The Rise of DeFi

In the summer of 2020, something unusual occurred in the crypto ecosystem. Yearn Finance's governance token, YFI, rised from $6 to over $30,000 in less than two months. That is a 500,000% growth in value.

Since then, over $262 billion has been invested in DeFi protocols, with over ten chains securing $1 billion in TVL or more. The most popular types of DeFi applications include:

  • Decentralized Exchanges (DEXs): Decentralized exchanges (DEXes) are a subset of decentralized financial protocols that allow users to trade cryptocurrencies and tokens without the involvement of a central authority. Using the Automated Market Maker (AMM) concept, Uniswap revolutionized the DEX industry by calculating the price of a token using mathematical calculations. Users could supply liquidity and market make for a charge (0.3%) in the AMM model, while buyers could have their bids filled at the current price. Curve's more complicated formula for stable coins, as well as Dodoex's Proactive Market Maker (PMM) model, have both been launched since then.

  • Stablecoins: Stablecoins provide a mechanism to connect fiat currencies like the US dollar with cryptocurrencies. Stablecoins are a novel answer to crypto volatility since they are price-stable digital assets that act like fiat money yet retain the mobility and utility of cryptocurrency. The four main types of stablecoins are fiat-backed, crypto-backed, commodity-backed, and algorithmic, depending on their underlying collateral structure.

  • Lending and Borrowing Platforms: β€’These platforms use smart contracts to facilitate both lending and borrowing automatically. They aim to replace intermediaries, such as banks that manage lending in the middle. Compound (COMP) and Aave have been two of the most popular DeFi lending protocol since their launches. Aave has also pioneered developments in DeFi, including flash loans and delegated loan vaults.

What Is Yield Farming in Decentralized Finance (DeFi)?

Yield farming is a way of generating rewards with cryptocurrency assets. In simple terms, users lock up cryptocurrencies and get rewards. There are many types of yield farming, the major ones come from:

  1. A portion of trading fees and extra DEX governance tokens granted from DEX (also known as Liquidity Mining)

  2. Lending interest from lending pool

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