rewards also come like an ERC-20 token as well. With a huge potential for this change in the nearest future, the Ethereum ecosystems carry out the majority of the yield farming transactions. Putting Pension Funds into DeFi Yield Farming - In the Right Direction?

How does DeFi yield farming Work?

The first thing you need to do in DeFi yield farming is to add funds to the liquidity pool. These are important smart contracts that contain funds. These pools fuel a marketplace where users can easily exchange, lend tokens or borrow. Once you do this, you have become a liquidity provider officially. As a result of you sealing up your funds in the pool, you will be rewarded with generated fees from the underlying DeFi Platform.

Effects Of Putting Pension Funds In DeFi Yield Farming

Currently, Fairfax County is considering putting its pension fund money in 2 crypto funds that use DeFi yield farming. When approved in a few days, these funds will be used to provide liquidity in decentralized cryptocurrency exchanges. Fairfax County is one of the first United States counties to put pension money into the crypto investment in 2019. They expect these investments to produce a yield of about 9%. Fairfax is the latest traditional institution that has stepped into the world of decentralized finance. This offers an opportunity for people to trade, borrow, and lend anonymously without the presence of intermediaries like banks. According to Fairfax, they consider putting pension funds in DeFi yield farming as a growth investment.

What is APR in DeFi Yield Farming?

APR in yield farming is one of the two measurements often used to calculate yield annual farming returns. The full meaning of APR is the Annual Percentage Rate. The other measurement is APY, which stands for Annual Percentage Yield. The main difference between APR and APY is that APR does not account for compounding and reinvesting gains to generate larger returns, while APY does.

What's so special about yield farming?

The main benefit of yield farming is its ability to provide a huge profit. When you join a new project, you can get token rewards that have the potential to skyrocket in value. Also, you can subsequently sell or reinvest their rewards at a profit. Presently, DeFi yield farming has the potential to provide a more lucrative interest than a commercial bank. However, you should also note that there are risks that come with it. Interest rates are unpredictable, making it impossible to foretell your rewards in the coming year.

Why should we care?

In 2020, a huge amount of money was made and lost through the Ethereum network. This is because developers built the yield farming platforms on Ethereum. Yield farming is very important as it helps projects gain initial liquidity. This is also useful for both lenders and borrowers. Though its explosion has died down after its 2020 summer boom, there is still a chance of earning a huge yield on the crypto asset when you compare it to traditional finance.

What Projects are into Yield Farming?

There are quite a several DeFi projects that are presently into yield farming. The largest of such project's in terms of value sealed into smart contracts is Aave, a project that provides users an opportunity to borrow and lend several cryptocurrencies. Yearn is the next one. It works to transfer users' funds between different liquidity and lending protocols to get the best interest. Finally, Compound is a DeFi platform that enables users to earn money on the cryptocurrency they store.

Conclusion

Practically it is impossible to predict the future of cryptocurrency and yield farming accurately. Moreover, the high hope and hype on yield farming could potentially strain the network. This could cause congestion problems. However, it still remains a high-risk, high reward practice that is worth practicing and pursuing. So far, the required reserve has been duly carried out. If you have no experience in yield farming, getting into it might be quite tricky. However, projects like compound, Aave, and much more are putting more effort into making the world of borrowing and lending accessible to everyone.


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