Advanced DeFi Protocols: Yield Farming, Flash Loans, and Liquidity Pools

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Introduction

The world of Decentralised finance keeps revolving and revolving every blessed day and it is getting better. It has become a major cornerstone in the crypto space as it has helped to create a financial system permission less which has been lacking for so long. It created this breaking away from the usual traditional finances.

With the Decentralised finance, we are now been able to trade, lend and even borrow and been able to earn. The DeFi is really functioning and helping to advance protocols. When I am talking about advanced protocols, I am talking about yield farming, flash loans and even the liquidity pools. They have helped to make sure that financial services is much more better and today I will be going much more deeper on it the more.

Yield Farming

Many of us might have been hearing about yield farming but we don't really know much about how it works. When it comes to yield farming, another name is called is liquidity mining and it works in a way whereby it helps to allow assets to be made available for users on several Decentralised finance platforms to be exchanged for rewards. It works in a way of staking. Whereby investors stake a certain proportion of their stake and then earn rewards in return as far as their staking is involved in liquidity pools.

One major benefit of yield farming which always attract a lot of users or let me say investors is the high APY. The high APY that yield farming offers is much more high than the traditional banking system we have been used to. We have a lot of Decentralised finance protocols like the Aave, uniswap, and many more. They all allow yield farming.

But even with the lot of benefits that yield farming offers, I will say it also comes with its own risk that we need to watch. Risks like the Volatility of the price, the smart contract vulnerabilities and many more. All these things are challenges to look to but I believe it will be settled in years to come. Even with those challenges, I will confidently say yield farming is the foundation of DeFi and it is here to stay.

Flash Loans

Alright let me talk about flash loans. Like I was saying earlier, one of the things that makes the Decentralised finance stand out is the loans which will make me to talk about flash loans. Flash loans as I call it to be are the uncollateriized loan that work on DeFi. It is different from the traditional loans that we have always been used to. With flash loans, you can borrow funds and pay back on Blockchain also. It works in a way whereby if the borrower does not pay back, the transaction will be reverted.

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Most of the time, flash loans are always used for arbitrage opportunities and even for collateral swaps. Even though it is always used for some financial criminal activities stuff, but I believe it is much more efficient. One of the challenges that I believe flash loans is facing is in the aspect of malicious actors that is making use of flash loans to change the price I mean manipulation of price. It is a very major challenge that needs to be looked into because it can go a long way to determine the impact of flash loans in the Decentralised Finance.

Liquidity Pools

Lastly for the day that I will want to talk about is the aspect of liquidity pools. For every Decentralised finance that you see out there, the major backbone is the liquidity pool. Trust me without liquidity pool, there will not be trading or even the lending services that takes place on Decentralised finance platforms.

When we talk about liquidity pool, I mean the aspect of funds that are locked by people called the liquidity providers. Those liquidity providers get in return rewards for locking their funds and this major feature allow Decentralised platforms to thrive. Perfect example like Uniswap.

For every liquidity pool that thrives, it makes use of something called the AMM model which stand for automated market maker. This model works in a way whereby it helps to ensure that trades are executed effectively in the liquidity pool. For every liquidity pool, it is made up of lot of assets for trading and also for lending. Of course sometimes the rewards that those liquidity providers get from the liquidity pool might change and that is because it is subjected to the asset value supplied in the liquidity pool and the volatility nature of the crypto space.

Conclusion

As I conclude, I will like to establish that there is so much that advanced DeFi protocols will have years to come. Beyond all these I have mentioned in my post like yield farming, flash loans and many more, I believe this is just the beginning as we will still witness a lot of positive innovations coming in the future.