The DeFi Yield Farming Engine
There is a knowledge gap in the Ethereum community and I intend to close it. If you have not heard of Uniswap.io, it is a Decentralized Exchange. This Ethereum Application allows users (using the Metamask Plugin) to trade cryptocurrencies (ERC20 Tokens) with absolutely no middle man, using a technology called Atomic Swaps.
An Atomic Swap is prepared in an Ethereum Smart Contract such that there exists a pool of liquid ERC20 tokens and other users can swap their tokens for those other tokens for a small fee. This fee is paid to the ‘liquidity poolers’ (called LPs) who are acting like ‘the house’ of the exchange. That way, there does not need to be a centralized entity to provide token liquidity such as occurs in a traditional Centralized Exchange.
In this way, anyone can Add Liquidity and ‘be the house’, so to speak. This means that you lock up your Tokens inside the Uniswap contract and other people trade into them. You earn any accumulated fees with only one downside: If the prices of the assets change, you will be left with more of the lesser valued asset and with less of the higher valued asset (‘impermanent loss’) but you will still end up with all of the fees earned.
This means that as an LP, you have two goals:
- You want the prices of the two assets to stay the same with respect to eachother
- You want high trading activity to occur between the pair so you generate maximum fees
Now that you know how to LP and add liquidity to Uniswap, let me tell you about one pair that has some special attributes.
The 0xBTC-ETH pair is very interesting because it is one of the only base pairs to have ‘natural activity’ or flow through it, as incentivized because of the 0xBTC token contract. You see, the 0xBTC token genesis started with 0 tokens and all tokens must be PoW mined from the contract. This requires hashpower (Graphics cards chugging away) and it requires a small fee in gas to be paid to call the method and mint() the new 0xBTC.
Miners and mining pools for 0xBTC are earning 0xBTC and having to spend a little bit of ETH in the process. (Usually always less than the value of the 0xBTC, since they are rational.) In order to keep mining, the miners will naturally swap some 0xBTC back into ETH and the best way to do this is via Uniswap. It is extremely secure, easy, and has good liquidity. This means that there is significant trading activity on this pair on Uniswap, significant fees.
This means 0xBTC is an active DeFi engine. The contract itself is indirectly and accidentally powering a Yield Farm like an electric generator. By pooling 0xBTC-ETH liquidity on Uniswap, you reduce slippage for miners who are doing that exchange and you are collecting some fees from them in return, like their ‘thanks’ to you.
Feel free to direct any questions about these thoughts to the 0xBTC discord: