Cryptocurrency Editor's Choice North America

Digital Currencies: Yield Farming in the US

The ‘hunt for yield’ – something income investors in traditional markets will be familiar with during the past few years of abnormally low-interest rates – has become the adoption story of the year, and one of two tailwinds for digital assets. 

But the emergent financial instruments of the decentralised finance (DeFi) sector are far from traditional, which after all is the whole point. There is no room to apply natural yield theory to the income streams generated for liquidity providers to myriad digital asset interest-bearing protocols. 

Indeed, far from investing purely for the income and leaving the capital/principal alone, the crypto yield-hunters are in it for whoever pays the most. So they will switch at will between network protocols, owing loyalty to none. So technically speaking, they are interested, so to speak, in appreciation of their capital in parallel with harvesting the income.

There is no ex-dividend date to worry about in this game. 

It’s not prudent to do so, but if we leave to one side the naked speculative nature of yield farming, it might be said to speak to the “animal spirits” that Keynes said was so important to the harnessing of capital for productive endeavours. 

So although the original idea of incentivising liquidity to come into a network to spur adoption is laudable, it is not exactly the sort of organic growth in use of a native token to access a network’s utility that should be the primary aim. 

However, as with Cryptokitties, yield farming is demonstrating, perhaps more seriously, what is possible with decentralised applications (dapps) running on top of blockchains. 

In the example of yield farming, it shows how the issuance of bonds and loans can be carried out in a fully automated, programmable fashion. And before we get too carried away, due diligence requires it to be noted that financial dapps also provide plenty of unwelcome case studies in how smart contract bugs can be exploited to target and steal someone else’s property.

Ethereum – the king among dapp platforms – is benefiting handsomely from the growth in activity, and so is the Compound (COMP) protocol at the centre of creating these new money markets. Measured by total value locked (TVL), COMP capitalises at $792 million. On 15 June TVL was a comparatively lowly $97.7 million, according to defipulse. 

The second tailwind for digital assets is custody. 

Aside from the money-printing and the shrinking value of the dollar courtesy of Covid missteps, a huge stride towards addressing, if not eliminating, a critical barrier facing ordinary folk considering holding bitcoin could be removed relatively soon, at least in the US, and that is custody.

When the US Office of the Comptroller of the Currency let it be known a couple of weeks ago that US national banks will be permitted to store bitcoin, it created waves of euphoria that may have added substantial wind power to the sails of the current bullish breakout of the bitcoin price.

Custody, alongside UI and UX, is right up there with volatility at the top of the to-do checklist for a new, improved bitcoin and digital assets more widely.

Despite all the PR inadequacies of the big banks, most of us still trust them to not lose our money. 

However, for the aficionados of bitcoin, “not your keys not your coins” is still the mantra. Banks are still the evil ones to be overthrown. In this view it is one of the benefits of bitcoin that you are – or should seek to be – your own bank. 

But for the majority that was never going to be its attraction. Indeed, a self-sovereign approach presents something of a barrier for mere mortals. Contrary to umpteenth warnings, that’s why many holders of digital assets prefer to keep their funds on an exchange in a mobile wallet or in hardware and paper wallets.

The option we missed out there was paying a custodian service to look after your digital asset for you. Up until now that has not been taken up by many. The customers of such services are largely confined to corporate entities and high net worth individuals.

But with US banks given the green light to store bitcoin, it threatens to reshape the entire custody landscape.

Admittedly, the banks will move slowly because of the sizeable risks involved. They may also initially focus on the institutional marketplace. 

Nevertheless, whatever the pace of the rollout of the first products in whichever segments, there will eventually be progeny birthed from the heightened competition for consumer business.

Describing the news from America as a game-changer is for a change not cheer-leading hyperbole. 

The US is arguably falling behind in the digital asset development space because of the perceived weakness of its regulatory framework and its very real fragmentation due to its federal governance. In July, for instance, the Commodity Futures Trading Commission (CFTC) indicated that it doesn’t expect to see a fully rounded digital asset regulatory framework coming into being until 2024 at the earliest. 

This makes the custody shift on the US banking front even more critical. Where the US goes, the world follows, at least for now. And no more so than where financial markets and their regulation is concerned. 

As China continues to take forward its digital yuan, the chasm it is opening up with the US in payments and distributed ledger technology widens. This is not to discount the fact that the US is still the digital asset leader in many ways, given the preponderance of top dapps, projects and talent-based there. 

But it will be deployment and active user traction in projects that add value to our lives, as opposed to thrills and returns for speculators, that will matter most. 

Leveraging the US banking system to deliver secure and easy-to-access custody at a fair price will help the US catch up in payments and perhaps in helping to set the future standards and best practices of our digital asset futures.


  • Gary McFarlane was the cryptocurrency analyst at the UK’s second-largest investment platform Interactive Investor for three years and was responsible for initiating coverage of digital assets at Money Observer magazine. His expert commentary on digital assets has appeared in UK national media outlets as diverse as the Daily Telegraph, Evening Standard and The Sun.

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