Join Delphi Research today and immediately get access to our full Member Portal!
Join Delphi Research today and immediately get access to our full Member Portal!
Back

Yield Farming Is Musical Chairs At 100MPH

Jul 22, 2020 · 4 min read

By Tom Shaughnessy

We’re back in the manic phase of crypto, where it’s too hard to keep up with the latest DeFi liquidity mining (yield farming) play. By the time you visit a project’s site, their token is already up and you missed it. Compound started this hurricane of interest, followed by a plethora of others including Balancer, Curve, AAVE, YFI and dozens more.

The real question is what happens when the music stops, slows down, or the song changes? Let’s look at the extremes:

  1. The mega buzz around yield farming never dies, and goes on forever (never going to happen).
  2. Yield farming slowly calms down. People either stay or leave a project due to either lower yield farming rewards in terms of issuance, or in terms of a lower token price for the received token, or a mix of both. Whether users stay on the platform despite this is the question. The assumption would be that a subset of users remain (~50% of users and liquidity stays on the platform)
  3. Yield farming is really just financial engineering where users hop from one project to the next, it blows up, and users exit this platform with limited stickiness once the music stops. The assumption would be that only a marginal (sub 10%) of users and liquidity stays on the platform.

I think we all agree #1 is illogical. Buzz by definition is short lived and projects will exhaust issuance and excitement eventually. 

The second option is the most logical and positive event for the space and projects. For example, yield farming acts to onboard a massive amount of existing and new crypto users who have a stake in these projects (and governance rights) which aims to supercharge the direction and liquidity of these DeFi projects into the future. The real question is whether or not users will stay on if the value of the issued governance tokens falls (either in absolute issuance terms or in the value of these tokens or both). 

The answer to this question is a moving target and rests on the projects themselves. If these projects ( Compound, Balancer et al) all offer a novel, sticky and useful service then users will stay on. This would be the demand side of the equation.

For the supply side, the former has to remain true (users driving fees and usage) to entice the supply side (liquidity providers) to stay on despite waning yield farming returns from governance token issuance itself (say COMP or Curve tokens granted, outside of fees). 

Number three is always a possibility (2008 wasn’t an issue until it was a big issue), although given the small size of the space and the flow into real projects (vs 2017 white papers in the ICO boom) I think a complete blow up is less likely overall but may be more likely for projects who are too aggressively rewarding their users early on as this is not a sustainable model over the long term. 

Net, the music will slow down since DeFi is a multi-generational long term trend – which is the goal. As such, I’d expect a hiccup once yield farming incentives slow down, and I am hopeful these projects continue to iterate to attract demand/supply side users despite waning yield farming returns vs the exuberance today. 

Yield farming is musical chairs, at 100MPH and the chairs are also moving. Money will be made/lost, projects will explode onto the scene and then blow up and new paradigms will be created. Regardless, this is one of the most exciting times in crypto: limitless creative expression in bootstrapping two sided marketplaces on a global scale. 

Join Delphi Research today and immediately get access to our full Member Portal!

Join Now  or  Sign in