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Yield farming & liquidity mining, main reasons behind DAIs market cap growth close to $1 billion

Photo of: Sangeetha Golchha
by Sangeetha Golchha

The rise and rise of DeFi have opened a box of wonders and yield farming is one such concept that has emerged successful along with DeFi. yield farming is closely related to a model called Automated Market Maker(AMM) that typically involves liquidity providers and liquidity pools. 

Liquidity providers deposit their funds into a liquidity pool which powers a marketplace where users can lend, borrow, or exchange tokens. When the platforms are used by the investors, it incurs fees when it is eventually paid out to the liquidity providers according to their share in the pool. 

Maker is a decentralized credit platform that supports the creation of DAI, a stablecoin that is pegged to the value of USD. The market capitalization of DAI is now not far away from the $1 billion mark because now DeFi is at the forefront of blockchain adoption on a bigger scale, in addition, to yield farming methods. The supply of DAI stablecoin grew a massive 623% in the third quarter of the year. DAI in July had a market cap of $130 million but ever since it has been on a growth-spree expanding itself to a great extent and crossing the $940 million mark. 

When the concept of stablecoins came into being, it allowed for creation only for Ether holders who could deposit their ETH into the Maker protocol as collateral in order to create it. But gradually its net widened and it introduced something called the Multi-collateral DAI which saw the introduction of other crypto assets as potential collateral. Some of the other assets include Wrapped Bitcoin, Brave’s Basic Attention Token, and the Centre Consortium’s USDC stablecoin. 

Source: DeFi Pulse

The chart above shows how Maker’s Total value locked has shown a consistent growth from July to mid-August after which it slightly slides downwards. The market cap of DAI as seen is increasing and the total value locked has moved up from $880 million in late July to more than $2.3 million at the time of writing. 

Between the end of August and a little near the mid-September timeline, it went down and lifted. But after that, to date, there has been no looking back for the stablecoin and the market cap is also seeing a continuous ride towards increase. 

Taking this further, DAI being an ERC-20 token, it is used in many applications, a majority of which are a part of the DeFi ecosystem. Anyone can open a Maker Vault to lock their collaterals as mentioned above. They can generate DAI as a debt against this collateral which has been locked. The debt incurs interest over time, also known as the stability fee. Yield farmers may use Maker to mint DAI to use in yield farming strategies. 

Messari has connected the massive growth spurts to liquidity mining and yield farming programs in DeFi which include YFI, COMP, CRV, and the very recent UNI. The firm puts forth that 65% of DAIs circulating supply is moving within DeFi protocols to farm yield. The growth of stablecoins has indicated that most of the tokens are Ethereum based with a few projects outside it.