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Liquidity mining, also known as yield farming, has become one of the most popular uses for cryptocurrencies in 2021, with billions of dollars worth of crypto assets now locked up in farming platforms.
But while the practice is still picking up considerable momentum, a lack of innovation among yield farms has somewhat stifled enthusiasm — with copycats, clones, and low quality yield farms becoming more numerous by the day.
Nonetheless, there are a number of creative projects continuing to push the envelope, helping to further fuel the explosive growth of the yield farming space. Some of the most promising candidates are detailed below.
Cross-Chain Liquidity Mining
For those that are familiar with liquidity mining, you’re likely aware that the process is typically a single chain affair — you provide liquidity on an exchange and earn farming rewards for doing so.
But YeFi, a novel DeFi ecosystem building on multiple blockchains (including Binance Smart Chain and YottaChain), is set to become one of the first platforms to provide cross-chain liquidity mining rewards. The platform is designed to provide an extremely attractive interest rate to those holding a variety of coins, including BTC, ETH, USDT, FIL and YTA — but eventually including other assets relating to decentralized storage networks, such as Chia and Storm.
These rewards are paid in YEFI tokens, which will eventually be bridgeable to multiple chains using YeFi’s upcoming cross-chain bridge.
The platform is looking to bridge two of the most promising blockchain sectors — decentralized data storage and decentralized finance (DeFi) — to produce a solution where users can help contribute to decentralized data storage projects to boost their yields. Right now, the platform offers up to 80% APY on a variety of tokens staked through the YeFi DApp with both 1-day and 15-day deposit options available.
Beyond this, the YeFi protocol will eventually allow offer a variety of DeFi products, including a highly capable lending and borrowing market, which will allow users to either supply assets in return for a relatively stable return, or borrow funds at a reasonable interest rates.
YeFi is unusual in that it is one of the few platforms to bypass the issue of “impermanent losses” — i.e. the potential losses that can occur when supply volatile assets to a liquidity pool due to changes in the pool weighting over time. It achieves this by allowing users to earn yields on a single cryptocurrency at a time, rather than on LP tokens as with most other yield farms.
Building Sustainable Tokenomics
Right now, the vast majority of yield farms suffer from a common pain point — supply-side liquidity far outstrips buy-side liquidity.
Though many of these projects offer impressive utility for the token alongside yield-farming rewards, the excess token supply inevitably leads to suppression of the token value. This is undesirable from a longevity standpoint, since it limits the growth of the project.
But Pera Finance — a novel yield farming protocol built on Binance Smart Chain — might just pose the solution. Rather than incentivizing only supply-side liquidity through farming rewards, Pera Finance allocates a large percent of the PERA token inflation to liquidity providers and traders.
The platform introduces the first decentralized trading competition that is designed to increase buy-side demand for the PERA token. The top 10 PERA token traders by volume are handsomely rewarded for strengthening the volume of the token.
Day 1 for PERA adoption week!
‘Pera Bridge’ will enable adoption in over 100 projects$PERA’s DEX competition tech is ready for the projects in the @PolkaFoundry
The first-ever CEX+DEX trading competition is live on @gate_io
Tomorrow, major announcements for 30+ new tokens! pic.twitter.com/IDrsPqdryt
— Pera Finance (@PeraFinance) July 7, 2021
In total, 70,000 PERA are distributed to liquidity providers, traders, and holders each day, in addition to 2% of the entire value transacted on the network. PERA hopes that this will set the standard for the first sustainable yield farm model, while allowing other projects to easily integrate its unique smart-contract powered solution in just minutes.
As an increasing number of projects integrate the solution, some of their rewards will be funneled back to PERA stakers as multi-asset rewards — further bolstering the demand of the token.
Crafting Utility and Demand
The long term viability of any liquidity mining or yield farming program is closely linked with the amount of demand for the underlying token. Unfortunately, many projects fail to successfully generate long-term demand for the token, and end up gradually seeing an exodus as users migrate to more profitable farms.
But PancakeSwap, the largest decentralized exchange on Binance Smart Chain (BSC), is arguably one of the few platforms that has managed to strike the right balance between fair rewards for liquidity miners, and long-term demand.
One of the major reasons why PancakeSwap has managed to maintain its momentum for such a long time is down to the sheer pace of new developments made by the platform. While many yield farms struggle to launch new products to build out their token utility, PancakeSwap has been launching back-to-back feature since it went live almost a year ago.
Is it really Q3 already? Time flies when you’re watching your $CAKE stack up…
Check out June’s recap along with what’s coming up next for #PancakeSwap!https://t.co/7KyWiqTM5h
— PancakeSwap 🥞 #BSC (@PancakeSwap) July 1, 2021
Despite starting as a simple decentralized exchange, PancakeSwap now offers a wide array of additional features, including NFT collectibles, prediction markets, yield pools, initial farm offering (IFOs) and more. As a result, the platform has managed to maintain the interest of its users over the long-term, and has spawned myriad similar projects on other blockchains — including Solana’s Raydium and Fantom’s SpiritSwap.
Given that the utility of an asset is closely linked with its demand, it stands to reason that yield farms that double down on utility stand the best chance at achieving long term success.