Yield Generation (YG)
Introduction to the concept of yield generation
Last updated
Introduction to the concept of yield generation
Last updated
Yield generation, also known as yield farming, is the act of investing money into something with the aim of generating a return from the investment. Most often, yield generation creates passive income. An example of yield generation in the real world is investing in a restaurant and getting a share of the profits or investing in stocks that pay dividends.
refers to the process of deploying capital into instruments that generate a return on said capital. Yield or return is defined as the appreciation in invested capital, after costs of deploying capital to an investment instrument. is calculated as a percentage over initial capital invested and it is time related.
For example, Investor A has free capital of $5000 that they would like to invest for maximum return. Investor A is advised to invest their capital into a listed stock on day 1 at a price of $1 after costs. After 364 days the metrics of AAPL show that the stock price is now $1.25 and AAPL declared a $0.1 dividend per share. Investor A initially bought 5000 shares ($5000/$1=5000), thus the Yield over 1 year is:
5000 * $1.25 = $6250
5000 * $0.10 = $ 500
Total Inv. = $6750
Yield = (Inv Current Val-Inv Initial Val)/Inv Initial Val * 100
= ($6750-$5000)/$5000 * 100
= 35%
In the above example, which is very optimistic for the sake of simplicity, we see that Investor A generated 35% of yield on their initial capital investment. This is in simple terms the process of yield generation.
Investors invest in crypto projects by purchasing tokens that they ) with the expectation that the assets will appreciate in value over the medium to long term.
While waiting for the profits to materialize, yield generation and yield farming protocols put these tokens to work, creating additional income for HODLing tokens.
The most common forms of yield generation are as follows:
Lending/borrowing protocols
Staking to participate in consensus mechanisms
Liquidity provisioning for decentralized exchanges
Quite simply, investors stake their tokens and in turn, the protocols loan these tokens out for interest. The interest is split between the investors and the protocol. This is not shariah-compliant and not used in the context of Takaturn.
Blockchains are fundamentally a consensus mechanism. When a transaction takes place on a blockchain, all participant nodes agree on and record the transaction, providing consensus that such a transaction has taken place. In proof of stake blockchains, participants are required to stake (lock up) their tokens in order to validate transactions. Each time a participant successfully validates a transaction, he/she earns fees.
Hence, staking to participate in consensus mechanisms earns investors fees by being a validator of transactions. This is sometimes shariah-compliant (and sometimes not), but not currently used in the context of Takaturn.
There are many real world examples of liquidity provisioning. The most common example is that of the liquidity available for foreign currency exchange. If someone wants to exchange US Dollars for Euros, there should be sufficient Euros available (liquidity) to make the trade.
In the decentralized finance world, decentralized exchanges fill the role of facilitating swaps between different tokens. Liquidity pools make it possible for instant trades. Investors who stake their tokens in these liquidity pools earn a portion of the fees paid for token swaps.
In Takaturn 2.0, yield generation is accomplished through liquidity provisioning. More of this in the .