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“If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes.” — Warren Buffett |
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In today's issue: Yield farming exploded in popularity in 2021, and for good reason. DeFi protocols like Uniswap allowed investors to generate yield (or interest) from their existing crypto assets, and those yields were superior to anything found in traditional finance.
In our new Sector Report on Yield Farming, we look at the current state of crypto companies that support yield farming. As always, our investment approach is to look at companies that have the most users, the most TVL, and the best chances of being future leaders of this important crypto sector.
Remember you can yield farm, or you can invest in the projects that let other people yield farm. Buying the tokens of those "companies" is like investing in their "stocks." Read on to find what we think are the best long-term bets. |
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| | Must Read Today's most important story for crypto investors. |
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On Tuesday, the Securities and Exchange Commission (SEC) filed a lawsuitagainst Coinbase (the largest digital asset exchange in the U.S.) for allegedly violating U.S. securities laws.
The SEC says that Coinbase has been operating as an exchange, broker, and clearinghouse without the necessary approvals from the agency.
This comes a day after the SEC charged Binance (the world's largest crypto exchange) with similar violations.
Coinbase CEO Brian Armstrong responded to the charges on Twitter, stating that the SEC had cleared the company to go public in 2021 after reviewing its business operations. He emphasized that Coinbase doesn't list securities and has attempted to register with the SEC multiple times. |
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The SEC's move was expected, as Coinbase received a Wells Notice (a communication that typically precedes enforcement action) last March. Despite the charges against Binance and Coinbase, the crypto markets have remained resilient, with bitcoin and Ethereum recovering from initial (small) selloffs.
The SEC also specifically labeled 13 digital assets as securities including Solana’s SOL, Cardano’s ADA, and Polygon’s MATIC. The SEC also alleges that Coinbase’s staking service constitutes an investment contract and is, therefore, a security.
Investor takeaways: Until we get some clarity from regulators on how crypto companies can register, expect more of this "regulation by enforcement."
As we pointed out inMonday's newsletter, bad news for centralized exchanges could be good news for decentralized exchanges like Uniswap.
Also, as we wrote in Tuesday's newsletter, the recent Crypto Market Structure bill could mean better laws are on the way. |
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Premium Power-Ups Level up your crypto investing game. |
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New NFT Investor Scorecard: Otherdeed for Otherside
Otherside is an immersive and interactive metaverse built by Yuga Labs to provide players with a space to explore with their Otherside-ready NFTs. Land parcels are called Otherdeeds, a collection of NFTs that contain all game assets. Similar to Decentraland, these parcels were designed to be infinitely buildable. |
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Considering that Yuga Labs is one of the most well-known creative NFT companies out there, our editors have rated the Otherdeeds NFTs highly. Given the success of Bored Ape Yacht Club and its many spinoffs, these land parcels could become enormously valuable in the future if the game takes off.
Our new Otherdeed NFT Investor Scorecard looks at things like Rarity, Utility, and Future Value to help investors determine the long-term potential of investing in Otherdeeds.
Not yet a Premium member? Sign up now for just $10 a month and get instant access to our complete library of industry-leading investor scorecards. |
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The Best Yield Farming Investments in 2023 by Preetam Kaushik |
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Executive Summary: Yield farming propelled the DeFi sector to a $150 billion market in the span of just 18 months. What does the space look like after the recent crypto winter?
In this new report, we'll look at the top yield farming companies in DeFi. We'll also cover our investment thesis on this sector to help you identify the top opportunities.
Industry Overview
Yield farming has been described as the lifeblood or rocket fuel of the DeFi ecosystem.
It first emerged as an investing strategy in 2020 with "liquidity mining" on the Compound protocol. Investors deposited crypto assets into Compound to earn interest or "yield." In just two months, the total value locked (TVL) in DeFi went up by $2 billion.
Yield farming provided high returns during a time when traditional banks were offering extremely low interest rates. Over the next two years, yield farming attracted over $150 billion into DeFi protocols, firmly establishing it as the “next big thing” in crypto. Per Nansen, the growth in the field between 2020 and 2022 was over 6,900%. |
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DeFi TVL fell off a cliff in May 2022. Image via DeFiLlama.
