Yield farming is the new GPU mining

Wow hello I have missed writing you. I have a lot to say so expect more regular posts.

Over the last week, “yield farming” has dominated the conversation.

Here’s a quick summary of the phenomenon (for a more layman’s explanation read the thread):

  • Compound is subsidizing both lenders and borrowers by distributing their native token COMP based on how many fees you pay or earn

  • These COMP subsidies are worth so much that users are going to great lengths to maximize their COMP earnings—notably by taking on leverage on low liquidity coins to increase rates and earn a greater share of the subsidy

  • Meanwhile, “Uniswap for Stablecoins” platform Curve has seen huge demand for buying USDT, driving volumes through their pools, leading to increased LP rewards for those adding liquidity to their pools. At times yields were 200%+ annualized

  • This meant users could achieve 100% annualized yields in a few different ways all thanks to the COMP subsidy

Of course, the pursuit of high yields is not without risk.

Risk in and of itself is not a bad thing. People seek risk for higher upside potential. But some vocal voices disagreed. I lost count of how many people commented or retweeted me calling this search for yield a scam and ponzi scheme.

I lost my temper and posted this:

Excuse my language but it really is frustrating for your notifications to get spammed with baseless accusations.

Why is it baseless? Because yield farming by its nature looks nothing like a ponzi scheme. Definition:

a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors.

Essentially investor 1 gets paid with the deposits of investor 2. And once deposits stop the investors who have not gotten paid back never see a return. And these schemes usually get marketed as guaranteed returns due to some unique insight into the market.

Here, there’s no trickery. Returns are:

Net yield = Rates + Subsidy - Costs

For example, say I lend USDT on COMP.

  • Rates = interest earned from lending

  • Subsidy = COMP earned from lending

  • Costs = Gas fees, transaction fees from acquiring the USDT

While these the behaviors of others on the platform impact the variables, the system is not a ponzi scheme where investor returns rely on the deposits of new investors. In fact, it’s the inverse—more investors means more competition for a fixed supply of yield, meaning less yield for everybody.

Now, some people might be calling the subsidy itself a ponzi in that the value of the subsidy is determined by market forces and in order for the subsidy to maintain its USD value, new capital needs to show up to buy it. But that’s the case for literally every asset so I find this argument silly.

Others might object with the claim of 100% APY because they don’t think the rates are sustainable so people could get drawn in with the promise of high yields and then find soonthereafter that rates have collapsed. This is actually almost guaranteed (and we see fees compressing already). Nobody can offer 100% fixed rate APY. Yields will vary over time as a function of subsidy size and competition for those subsidies.

All this leads me to my conclusion that yield farming is the new GPU mining.

A few years ago, I built a little miner out of a handful of GTX 1070s. The ROI was terrible because I was paying California electricity costs and it made my room hot as hell. But the dynamics were the exact same:

  • Make a fixed cost investment: the hardware for the GPU miners

  • Pay variable costs to run the operation: electricity

  • Get paid for serving organic demand: making blocks

  • Get paid for speculating on an asset: cryptocurrency

Miners could optimize their “yield” in real time by continuously switching to the most profitable algorithm and sell what they mined for USD instantly. Others would “spec mine” or speculatively mine cryptocurrencies that were not yet liquid betting that they would be worth way more in the future.

Over time, bedroom GPU farmers couldn’t compete any longer because professional operations with more capital to spend on hardware and lower cost of electricity out competed them. And we can already see this starting to happen with yield farming.

But professionalization of GPU farming took several years. It still felt like the wild west in 2017, 5+ years after GPU mining altcoins became a thing.

The opportunity for yield farming is a function of the total dollar value of the subsidies in the market. I can think of at least a dozen other relatively high profile projects that will likely release tokens in a similar way. And the market seems to value these tokens so far. If these trends hold—more assets, people continue valuing them—then at least in the short and medium term, yield farming should grow.

GPU mining brought in a lot of speculators and hobbiests that turned into true believers. Yield farming will do the same.