Yield farming enables web3 users to sweat their spare assets by providing liquidity to decentralised protocols. And this is one of the most important trends in all of DeFi.
That’s because yield farmers help power liquidity pools, DeFi’s answer to 20th century order-book trading. Traders can dip in and out of these pools to buy and sell at any time of the day, without the need for a human trading partner. By filling these pools with their own assets, liquidity providers remove the need for conventional financial institutions.
But liquidity provision is just one form of yield farming. You can also earn passive rewards by lending your assets to other traders, borrowing assets with collateral, and staking your assets in blockchain networks to earn validator fees. The concept is meant to be agile and dynamic, with farmers continually moving their funds in and out of various opportunities (something that was extremely tricky in fiat).
The one snag is that crypto, at least in its original version, isn’t really designed for this kind of fluidity.
As we’ve said before in RhinoLearn, all blockchains are islands. They have their own rules embedded in their code, as well as their own mechanisms for validating transactions by consensus. It’s not easy to move between them.
This is a problem for yield farmers who want to spread their strategy across various blockchains. If, say, you want to invest in pools hosted on Ethereum, Polygon and Arbitrum, you’ll have to create wallets on each of these chains and it can be frustrating when you want to quickly move your assets to seize a new opportunity.
This is why cross-chain is so important for yield farming.
Cross-chain innovation is a direct response to blockchain’s interoperability challenges, and has obvious benefits for yield farmers. Crypto users can transfer data or value from one blockchain to the next seamlessly, and help grow the entire blockchain ecosystem by pushing liquidity to where it’s needed most.
Bridges were the ‘1.0’ version of cross-chain technology, enabling users to lock their tokens on one chain and create new versions on another. The bridge is controlled by either a human oversight committee or a smart contract, which is trained to trigger the crossing when the user fulfils certain conditions.
Here’s a very simple guide to how cross-chain bridges work:
- The user sends the assets from their origin network, and the funds are locked in (to prevent double-spending or fraud).
- The bridge verifies the transaction and generates a hash (or proof) of the locked assets.
- The bridge sends the hash to the destination network as a trigger to release the equivalent assets.
- The other network verifies the hash, the assets are released and the transaction is confirmed on both networks.
However, while bridges are great for certain things (and we still use them on rhino.fi) they’re not great for yield hunters, who want to maximise their rewards and seize new opportunities quickly.
For one thing, bridges can be complex to use. For another, you’ll have to switch networks when you cross the bridge, which can be time-consuming. And most importantly of all, you’ll have to pay a native gas fee (in other words, a fee in the blockchain’s native token) on each side of the bridge.
So, now, a generation of DeFi projects are developing better solutions for cross-chain yield farming.
These solutions vary from one project to another. In rhino.fi’s case, we post liquidity on various chains and enable users to access this liquidity, using smart contracts. StarkWare, our scalability partner, serves as a central router in the system: instead of crossing a bridge, you transfer your assets to and from StarkWare, which handles the rest of the journey for you.
If you want an analogy, imagine you’re in the Himalayas and you want to exchange some unwanted goods in a market on the other side of a ravine. Instead of crossing the bridge yourself, you hand your unwanted goods to a sherpa when you get to the bridge. The sherpa takes them over for you, visits the market, buys your desired goods and then brings them back to you – all with your explicit instruction.
So there’s no need to cross the bridge yourself, and pay the native gas fees. In other words, you can pursue your cross-chain yield farming strategy on loads of different chains simultaneously without leaving your self-custodial control centre on rhino.fi.
Ok, that’s great. But what are the risks of cross-chain yield farming?
The risks of running a cross-chain yield farming strategy are the same as the risks of spreading your investments across loads of different networks.
We’ve written about these elsewhere, but here are the ones to look out for:
- Market risk. Yield farming rewards are often paid out in volatile cryptocurrencies, particularly when you provide liquidity to a pool hosted on a new or emerging blockchain.
- Smart contract risks. Although security in blockchain is improving all the time, a very small number of smart contracts have been hacked.
- Impermanent loss. This is another type of opportunity cost. The liquidity pool is essentially a closed loop, insulated from valuation changes in the ‘outside world’, and it’s possible that the value of one of the tokens will rise more quickly outside than inside. In this case, arbitrage traders may rush into the pool to grab the token at a cheaper price, which reduces the amount you can eventually reclaim; what’s more, it may be more profitable to simply HODL your tokens than have them invested in the pool (this is a very complex subject and we’ll be writing a full explainer soon).
However, by adopting a dynamic strategy and moving your funds around quickly, you can mitigate these potential downsides.
Right, I’m keen. How do I pursue cross-chain yield farming on rhino.fi?
We are building a cross-chain yield aggregator, opening up all the best passive-income opportunities just as we’ve done with active trades and swaps.
Our cross-chain yield portal is brand-new, and we’ve got a handful of carefully curated showcase opportunities.
In fact, to celebrate the arrival of cross-chain yields on rhino.fi, we’re offering a 7% boost on our launch opportunity, Stargate USDT (which is hosted on LayerZero). That means we’ll boost the regular yield provided by our launch partner, Beefy Finance, by 7%.
The offer went live at the start of March and the boosted yield has hovered in the 12-15% band – which means it’s far more lucrative than many of the other USDT opportunities you’ll find.
To seize the opportunity, or see what else our cross-chain yield aggregator has to offer, just click below.
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