Though there's been a 76% decline in DeFi protocols since 2022, the sector is still valued at $47.3 billion in TVL. The Ethereum blockchain hosts more than 57% of all DeFi yield farming activity, followed by Tron (11.94%) and Binance Smart Chain (9.37%). |
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Ethereum has a commanding lead in the yield farming ecosystem. Image via DeFi Llama.
There's considerable diversity among the top protocols. DEXs are the most dominant platforms for yield farming, led by Uniswap and Curve Finance. DeFi lending is another hotbed of activity, mainly centered on protocols like Aave.
Stablecoins continue to play decisive roles in the evolution of DeFi and yield farming. Given their low volatility, coins like USDC and USDT have emerged as popular farming and staking options.
Capitalizing on this trend, many DeFi protocols are in the process of launching native stablecoins. Curve Finance was the first to achieve this milestone with the issuance of crvUSD on the Ethereum mainnet in May 2023.
In a time of rising traditional yields, does yield farming and the wider DeFi scene retain value for investors? To address this question, let's look at the top six yield farming companies in DeFi.
Top Yield Farming Companies |
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Investment Thesis
So long as investors are holding crypto, there will be a demand to earn interest on that crypto. Many investors will want to put their crypto to work with the companies listed above, similar to putting your money to work in a traditional savings account.
These yield farming companies take in money from liquidity providers (LPs), who provide the capital to make their products work. While becoming an LP is one strategy to make money through yield farming (and there are many others) we think the simplest investing approach is to buy and hold the tokens of top yield farming companies.
We believe investing in the tokens themselves (buying and holding UNI, for example) is like making traditional investments in company stocks. If a company does well over the long term, we expect the token price (like a stock) to grow in value. |
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Here's why we're still bullish on yield farming as an asset class:
The Promise of High APY
Yield farming rewards can sometimes cross absurd levels, reaching as high as 3,000% APY. This is a major factor that pulls in many investors despite the steep risks involved in staking funds across highly volatile cryptos and other derivatives. Our rule of thumb:if an APY seems too good to be true, it usually is.
Efficient Utilization of Idle Capital
At Bitcoin Market Journal, we encourage a long-term, buy-and-hold approach. Yield farming allows investors to put their crypto to good use instead of letting it sit idle in a cold wallet. The DeFi marketplace has both higher- and lower-risk staking options, letting you to pick opportunities that match your risk tolerance.
The Perks of Holding Governance Tokens
Most DeFi protocols reward LPs with their own tokens. Some of these "governance tokens" come with special perks and additional benefits. On a well-established company with high TVL, governance rights can grant access to extra revenue from trading fees. Voting rights also grant you the power to have a say in the future trajectories of the companies.
Benefits of Diversification and Market Exposure
Diversification and risk mitigation are equally important in both traditional and crypto investing. Yield farming allows you to increase your exposure to exciting new DeFi projects and tokens. It could give early access to innovative new companies and unlock massive ROI. Spreading your funds across multiple companies and farming pools is also a great way to diversify.
A Potential Hedge Against Market Volatility
DeFi protocols have shown remarkable resilience during the ongoing crypto winter. Even as centralized exchanges collapse, DEXs continue smooth operations with minimal hiccups. Many yield farming companies continue to offer APYs that are well above what you would find with traditional savings accounts and treasury bonds. For investors comfortable with crypto markets, yield farming offers a smart way to beat high inflation.
Who’s Investing: Institutional Backing
Crypto enthusiasts and developers hail DeFi as the future of finance. Even major organizations like the OECD and IMFacknowledge its potential to revolutionize the modern financial system. Based on recent investment trends in the space, it seems institutional investors and VCs agree with that assessment.
Uniswap, the largest DEX offering yield farming and staking services, has received over $176 million in total funding. The funding was led by Polychain Capital and Andreessen Horowitz across two rounds and included other investors like Paradigm, SV Angel, and Variant.
Likewise, Aave has been busy in the fundraising circuit over the years with nine funding rounds, yielding $49 million from investors like Blockchain Capital, Three Arrows Capital, and Standard Crypto.
