Additionally, in 2024 DeFi lending protocols hit an incredible milestone. They recently crossed the $60 billion mark in total value locked (TVL). This dramatic rise is a testament to the growing popularity of DeFi and its integration into traditional finance. DeFi platforms are attracting users with the promise of high yields, innovative financial instruments, and accessible financial services, thereby transforming traditional finance.
Casino-style money laundering DeFi protocols provide users with opportunities to deposit or stake their funds in liquidity pools. These pools then generate trading fees, establishing an open market where anyone can enter and liquidity providers can be rewarded for their service. Furthermore, users often receive additional token incentives. These incentives often come in the form of CRV or third-party rewards, from protocols such as Convex, further making yield farming more lucrative.
Additionally, DeFi protocols like Compound and AAVE issue cTokens, tokens that represent ownership of interest in the lending pool. In a similar vein, Aave offers aTokens which generate interest instantly as users deposit money. Aave has already expanded its ecosystem by deploying on Optimism and Base. With this expansion, dynamic TNS users can enjoy nearly instantaneous transaction speeds and minimized gas expenses.
Compared to traditional yield farming methods, DeFi yield farming stands out as it typically compounds automatically every few seconds. With frequent compounding, compounding increases your returns by 66%! An interest rate as low as 15% APR can generate a dazzling APY of 16.1%, assuming monthly compounding.
In sum, DeFi connects the best of yield farming with the worst of traditional financial institutions. It establishes an open, global, and interoperable space. DeFi has presented lucrative double-digit annual yields on everything from stablecoins to volatile assets, luring millions of new users into its ecosystem.
DeFi is not without its challenges. This is the case with impermanent loss, which happens when the value of a token pair in a liquidity pool moves apart too much. This often occurs when the price of one asset increases compared to the other, thus reducing the liquidity provider's return.
As DeFi protocols such as Aave become more entwined with RWAs and Layer 2 chains, these topics are becoming ever more relevant. Moves like these are intended to make DeFi more scalable, affordable, and increase the use cases for DeFi applications.
Users should take advantage of the opportunities provided by DeFi protocols, but they must be on the lookout. It is important to evaluate risks from both a macro and technical perspective.
"Yield farming provides high profits, but it also entails smart contract risk, protocol risk, and market volatility. Understand what you’re growing." - DeFi researcher
From this quote, it can be inferred that having a thorough understanding of the risks involved is imperative when considering DeFi yield farming.
