The growing rise of the different DeFi platforms and the various incentives they offer, has allowed an increasing number of users to investigate in the mercando looking for the best opportunities available to obtain a greater return on their investment.
In this sense, the practice of Yield Farming, known as performance agriculture, is a modality to obtain dividends with cryptocurrency portfolio values. That is, rewards are obtained when blocking the funds in a way that resembles the Staking, however, there is a greater complexity.
Usually the Yield Farming works through users called "Liquidity Suppliers" or "Farmers" that add funds to Liquidity Reservations or Pools, which are basically an intelligent contract containing funds. The so-called farmers or liquidity providers obtain rewards for adding liquidity to the pool, which comes mainly by the commissions generated by the same platform, although it can also come from other sources.
Some liquidity reservations reward your suppliers with multiple tokens, which can be deposited in other pools to also get there rewards, and so on. But the basic idea that underlies the Yield Farming, is that the liquidity provider deposits its funds in a pool or reservation and, in return, gets rewards for its deposits.
This practice is usually done using developed tokens under the ERC-20 protocol of the Ethereum network, and the rewards granted to liquidity providers are also usually through some type of TOKEN ERC-20, because most of these activities They take place in Ecosystem Ethereum.
However, Cross-Chain Bridges and other similar technologies could allow in the near future, operate DeFi applications in other networks that also have "intelligent contracts" type functionalities.
The growing boom that exists by the Yield Farming can be attributed to the launch in June last year of the Token Comp, which is the Governance token of the Compound Finance ecosystem, a loan protocol developed in the Ethereum network to facilitate users to emit and acquire loans from different types of cryptocurrencies.
Although Compound Finance did not invented Yield Farming, the launch of the Token COMP greatly promoted the popularity of this tokens distribution model, based on algorithms that seek to attract liquidity providers. Since then, other DEFI applications have developed innovative schemes to attract liquidity to their respective ecosystems.
In short, the practice of Yield Farming basically consists of evaluating the different investment opportunities offered by DEFI applications to design strategies that allow farmers to maximize the economic return of their investments, which increases on many occasions, the use of More than one platform, thanks to the compatibility of a large majority of projects in the Ecosystem DeFi of the Ethereum network.
However, as has been said above, this is a practical growth, so it should not cause surprise that in the short term the number of platforms that offer its users this modality of generating income with their assets.
Total locked value (TVL)
The total locked value (TVL) is a figure that represents the number of assets that are currently locked in a specific protocol. This value is usually expressed in fiduciary terms, for example, US dollars, and does not intend to represent the number of pending loans, but the total amount of underlying offer that is being locked by a particular application, or by the ecosystem defined in its entirety .
This is a metric that is used to measure the overall health of the DEFI market and the performances obtained by users. It is possible to track the TVL in various applications or platforms.
Unlike the market capitalization value, which is obtained by multiplying the offer in circulation of an asset for its current price; The total locked value (TVL) is calculated by multiplying the amount of funds that are blocked as a guarantee in the ecosystem for the current price of the assets.
There are three main factors that are taken into account when calculating and studying the total-blocked value ratio of the DEFI ecosystem, which are: calculation of the offer, the maximum offer, as well as the current price.
The calculation of the TVL ratio is obtained by dividing the market capitalization value between the TVL of the Protocol or Application. From a theoretical point of view, the higher the TVL ratio, the lower the value of an asset; However, this is not always the case in reality. One of the simplest ways to apply the TVL ratio is to determine if an asset defi, for example, AAVE, Pancakeswap, Uniswap, among others, is undervalued or overrated, and this can be done by observing the ratio. If this value is less than 1, it is undervalued in most cases.
Obviously, with the complexity of the DeFi ecosystem, not all tokens are equal, and there is a greater number of factors that affect the price of an asset that only the TVL, among which could be mentioned the utility that the Token in question has.