The Basics of DeFi and Yield Farming
In the next few weeks we would like to share some knowledge to help you understand the basics of decentralized finance. How it all started, how to make money and where is it going from here.
Everything started back in 2018, when a Chinese exchange created a token that rewarded people for making trades. You won’t believe what happened next! People just started running bots to do pointless trades with themselves to earn the token.
Then the Ethereum based cryptocurrency called Compound started distributing its governance token, COMP, to the protocol’s users. Demand for the token (heightened by the way its automatic distribution was structured) kicked off the present craze and moved Compound into the leading position in DeFi.
But the hottes new term in crypto is “yield farming,” a shorthand for clever strategies where putting crypto temporarily at the disposal of some startup’s application earns its owner more cryptocurrency.
Another term floating about is “liquidity mining.”
The buzz around these concepts has evolved into a low rumble as more and more people get interested.
The casual crypto observer who only pops into the market when activity heats up might be starting to get faint vibes that something is happening right now.
But let’s go back a few steps and start by giving you a definition of tokens.
What are tokens?
Most readers probably know this, but just in case: Tokens are like the coins you earn when playing video-game, money you can use to buy gears in the universe of your favorite game.
But with blockchains, tokens can be earned in one place and used in lots of others. They usually represent either ownership in something or access to some service. We will talk about shortly on the relation of such tokens with a Decentralized Exchange called Uniswap where you can profit share by adding liquidity to a pool that will serve as a trading platform.
Tokens proved to be the big use case for Ethereum, the second-biggest blockchain in the world. The term of art here is “ERC-20 tokens,” which refers to a software standard that allows token creators to write rules for them.
Governance tokens, such as COMP or MKR are not like a token at a video-game arcade, as so many tokens were described in the past. They work more like certificates to serve in an ever-changing legislature in that they give holders the right to vote on changes to a protocol.
So on the platform that proved DeFi could fly, MakerDAO, holders of its governance token, MKR, vote almost every week on small changes to parameters that govern how much it costs to borrow and how much savers earn, and so on.
One thing all crypto tokens have in common, though, is they are tradable and they have a price. So, if tokens are worth money, then you can bank with them or at least do things that look very much like banking. Thus: decentralized finance.
Learn more about Tokens in the next article: https://blog.brozbot.com/2020/09/07/what-are-tokens/