Remember our thesis:You too can "invest" in these platforms simply by buying and holding their native tokens.
Top Yield Farming Platforms |
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Uniswap (UNI)
TVL: $4.12b UNI Price: $5.04 Daily Active Users (30-day avg): 83.45k Trading Volume (annualized): $400.95b Twitter Followers: 1m
Uniswap is one of the most popular decentralized exchanges on the Ethereum blockchain. Founded and launched in 2018 by Hayden Adams, the DEX has attracted investment from Paradigm, USV, and Andreessen Horowitz (a16z).
Uniswap is designed for trading/exchanging ERC-20 tokens and for decentralized lending. There's no buying or selling involved. The protocol governance is handled by holders of the UNI token. Uniswap rewards LPs with shares of the trading fees generated on the platform. |
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As one of the largest DEX platforms with a TVL of $4 billion, Uniswap is a highly attractive platform for yield farming. In terms of sheer size, median APY, and market position, it's hard to argue against the long-term potential of Uniswap.
However, the lack of any kind of KYC process raises concerns in the current climate. Regulators are getting actively involved in the crypto ecosystem and tend to have dim views of privacy-oriented platforms like Uniswap. |
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Aave (AAVE)
TVL: $3.83b AAVE Price: $64.41 Daily Active Users (30-day avg): 1.81k Active Loans (annualized): $2.56b Twitter Followers: 534k
Aave is a decentralized platform dedicated to the lending and borrowing of crypto. While it was originally launched on the Ethereum blockchain, Aave has expanded its presence to other blockchains like Avalanche and Harmony.
The Aave project was launched in 2017 under the name ETHLend by Stani Kulechov, a Finnish law student. In 2018, it was rebranded as Aave, which means “ghost” in Finnish. Here, the LPs are lenders who earn interest income in the form of “aTokens.” |
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The protocol also has a native governance token called AAVE. Loans on Aave are overcollateralized to reduce default risk. To get a loan, borrowers have to pledge other crypto assets worth more than the loaned amounts.
Aave is one of the top ten DeFi platforms in terms of TVL. It also serves a clear purpose in the crypto ecosystem. It allows holders a chance to temporarily pawn their holdings to gain exposure to other tokens without having to sell.
However, this kind of activity has limited use outside the world of DeFi, and like all other DeFi projects, there's considerable risk of regulatory action due to the decentralized nature of the protocol’s operations. |
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Synthetix Network (SNX)
TVL: $415.22m SNX Price: $2.34 Daily Active Users (30-day avg): 452 Trading Volume (annualized): $59.14b Twitter Followers: 230.2k
Synthetix is a non-custodial exchange protocol built on Ethereum’s layer-2 scaling solution Optimism. The DeFi protocol was launched by Australian crypto enthusiast Kain Warwick in 2016. It was called Havven before rebranding to the Synthetix Network in 2018.
Synthetix is a highly innovative DeFi platform that functions like a derivatives market in traditional finance. Users can trade indirectly in a wide range of commodities, coins, and fiat currencies without directly holding them.
These derivatives on the network are called Synths. They track the value of the underlying asset (which could be gold, US dollars, or even bitcoin). The protocols that track these prices are called Oracles. The native token on the platform is called SNX.
Due to its first-mover status in the derivatives side of crypto, the Synthetix Network has plenty of staying power in the long term. Its main allure is its ability to provide exposure to new assets without ownership.
Crypto users can also hedge against volatility in adverse market conditions by holding short positions on synths. We saw this in action in 2022, as the network racked up $1m in daily fees and a 100% surge in SNX value due to massive trading volumes. |
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Curve Finance (CRV)
TVL: $4.22b CRV Price: $0.818 Daily Active Users (30-day avg): NA Trading Volume (annualized): NA Twitter Followers: 345k
Curve Finance is the second largest DEX platform by volume after Uniswap. Launched in 2020 by Michael Egorov, Curve is a non-custodial exchange protocol focusing heavily on stablecoin liquidity pools.
