Farming and Liquidity Baking
What do you mean by “farming” and what are the expected APYs for farmers?
Farmers are liquidity providers who use Tezos that Lenders allow them to borrow to boost the returns they obtain for liquidity baking. The way they are able to gain excess returns is by using the leverage from borrowed Tezos/tzBTC and inflationary rewards for providing liquidity to the xtz/tzBTC trading pair.
Farmers can use the leverage to boost up their returns by borrowing Tezos and/or tzBTC and the leverage they can achieve through our protocol is around 4x their funds. Since they borrow from Lenders the return of farmers is roughly Liquidity Baking Reward*Leverage - Borrowed Funds*Lender Interest Rate.
Tezos this Tezos that: why do you suggest anchoring it all to BTC if you are Tezos true believers?
First of all, we are not “anchoring” anything here as at the end of the day Tezos’s price is determined by its own set of factors and is not a derivative from Bitcoin. What liquidity baking aims to achieve is to help Tezos ecosystem enjoy the benefits of much larger liquidity BTC still offers. At the same time, BTC is still a crypto, so unlike say USD, you will be exposed to much less exchange rate volatility and both liquidation and impermanent loss risks.
Isn’t liquidity baking inflationary and thus bad for Tezos?
This “inflation” is rather modest and presently all of the liquidity baking on Tezos contributes to less than 0.5% of total Tezos supply growth per year. Needless to say, this is not going to move a needle in terms of Tezos depreciation. Liquidity provided by liquidity baking has a much higher influence on Tezos market cap through the liquidity it provides to the system thus being a huge net positive for Tezos Blockchain. And since we are adding even more liquidity to these contracts our protocol is highly beneficial to Tezos. Plus the liquidity baking contract also has an internal xtz burn mechanism (0,1% of it is burned during each transaction) that to a large extent offsets an inflationary pressure from liquidity baking awards.