So I’ve been reading all questions about pool reward, or so called farmed coins, on previous topics. Our brother mufti was not able to answer any of them except for the first one I posted 20 days ago (Investing Question: Is participating in a proof of stake network halal?). Mufti said it’s close to riba, and I think it was due to the poor explanation by me, as I was also learning about this new DeFi world.
Let me give it another explanation and suggest an approach, I will try not to name a single coin because mufti cannot review particular coins. There was another topic where mufti replied (Crypto Question: Yield Farming) and I would like to elaborate on it.
The most common yield farming is liquidity farming. Where user X put coin A & B into a liquidity pool C. This pool will be used for user Y to trade coin A into coin B or vice versa. The protocol of C coin determines that there will be a fixed amount of daily rewards given to all liquidity providers, depending on their proportion to the entire pool. Most of the protocols declared that these rewarding coins have no financial value. Note there’s a new form of reward that includes, a % of the trade fees that was done by user Y.
Personally, this looks like a typical market maker on an order book, where you do not have to worry about putting a sell or buy limit order but a code is doing it for you in the pool.
The review by brother mufti here (Crypto Question: Yield Farming), where he leans toward the coin being lent. I think he was reading COMP coin because compound.finance is a platform for lending and borrowing with rewarding COMP coin. Though I am not sure if it’s used in a liquidity pool. I agree that COMP reward on compound.finance is indeed very much like the typical lending and borrowing, but I would love for the mufti bro to take a look at liquidiy pools. Please remember impermanent loss that can rise from being a liquidity provider that was explained well here (Uniswap Liquidity Pools (Decentralized Exchanges)).
Binance launchpools are a place where most conservative retailers would use. Highly recommend to review only the liquidity pools offered by the centralized exchanges, like Binance.
Thank you brother and appreciate the work.