The protocol launched on the Ethereum blockchain at a time when stablecoins like Tether and USDC were surging in popularity. With its promise of low fees, low risk of slippage, and efficient stablecoin trading opportunities, Curve rapidly attracted LPs. |
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Apart from stablecoins, the liquidity pools on Curve follow wrapped versions of popular cryptos. This combination allows Curve to stay ahead of other DEXs in terms of fees and efficiency while still reducing the risk of volatility.
The native token on the platform is called CRV. It's both the governance token and the reward for yield farming. Since stablecoins continue to play critical roles in the crypto space, Curve seems to have more growth and lasting potential than other DEX alternatives. |
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PancakeSwap (CAKE)
TVL: $1.94b CAKE Price: $1.63 Daily Active Users (30-day avg): 142k Trading Volume (annualized): $65.9b Twitter Followers: 1.6m
PancakeSwap is a decentralized exchange that shares its DNA with Uniswap. Originally a fork of Uniswap, the new protocol was adopted and deployed on the Binance Smart Chain (BSC). Although it's a Uniswap fork, PancakeSwap exists independently on the BSC.
The high gas fees and slow transactions that plagued the old Ethereum network in 2020 prompted the development team to make the switch to Binance. This allowed PancakeSwap to attract more users with its efficient and cost-effective solutions. |
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The native token on the platform is called CAKE. PancakeSwap functions as a straightforward DEX where LPs earn rewards for staking and yield farming. The protocol pays a percentage of trading fees to LPs in CAKE.
The only major limitation of PancakeSwap is its absence from other popular blockchains like Ethereum. Being on the BSC has some major disadvantages (i.e., the inability to trade in any tokens that are not BEP-20).
However, in terms of its size, available features, and reliability, PancakeSwap is one of the better options. With its presence on Binance, the protocol has excellent growth opportunities ahead of it. |
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yearn.finance (YFI)
TVL: $449.24m YFI Price: $6472.27 Daily Active Users (30-day avg): NA Trading Volume (annualized): NA Twitter Followers: N/A
yearn.finance is composed of four different protocols that run on the Ethereum blockchain. The project was launched in 2020 by an independent developer from South Africa named Andre Cronje. The protocol was launched and released without any outside assistance.
Apart from the Ethereum blockchain, the protocols support smart contracts on DeFi platforms like Curve and Balancer. It's also available on Fantom and Arbitrum. Cronje created yearn to make yield farming and DeFi lending easier and more accessible for everyone.
The main yield farming protocol on yearn.finance is called “Vaults.” Other products include yCRV, veYFI, and yBribe. The latter is an innovative tool that allows YFI holders to sell their votes in the DAO to the highest bidders.
As a beginner-friendly DeFi platform, yearn.finance could play a critical role in the future, but its fortunes are tied to wider market conditions. In a sustained bear market, yearn fails to offer exceptional rewards. It's also one of the smaller DeFi protocols by TVL, further increasing the risk for those using its vaults. |
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Investor Takeaway The yield farming space has lost some of its sheen in the crypto market crash of 2022, but it's not all gloom and doom. The collapse of centralized exchanges like FTX, and the ongoing SEC lawsuits against Binance and Coinbase could make DeFi more attractive to investors worldwide.
The continued smooth functioning of major DEX platforms and protocols is also a testament to the resilience of this model. Despite a two-thirds decline in TVL, yield farming in DeFi retains considerable investor interest. Close to $50 billion is still locked away in liquidity pools across a wide array of protocols on Ethereum and other major blockchains.
However, uncertainty persists across the DeFi space due to the impending arrival of new regulations. From the EU to North America, regulators are taking ever closer looks at the entire crypto ecosystem... and DeFi could be next.
With so much variability and uncertainty in the system, we advise caution and due diligence for all newcomers. A good rule of thumb is to narrow your investment considerations to the token(s) with the most users and the highest TVL. |
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| | ICYMI In Case You Missed It |
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Bitcoin Market Journal is a daily newsletter that makes you a better crypto investor. It's created by John Hargrave, Nick Marinoff, Steve Walters, Anatol Antonovici, Matthew Du, Daniel Joel, and Preetam Kaushik.
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