Yield Farming Fuels Buzz Around DeFi, but Fundamentals Are Lagging

The rise of liquidity mining, or yield farming, is throwing the metrics off balance in some ways.

A frenzied movement to maximize the yield for these tokens distorted the prevailing DeFi success metric, the Total Value Locked, or TVL. A clear example of this is the Compound protocol where the value of Dai supplied to it surpasses its total amount of tokens by almost three times - $1.1 billion vs. $380 million in existence as of writing.

The purpose of evaluating the bank's or lending protocol's revenue is to gauge how much of that value can be captured through the stock or token, but since the token is being used to subsidize the cost of borrowing, the value is being effectively extracted from its holders.

"So, if circulating market cap equals TVL, what's the best way to increase that? Increase TVL. How do you increase TVL? Reward with tokens. Token value goes up because of TVL speculation, and repeat the loop."

Compound started the yield farming trend, but it was not the only protocol that saw sizable increases in activity.

Volume on Curve, a DEX focused on swapping stablecoins with one another, jumped as yield farming began in June.Monthly volume across decentralized exchanges.

The liquidity mining boom had an undeniably positive impact on some general metrics, specifically the visitor volumes for DeFi platform websites and the number of users interacting with the protocols.

Protocols with a weaker relation to yield farming benefited as well, with MakerDAO and Aave posting more modest but still significant growth.

"It's always possible that people will farm the yield and then find a fresh field, so bootstrapping liquidity is not a guarantee that your protocol will retain users. But bootstrapping liquidity with some sort of incentive is a great way to attract newcomers because if you have anything resembling product-market fit, then there is likely to be some stickiness."

Cronje was somewhat more negative, using a farming analogy to describe what could happen, saying: "All the yield chasers just running in to farm yield and then leaving," which is a negative thing according to him, acting like a swarm of locusts, adding: "But after they have ruined the crops, sometimes, a stronger crop can grow, and some locusts remain, and they end up being symbiotic instead of the initial parasitic."