One of the newest trends in DeFi is the idea of yield farming. Compound Protocol was one of the first to pioneer and popularize this new farming method. Traders depositing assets into the compound liquidity pool were not only rewarded with a share of the transaction fees proportional to their holdings, but also received yield in the form of the COMP token. As the COMP token has increased in value, yield farming has turned out to be a very profitable activity.
Yield farming has become more popular in DeFi as liquidity pools are trying to attract investors. Without investors depositing assets into a pool, liquidity pools cannot perform their core function. Rewarding liquidity providers with an additional protocol token gives them an additional potentially high upside revenue stream and often rights to participate in the protocol’s governance. The additional yield might also help make up for the impermanent loss encountered when depositing funds into a liquidity pool.
Impermanent loss: Loss encountered due to slippage when depositing funds into a liquidity pool vs. simply holding the assets. As smart contracts governing the liquidity pools don’t have insight into the prices outside of the pool, assets in a liquidity pool often trade at a different price. Eventually, this loss disappears as arbitrageurs close the gap.
While yield farming can be highly profitable, it’s also very time-consuming. If you ever tried to chase the highest yield across protocols, you might have also noticed that high gas fees might cancel out the returns.
Harvest Finance has built a solution for those traders that want to put their assets to work in the most profitable and yield-producing way. It’s a protocol for traders lacking the time or resources to monitor the markets 24/7.
Harvest FInance is an automated protocol chasing the highest yield-earning opportunities and optimizing returns with the latest farming techniques. The protocol is governed by the FARM token, which allows holders to vote on the future direction of the protocol. FARM is also used to reward liquidity providers for depositing assets into the Harvest Finance Protocol. Token holders will also participate in profit from sharing yield farming revenue. 30% of the yield farming revenue is distributed to FARM stakers, and the rest is going towards the traders who deposited funds.
When depositing or withdrawing funds, no additional fees are charged. The only fees that traders encounter are transaction fees when swapping tokens in the liquidity pool.
Using the platform works in the following way:
- Deposit stablecoin, tokenized bitcoin, uniswap lp tokens, or any other supported asset
- Once assets are deposited, start earning interest and FARM tokens
- Deposit FARM tokens to participate in the profit-sharing mechanism
When depositing into the Harvest Finance pool, traders will receive fTokens. These are yield-bearing versions of the underlying assets that automatically appreciate and can be redeemed at any time. If you had USDC, which you want to deposit, you’d receive fUSDC in return. This fUSDC would automatically earn interest. Whenever you want to cash out, you can unwrap the tokens and receive your USDC back, including the earned interest.
Unlike other protocols that are often a fork of existing DeFi services, Harvest Finance was built from the ground up by a mostly anonymous team of developers. While security audits had been carried out, unfortunately, the protocol still encountered a major hack in October 2020.
Harvest Finance Hack
The Harvest’s USDC and USDT vaults had deposited into curve.fi to earn yield. The hacker took advantage of flash loans to drive down the price allowing them to buy assets below market value. The hacker explored the concept of impermanent loss by manipulating the asset value and exiting with profits. For a more in-depth explanation of how exactly the hacker exploited a vulnerability in Harvest, check out the below article:
The Harvest Finance Exploit Explained
In response to the incident, the Harvest Finance team appealed to the Hacker to return some of the funds and made the bitcoin addresses to which funds had been withdrawn public, asking exchanges to blacklist them. The team took responsibility for what had happened and implemented strategies to prevent flash loan attacks in the future. They also opened a new vault that completely prevents the previously exploited flash loan attack vector.
Users affected by the hack were given GRAIN tokens in a pro-rata manner. They also received a pro-rata share of the $2.5 million the hacker returned after the appeal.
Since the incident, harvest finance has ramped up its security and continues chasing the highest yields for investors. As yield farming is here to stay, as long as the Harvest Team can prevent future attacks or have insurance in place, they have a lot of potential in helping traders to make the most of their holdings.
FARM is now trading on Bitcoin.com Exchange paired with USDT.