Trading vs Yield Farming: Making Money with DeFi Basics


We are making a video series on the Basics of DeFi. Watch our first video embedded on this Thread, or follow along by reading below.

This series aims to explain the mechanics behind DeFi's most popular money-making strategy: Yield Farming.

The Long and Short of Crypto

“2009 -> Bitcoin (100,000x)”, “2015 -> Ethereum (150x)”, images of rockets 🚀, moons 🌙, charts going 💹 and Crypto millionaires like “Satoshi”, Roger Ver, the Winklevoss twins, Barry Silbert, and Vitalik Buterin

Most people who get into Crypto are looking to make money — they see those that have gotten early and done it. Crypto is now over 10 years old, and the early adopters of Blockchain-based assets like bitcoin and ether have seen incredible upside on their bets, some building huge fortunes in the hundreds of millions and billions of dollars. After a decade of Crypto, however, the industry is maturing to the point simple buy-and-hold strategies appear suboptimal to make the most of your time in Crypto.

In the decade since the launch of Bitcoin , most who have joined the ranks of Crypto millionaires are those who got in early and made big bets: Roger Ver, Barry Silbert, the Winklevoss brothers. Creators like Satoshi Nakamoto (presumably) and Vitalik Buterin of Ethereum have reportedly done exceedingly well.

However, these days, doing well for oneself in Crypto is not as simple and straightforward as buying early and holding for long. There are lots of pump--dumps, lots of scams, lots of moonshots that will never pan out. The first-mover advantage of Bitcoin as the first cryptocurrency and Ethereum as a smart contracts platform has paid handsomely to those early adopters, but what about newcomers, are they late to the party?

From the ICOs to Yield Farming

Split screen in halves. First half “Trading” with “2017 ICO Boom”, CEXs like “Binance”, “Coinbase”, and “Kraken”, ETH-killer tokens like “TRON”, “EOS”, “IOTA”, and other weird exchange tokens like “BNB”, “Bancor”; “vs”; Second half “Farming” with DEXs “Uniswap”, “Balancer”, and “Curve”, lending “Compound” “Aave” “dydx”, and pure-farming YFI with “Andre Cronje” (I test in prod), “Blue Kirby”, “Degen Spartan”

As bitcoin and ether consolidated their positions, the initial coin offering (ICO) boom stroke in full force. Projects like EOS , TRON , and IOTA raised hundreds of millions while exchanges like Binance , Coinbase , and Kraken made billions in listing and trading fees from all the hype and price action. The boom was followed by a bust cycle, but it seems, at least in Ethereum, a nice of developers put their heads down to #buidl and we know have decentralized finance (DeFi) protocols together with a new frenzy in user activity: so-called yield farming.

Which begs the question: is yield farming or simply, “farming”, different from “trading” Crypto? Is it like a sophisticated form of trading or is it something completely different? More importantly, do Crypto believers (the micro-investors / user this guide is made for) have to choose between one or the other as they seek the best possible exposure to the space?

Before we finish this part of the series, we will answer those questions. Let us begin by positing that farming is quite different from trading. To elaborate, let us think of the framework we use to understand Crypto trading and, in turn, the one we should use to understand Crypto farming.

Technical Analysis vs Fundamental Analysis in Crypto

“pre-DeFi” with “Crypto = Commodity” and “gold”, “silver”, “copper”, “iron”, “rice”, “sugar”. The text element “Buy Low, Sell High”

Let us begin with a sort of economic history. Up until now, all major cryptoassets have behaved as commodities. Commodities have interesting properties, the main one which is fungibility — a metric ton of wheat is essentially like any other metric ton of wheat. Commodities also have some sort of utility and thus an underlying value for which they can be bought or sold. Classic examples are gold, silver, iron, copper, rice, and wheat. Commodity markets exist to effectively trade commodities: producers who obtain them offload them to traders who try and profit from allocating them, in the process, a price is discovered for each of them that theoretically changes with demand and supply. But, wait a minute, aren't most cryptoassets currencies?

Well, yes and no. Currency can be treated as a commodity even when it’s used for facilitating exchange. The truth is, the role of most cryptoassets is very far away from being used ubiquitously for payments or as units of account, convenient as they can be for certain use cases. The fact remains that cryptocurrency markets have been structured like commodity markets. We think this distinction is quite important as many users may confuse the cryptocurrency markets with the ever-present stock markets that many are familiar with from years of exposure to the financial press.

