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Ethereum yield farming change could “sharply break” DAI’s $1 peg: analyst

The past few weeks have seen so-called “yield farming” gain popularity throughout the Ethereum ecosystem. Yield farming, in short, is the act of maximizing the yield one makes via decentralized finance (DeFi) applications.

So far, yield farming has arguably been a good thing for the Ethereum blockchain. Blockchain analytics firm Santiment reported on Jun. 29 that the number of daily active Ethereum addresses just hit a two-year high, somewhat shy of the all-time high.

Yet a proposed change to the Compound DeFi protocol purportedly threatens to upset the stability of the DAI stablecoin and the MakerDAO ecosystem.

And that isn’t good for the DeFi ecosystem.

What’s yield farming?

Before we get into the details, some background: in the middle of June, leading money-market DeFi protocol Compound publicly released their native token, COMP.

COMP is an Ethereum-based governance token that allows its holders to influence the direction of the protocol. But that isn’t what’s interesting about it. What’s interesting is that it can be “mined” by users of Compound by lending or borrowing cryptocurrency.

This system is effectively the origin of yield farming.

Compound may soon change how COMP is mined — and DAI could be affected

Yet, yield farming is set to change.

Last week, a user revealed a COMP distribution patch that will change how the token is distributed. As it’s somewhat complicated, the long and short of the change is that it is implemented, it will remove leverage from yield farming while also aiming to more equally distribute the altcoin.

According to Cyrus Younessi, a risk analyst at Maker (the team behind MakerDAO), this change could have a disastrous effect on the stability of the DAI stablecoin, algorithmically pegged to the U.S. dollar.

As it stands, DAI has been largely kept out of the yield farming equation due to the low yields offered when using this market (image below).

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