Harvest 101: Understanding Profit Share
Yield Farming — Background
The catalyst for the recent DeFi market boom was the invention of Yield Farming — a vernacular term used to describe the ROI that could be obtained by providing liquidity to a liquidity pool or lending service. DeFi applications such as COMP, AAVE, and YFI created decentralized lending platforms that incentivize users to provide loan collateral with an interest rate. Oftentimes these incentives are boosted by rewarding a “yield” of governance tokens to lenders, in addition to the interest already generated. These platforms and applications are created via composable smart contracts — meaning they could be linked together and used in tandem to create new, more powerful innovations. These composable smart contracts are often referred to as “money legos” by DeFi enthusiasts.
As more of these DeFi money legos became available, blockchain entrepreneurs began to combine them in unique ways, creating powerful — and potentially dangerous — investment opportunities. This led to an “arms race” for yield between Yield Farming projects, with investors constantly moving from one opportunity to another in order to capture the highest yield. For many people, the work required to keep up with the fast-moving industry became too burdensome, while simultaneously becoming increasingly difficult for smaller investors (farmers) to access due to rising gas costs.
Harvest Finance — Overview
Harvest Finance was created to solve the two aforementioned issues by providing its users with a platform that discovers the safest, most profitable farming strategies, while also minimizing gas costs with vault contracts. All Harvest Finance investments are essentially Vaults — yield farming smart contracts, directed by a “controller” smart contract that is able to switch yield farming strategies. These vault contracts can make such changes without requiring users to withdraw their funds and redeposit — saving each user thousands of dollars of gas fees over the long term. Users can deposit their funds into a strategy and have peace of mind, knowing that their funds will always earn the top rate available, maximizing their yield.
In addition to strategy optimization, Harvest has integrated other features to optimize its users’ profits, namely: compounding interest. There is an often-told story that Albert Einstein himself once called compound interest the 8th wonder of the world. When one looks at the difference between simple interest and compound interest, the results are astounding:
In short, compound interest is when the money you make, makes money — “compounding” itself. Over time the results are quite powerful, resulting in parabolic gains (rather than linear).
Prior to Harvest, farmers would need to manually claim their rewards, sell them for their principal asset, and re-deposit those funds to the smart contract in order to compound their earnings, paying exorbitant gas fees in the process. Harvest Finance has a built-in command called “DoHardWork” which automates this process and saves users fees while doing so. DoHardWork is called by Harvest once per day, effectively giving users a much higher interest rate than what is advertised on the native platform. Per the nature of blockchain-based smart contracts, these contract calls can all be seen on the explorer. Click here for an example.
In the linked example above, the strategy is reinvesting profits from a WBTC vault, converting harvested CRV into ETH, and then to WBTC before depositing the WBTC back into the Harvest smart contract. As you can see, manually conducting all of these transactions would be time-consuming and expensive. With Harvest, it could not be easier.
FARM Profit Share
When looking at the DoHardWork example from the link above, you will also see a few transactions swapping Ether for FARM tokens on Uniswap. As part of the Harvest protocol, 30% of all collected earnings are used to buy back FARM from the market and pay it to FARM stakers as a reward. Not only does this help to keep the market price of FARM afloat, but it also incentivizes farmers to hold their FARM rewards and compound them. At the time of writing, FARM profit share is by far the highest-earning vault available.
At the time of writing, there is about $550M of assets deposited in Harvest contracts, earning about $78.76M per year in yield. 30 percent of this $78.76M will be converted to farm, meaning that $23.628M worth of Farm coins will be bought back from the market this year alone. That’s nearly $65k per day being taken off the market and paid back to FARM stakers as an incentive to hold. The overall market cap of FARM coin right now is only $35.8M, meaning that if we were to calculate a P/E ratio for FARM, it would be a mere 1.5. Compared to major corporations — which often have a P/E ratio of 30 or higher — 1.5 is an absolute steal. The growth potential for FARM is obvious, and with the crypto bull market in full swing — FARM profits are only going to grow!
In a sense, staking FARM coins can be thought of as a method of farming all opportunities at once, and with leverage. This is because all farming strategies contribute to buying back FARM. As strategies listed on Harvest begin to outperform expectations, it will only benefit Farm stakers even more.
For more information on Harvest Finance, please use the following links:
This is not financial advice. Always do your own research and speak with a financial advisor before making any investment decision.