So, how to profit from a commodity market? The answer is Trading. Buy low, sell high, repeat until very rich. Which begs the question: what is considered low and what is considered high? To answer that more specific question, two frameworks have been popularized: technical analysis (TA) and fundamental analysis (FA). TA uses price charts, trends, and other metrics to try to explain and predict the behavior of other traders in the market, whereas FA looks at the health of an asset by studying its mission, financials, competitors, and both micro- and macroeconomic factors.

Split screen in halves. First half “TA” with a “technical chart” showing some candles and resistance/support lines/arrows, maybe “volume” chart under; “vs”; Second half “FA” with “Discounted Cash Flow” or “Compound yield” bar chart with exponentially increasing bars, and buzzwords like “intrinsic value”, “financials”, “story”, “payback time”, and “antifragility”

For anyone that's been in Crypto even for a little bit, a peek on social media will expose you to a few charts annotated with “resistance” and “support levels”, talk about “candles” and “volume”, and of course, channels. Crypto users are flooded with TA by centralized exchanges, and the Crypto press will have a column here and there dedicated to it as well. One could say, the so-called Chartists are the dominant force in Crypto trading. Whereas FA has made good inroads in the stock investor community, it is nowhere near as developed in Crypto. A big difference is that in the stock market, investors have access to financial statements and prospectuses where management shows how a company brings cash in and how it will try and bring more next quarter. FA investors use these numbers to calculate expected cash flows, then make a valuation, and finally compare it with the current stock price. Then, they try to buy $1 for $0.50, so they can sell it for $1 later on. Of course, there is TA in the stock market too, but for many FA investors, they practice their profession at the intersection of cash flows and longer time horizons. Do you see where we're heading?

The Intrinsic Value of Crypto

“pre-DeFi era”: “Warren Buffett” the “King of Fundamentals” with maybe a crown, saying “Cryptocurrencies have no value and don’t produce anything” and “??? 😖”, “why 😫 ?!”, “rekt 😭” reactions next to it

Let's do a little more foreshadowing. Does the name Warren Buffett ring a bell? The legendary stock investor who dethroned Bill Gates as the world’s richest man before donating a large portion of his wealth. Famously, for Blockchain enthusiasts, we know Warren Buffett doesn’t invest in cryptocurrencies. His position has been exaggerated both ways, the fact is that Buffett doesn’t invest in non-cash-generating assets, which includes all commodities. Buffett doesn't buy gold, or silver, or yams — according to him, they have no intrinsic value. Warren Buffett buys companies, not for just capital appreciation, but to hold them long term and reinvest the dividends. Company stock is a productive asset — it makes money as well as appreciates (or depreciates) in its market price. Besides company stocks, commercial real estate, and even farmland are considered productive assets. Warren Buffett won't put money in nonproductive assets because they won't generate any value — the investment is based in the belief that someone else may pay more for them down the road. Buffett follows a particular school of FA called “value investing”. By value, Buffett-style investors mean long-term fundamentals, based on expected cash flows. Value investors pick stocks to hold long-term and compound their capital.

Farming = Cash Flows = Value

“DeFi era” with “Farming = Crypto Cash Flow = Value” and governance tokens like “COMP”, “BAL”, “SNX”, “CRV”, “UNI” + the text elements “Yield”, “Profitability”, and “Governance = Claim on Earnings”

The meaning of DeFi, the real meaning, is bringing cash flows into Crypto. Interest on lending, liquidity incentives, and staking governance tokens can all generate a steady stream of more cryptoassets, which can then be swapped for cash or reinvested. This is the art of Yield Farming. This is the gravy. This is Yield Farming, explained.

Hold a long and short position in bitcoin or an altcoin, you will your capital will increase or decreased based on how the market moves. Put your capital in the right DeFi protocol, and you will have a productive asset that produces value for others and yourself. Holding a position in a DeFi protocol is then akin to holding stocks, commercial real estate, or farmland. With DeFi, we can start to do reliable FA and even “value investing” on Crypto.

That's the big takeaway.

Farmer tending to his crops

In Parts 2 and 3 of this series, we will get into the concepts and methods of Yield Farming, and the new realm of opportunities for making money in Crypto in the DeFi era.

Are you interested in DeFi? Let us know your opinions, questions, and feedback on the comments below. Don't forget to give us a 🦄 kudos if you haven't already to keep getting this content. If you enjoyed this article, our video guide, or both — please consider sharing it.


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