Best in the Field

Vol #60 - November 12th, 2021

Distributed ledger technology is upending how industries across the spectrum function and create value. It is a disruptive technology, heaved into existence by brilliant and creative technologists- who have a terrible track record of naming things. 

Bitcoin isn’t really even a coin. A wallet is more like an address. Miners are just digital accountants. Impermanent loss is a gangly way of describing opportunity cost. 

I felt the same way about “yield farming” when I first heard the term last summer. During the first explosion of decentralized finance apps in the summer of 2020, the term was coined to describe the practice of earning yield from depositing or staking tokens in different protocols. 

Now it sounds pretty off-brand for a blog called the Till, from a group called “Harvested” to get literal about an agrarian analogy. But wasn’t this just “investing” but with a better meme?

The early implementations of yield farming were fairly basic, passive activities. Investors would take their crypto tokens, and deposit them into a protocol as a way of supporting liquidity for users. Owners of Bitcoin or Ethereum could capture a portion of the fees charged to borrowers of those same tokens. 

Like any new business, the protocols began looking for ways to market themselves. Their platform required both borrowers and lenders, and the more of both, the better the experience for everyone. Protocols needed to spend money to jumpstart the self-reinforcing flywheel of liquidity.

Most companies spend double digit percentages of their revenue on marketing and advertising. That doesn't include the subsidized pricing of schemes like Uber who artificially lowered the cost of rides to hook customers. Getting customers in the door is expensive. 

This tactic has exploded in the DeFi space, and there are dozens if not hundreds of opportunities competing for investor capital. These platforms give their marketing budget directly to their users in the form of rewards tokens. Being a participant can pay well. To be an effective and productive yield farmer, there is a lot to monitor, and you have to get your hands dirty. 

Much like farming, there are many different tactics that one can use to harvest yield. Certain staking strategies might be used as a way to boost returns on speculative investments. You can own a project's token for the long term, and collect extra fees from committing that capital. 

Other strategies require constant pruning. By carefully selecting protocols to diversify risk, and balancing overall exposure through other instruments, the risk managed farmer can extract yield without directional risk. 

Regardless of the strategy, there is a constant rhythm to the process. Time moves at the same pace for everyone, and yield is ultimately a function of time passing. Whether it’s a daily rebalancing, or staying vigilant for a quick scoop in a new launch, yield farmers must always be tending their crops. 

A farmer must know his land. They don’t grow oranges in Idaho, and too many shitcoins in your portfolio will spoil the lot. With so many new projects, there are bound to be some rotten apples. However, with more funk on the fruit, the better the yield for as long as it lasts. It’s a balance as delicate as nitrogen and phosphorus. 

All farmers are at the mercy of mother nature. The greatest variable we can’t control is what tomorrow’s weather brings. Every day brings a different hailstorm in crypto. There’s upside risk from a coin skyrocketing into virality, and downside risk from a rug pull. (Rug pulls are one of the well branded crypto terms where protocol founders take the keys to the cookie jar and run away with people’s capital-pulling the rug out from under investors.)

Knowing how all of these elements fit together means a good farmer must be a systems thinker. In planting their fields crop selection and location are tantamount. One must select the appropriate balance of risk and reward, ensuring that no single blight will devastate the harvest and that the fruits of their labor represents the maximum potential from the land.

Farming and investing are both romanticized. Whether it's the lure of living off the land, or your own ingenuity, many people are drawn to these activities with bright eyes. The reality is that there’s a hard day's work starting with the crow of the rooster.