The ICON DeFi Guide: Part 8— Yield Farming Strategies on ICON
So what is yield farming?
The most simple explanation of yield farming is platforms giving users tokens for utilizing those platforms. And in most cases “utilizing” the platform means depositing your funds (aka capital) for some purpose.
Not so scary when you think of it that way, right?
Of course, there are a lot of ways this concept can be abused, either intentionally or unintentionally (as we saw in the prior chapter); however, there are a lot of ways this concept can be used for good.
Like many other applications on blockchain, DeFi (and yield farming) is a tool available for use that has risks and rewards. As a user, it’s up to you to determine whether or not a given protocol or strategy is advantageous for you.
As we’ve discussed, during the DeFi hype boom over the Summer of 2020, what drove a lot of activity was an ever-escalating promotion of high-yield farming across all sorts of new platforms sprouting up over night. One platform would offer a 100% yield. Then, another one wanting to gain more users would offer 200%. Another would offer 300%.
What ended up happening is that instead of utilizing platforms that people thought were useful or would create value over the long-term, they instead simply hopped around from platform to platform, chasing higher and higher yields. This ultimately wasn’t sustainable for the ecosystem.
A more sensible approach should be to evaluate each project on its own merits, and ask yourself “is the token this platform is offering me going to be valuable to hold over the long-term?” If a platform is truly adding value to an ecosystem, the answer should theoretically be “yes.” If it isn’t, then the value of that platform’s token will likely vanish in the near future.
DISCLAIMER: The strategies below are just ideas for you to consider. As described, they depend on a lot of variables, which may make them profitable or not profitable, depending on the circumstances. They are simply available for you to consider in order to see the various possibilities that DeFi offers on how to increase the yield on the ICX you currently own. I would not suggest replicating any of these unless you’ve done your own research and believe they have an adequate risk/reward ratio.
While this strategy probably doesn’t fall under our definition of “yield farming”, it’s still utilizing the DeFi platforms on ICON to generate a profit. It has the added benefit of helping the ICON network as a whole.
With two AMMs on ICON (uTrade and ICONPOOL), along with a decentralized exchange on Balanced, there are essentially three ways to trade assets on the ICON network.
As you remember, with AMMs, the price is set by the ratio of liquidity within the two pairs being traded. That means the price is set within the AMM. What this ultimately means is that it’s almost a certainty that at some point the price on one AMM (uTrade) will differ from the price on another (ICONPOOL), as well as the DEX on Balanced.
That means if you’re vigilant and quick enough, you can serve as an arbitreuger, meaning you can purchase the asset on one AMM for a lower price, and sell it on another for a higher price. If you do so successfully, you’ll make a small profit (after factoring in the transaction fee), and you’ll also help ensure price consistency across the whole market.
Intermediate: Borrowing & Liquidity Mining
In this example, let’s pretend that there is a pair on uTrade that doesn’t have a lot of liquidity, but does have a lot of trading activity (meaning you can earn a decent amount of UP by providing liquidity). For this example, let’s pretend that pair is ICX/SEED.
Now, let’s also assume you only hold ICX. You’ll need SEED to provide liquidity, but you’re also hesitant to sell your ICX.
So what you could do is go to Omm, deposit your ICX as collateral, and borrow some SEED. Now you can use that SEED and a portion of your remaining ICX to provide liquidity to the SEED/ICX pool, earning UP tokens. And don’t forget, since you borrowed from Omm, you’re also receiving OMM tokens!
Now, in order to borrow that SEED, you’re paying an interest rate to Omm. So you’ll have to figure out if the UP you’re earning is enough to offset that rate you’re paying (along with any impermanent loss you may endure by providing liquidity!). In some cases it might be worth it; in other cases, maybe not.
Intermediate: Interest Rate Rotation
As you know, Omm is a platform for lending out assets you hold in exchange for interest. The interest is variable based on how much borrowing demand and lending supply there is for an asset.
Let’s say you hold ICX and want to lend it out. However, because lots of other people have the same idea (and a lot of ICX), the yield on lending out ICX is pretty low, because there are so many lenders.
But then you notice that the rate for ICD is pretty high, because a lot of people want ICD but not as many are willing to lend it (for whatever reason, including the fact there isn’t as much ICD in circulation as there is ICX).
So you could take your ICX and deposit it as collateral into Balanced, taking out a loan of ICD. You could then lend out that ICD for a decent return.
Of course, you’d have to factor in the modest fees you’d be paying to Balanced, as well as the fact you’d only be able to borrow a fraction of ICD compared to your ICX due to collateral requirements. But if the interest rate is high enough, it could be worth it.
At the end of this process, you’d have earned staking rewards from holding ICX (since Balanced and Omm ensure you always receive your staking rewards via sICX), you’d have interest on the ICD you lent out, and you’d have both BALN and OMM tokens from utilizing both platforms.
Advanced: The Balanced Ladder
Let’s say you think Balance tokens are going to be really valuable in the future and you want to earn as many as possible.
Assuming you are starting with ICX, you could deposit your ICX into Balanced, borrowing ICD in return. Now you’re mining some BALN as a result.
Then, you could go over to the Balanced decentralized exchange and provide liquidity on the exchange for the ICD:ICX pairing. Remember, providing liquidity here also earns you BALN tokens.
Now let’s say you have a decent stash of BALN after a few days or weeks. You can then take your BALN and provide liquidity on the BALN:ICD liquidity pool, earning even more BALN.
As long as you aren’t liquidated, you’ll be able to eventually get back all the ICX you originally deposited (minus any fees), as well as all the BALN you earned.
These are obviously just a handful of different ways you can utilize DeFi to your benefit. As you become more and more comfortable interacting with the various protocols, you’re bound to recognize new strategies on your own, but I hope some of these ideas can at least get the ball rolling.
As I’ve alluded to before, the more DeFi protocols you interact with, the greater your potential risk, so please keep that in mind.
Now that we’ve explored how DeFi can benefit you, lets finish up by looking at how DeFi can benefit ICON as a whole.
If you’d like to ask questions about DeFi, discuss strategies, or just have a general discussion, please join us in the ICON DeFi Discussion group I’ve created on Telegram to supplement this guide and build a vibrant DeFi community around ICON.