Non-interventionists may be forgiven for thinking that “product farming” refers to the latest crop of corn or peanuts. Instead, the term refers to an innovative trend that those who own cryptocurrency can reap steady, guaranteed returns.
Product farming is a way for those who participate in specific products powered by cryptocurrency to use their crypto to win crypto. By pledging consumer tickets (and interest, in some cases) in return for their participation, the founders and promoters of decentralized finance products aim to increase interest in their platforms.
What Is Product Farming?
Understanding product farming may require you to understand what “product” means in the context of finance. Per Investopedia, the product is “returns generated and realized on investment over a specified period of time ”. Generally, a product can take two distinct forms:
- Interest earned on investment
- Guaranteed dividends paid in return for your investment
A product may apply to several classes of financial assets, including but not limited to stocks and bonds. A product may be fixed or may vary with different variables, such as the value of the security invested. These same holdings may apply to products issued in cryptocurrency rather than dollars, but there are also some notable differences between traditional products and crypto products.Product farming is a term specific to cryptocurrency, and DeFi specifically. Simply put, for a farm product is to invest your cryptocurrency in a specific DeFi platform or product in exchange for rewards, which could come as interest and / or dividends.
Some of the most prominent projects to date for product farming, such as Compound, involve cryptocurrency lenders and lenders who receive Compound tokens (COMP) as their product. This practice can also be referred to as liquidity mining, because those who invest their crypto in platforms in earning a product provide liquidity to the administrators of that platform. In this sense, their role is similar to that of a lender who exchanges money for:
- Guarantee of future refund, plus:
- Interest payments
While the investor who farms a product certainly benefits from the arrangement, they may not be the only winners.
Who benefits from Product Farming?
It’s obvious why someone might invest their cryptocurrency in a platform or product offering them a product. If they didn’t plan to liquidate their crypto shares in the near term, then why not earn some extra (guaranteed) coin on their stake by farming for produce? Here’s how it goes:
An investor borrows his money to the platform, receives tickets for their investment, eventually gets their principal investment repaid, and can earn interest on top of it. This is a classic lender’s benefit, plus an extra ticket. That extra token is a key difference between traditional lending and product farming with DeFi platforms. If the value of the token provided is as dividend skyrockets, then a DeFi lender investor can get returns well beyond what they could get in traditional, non-crypto markets.
Heck, if the token used as a dividend accumulates value quickly enough, it may even be possible to make a cash farming product as a lender. Let’s say someone borrows cryptocurrency and receives tokens as a reward for participating in the lending platform. As long as the value of that ticket increases at a rate that exceeds the cost of borrowing, they can eventually earn a profitable product despite paying interest on their loan. There is always a risk in borrowing, and one would have to be very confident in the rate of appreciation of a token to the bank on making money through crypto lending. Yet, this scenario is not beyond possibility, and the rapid rise in the value of a Compound ticket a few months ago acts as evidence in the real world.
The last party that could benefit from product farming is platform or ticket specific governors. Whether governors refer to central co-investors or participant-investors in a decentralized platform, the interaction that generates farming incentives is generally positive for stakeholders. As investors flock to a platform that offers a worthwhile product, the platform itself and any associated ticket become more valuable due to increased popularity. As the ticket builds up in value, the product (s) provided by participating in the linked platform become more attractive, more farmers flock to reap that product, and so does the growth cycle going…
What is the Current State of Product Farming?
Like many specific genres of devolved funding, product farming has seen a significant growth in participation over recent years, and in the last few months in particular. With Compound preparing the most viable blueprint for product farming to date, subsequent projects have generated similar popularity. The BAL Balancer Labs token was issued shortly after the first appearance of COMP token, becoming the second governing ticket that would facilitate product farming in the DeFi space, according to NASDAQ. He went on to start with a single day 235% spike value, again illustrating the drive for product farming, and by extending the tickets and platforms that allow for product farming.
As more and more investors sink their crypto capital into product offering platforms in exchange for liquidity, the sustainability of the practice seems real. Unless regulators break down the party, the attraction of product farming can continue.
How Do Regulators View Product Farming?
You would have to be the regulator to answer this question. Generally speaking, there is some concern that regulators will eventually want to have their say on how the DeFi sector is run, including how punitive measures are distributed to fraudsters. Product farming may not be immune to this development if and when it occurs. Whenever the term “risk” becomes associated, fairly or not, with a financial sector, you can bet that regulators will act at some point. Whatever you think of their motives, this tends to be generally true.
Like any investment, there is a risk to product farming, with questions about the legality of ticket issuers be one of those risks. However, it is not yet possible to know for sure how regulation will affect product farming. For the time being, it seems that product farmers think they might be getting (produce) while the good is.