Yield Farming is taking the crypto space by storm by offering attractive rates and cheap transaction costs. Traditional investment vehicles are being outperformed and driving crypto adoption at paces never seen before. By the end of this article, you will understand the basics of what tools you need and what to look for to get passive returns on cryptos you already hold.

Key Takeaways

  • Yield farming is the process of earning a return on capital by putting it to productive use
  • Money markets offer the simplest way to earn reliable yields on your crypto
  • Liquidity pools have better yields than money markets, but there is additional market risk
  • Incentive schemes can sweeten the deal, giving yield farmers an added reward

What is Yield Farming?

The hottest buzzword in crypto today is “yield farming,” which allows people to earn fixed or variable interest by investing crypto in a DeFi market. Investing in ETH is not yield farming; lending out ETH on Aave for a return beyond the ETH price appreciation is yield farming.

As the newest trend in crypto, investors in the space need to understand what it is and how it works.

But before hashing out the specifics, it’s important to note that given the amount of competition between investors and high gas prices, yield farming is only profitable if you’re willing to put a significant sum of money to work. Yield farming with $100-1,000 in crypto will result in a net loss. If you’re tinkering with small amounts to understand how it all works, that’s okay, but the strategy isn’t profitable

Money Markets: Compound and Aave

Compound and Aave are DeFi’s primary lending and borrowing protocols. The two together account for $1.1 billion of lending and $390 million of borrowing.

Dashboard for total supply and total borrow on Compound
Source: Compound

Lending capital on a money market is the easiest way to earn a return in DeFi. Deposit a stablecoin to either of the two and start earning returns immediately.

Aave generally has better rates than Compound, because it offers borrowers the ability to choose a stable rate of interest rather than a variable rate. The stable rate tends to be higher for borrowers than the variable rate, increasing the marginal return to lenders.

Aave Protocol stats, via AaveWatch

However, Compound introduced a new incentive for users through the issuance of its native token COMP. Anyone that lends or borrows on Compound earns a certain amount of COMP. 2,880 COMP is issued to Compound users per day. At $250 per COMP at press time, this translates to $720,000 in extra rewards per day.

Security from Financial Risk

DeFi money markets employ over-collateralization, meaning a borrower must deposit assets with more value than their loan. When the collateralization ratio (value of collateral / value of the loan) falls below a certain threshold, the collateral is liquidated and repaid to lenders.

This setup is optimal for financial speculators who want to obtain leverage. But it also ensures that lenders don’t lose money when borrowers default. Smart contract hacks are still a significant risk, but Aave and Compound have avoided this risk so far.

Yield Farming Liquidity Pools

Uniswap and Balancer are the two largest liquidity pools in DeFi, offering liquidity providers (LPs) with fees as a reward for adding their assets to a pool. Liquidity pools are configured between two assets in a 50-50 ratio in Uniswap. Balancer allows for up to eight assets in a liquidity pool with custom allocations across assets.

Most liquid pools in DeFi, via Pools.fyi

Every time someone takes a trade through a liquidity pool, LPs that contributed to that pool earn a fee for helping to facilitate this. Uniswap pools have offered LPs healthy returns over the past year as DEX volumes picked up. However, optimizing profits requires investors also consider impermanent loss, which is the loss created by providing liquidity for an asset that rapidly appreciates.

Read more about impermanent loss in our guide about yield farming on Uniswap.

Balancer pools can mitigate some impermanent loss, as pools don’t need to be configured in a 50-50 allocation. They can be set up in an 80-20 or 90-10 allocation to minimize, but not entirely eliminate, impermanent loss. Additionally, users can earn Balancer’s governance token, BAL, by providing liquidity on a Balancer pool.

There’s another kind of liquidity pool that eliminates impermanent loss. Curve Finance facilitates trading between assets pegged to the same value. For example, there is a Curve pool with USDC, USDT, DAI, and sUSD: all USD pegged stablecoins. There’s also a liquidity pool with sBTC, RenBTC, and wBTC: all pegged to the price of BTC.

Returns for providing liquidity on Curve

Since all of the assets are worth the same amount, there’s no impermanent loss. However, trading volumes will always be lower than general-purpose liquidity pools like Uniswap and Balancer.

Ironically, yields for Curve Finance LPs rocketed in the last week as the yield farming narrative led to excess demand for stablecoin-to-stablecoin trades. Bottom line: Curve Finance eliminates impermanent loss, but Uniswap and Balancer result in higher fee collection.

Binance Smart Chain Yields

Binance has proven themselves worthy by giving birth to the BSC (Binance Smart Chain).

Binance Smart Chain’s compatibility with the Ethereum Virtual Machine (EVM) and its interoperability with ETH-native protocols have turned it into a popular destination for DeFi DApps.

Yield farming on Binance Smart Chain (BSC) has witnessed rapid growth and several protocols have been grateful participants with many more still on the line.

Below, you will find five of the most popular yield farms on BSC.

1. PancakeSwap

PancakeSwap is the leading automated market maker and the first billion-dollar project on Binance Smart Chain. The decentralized exchange protocol has surged to the top platform the DeFi space with a current 24-hr trading volume of $400M, leaving incumbents like Uniswap and Sushiswap trailing.

Its native token, which was at $0.48 at inception, is currently trading at $13.

Liquidity providers can deposit cryptoassets into PancakeSwap liquidity pools to earn fees and liquidity mining rewards. In return for providing liquidity, they receive liquidity pool tokens (also called FLIP tokens), which can be staked to earn CAKE.

Its yield farm remains ever rich as well with more than 10 pairs yielding an annual APR of 300%+ at the time of writing.

2. Venus

Venus is an algorithmic money market for decentralized lending and borrowing. Users can deposit cryptoassets like BNB, ETH, and stablecoins to earn interest.

Interest earned can be used as collateral to borrow more digital assets or to mint VAI (Venus’s stablecoin).

Launched in October 2020, Venus has gone on to become one of the largest protocols on BSC with a 24-hr volume of $237M.

3. Bearn

Bearn seeks to provide an extensive yield farming ecosystem and to improve the interoperability between BSC and the Ethereum blockchain.

The cross-chain protocol’s new product, bVault, offers double/triple reward systems. Vault holders get to earn 3% of newly minted BDO in addition to high APYs and accrued fees on farmed assets.

Bearn’s liquidity pools remain high as well with their ETH farm generating more than 1,000% APY and BSC farms with over 300% APYs (at the time of writing). Its native token has surged from just $15.22 in December to an ATH of $984.50 with a current price of $507.

4. Pancake Bunny

Pancake Bunny is a DeFi yield farm and aggregator that compounds your Pancakeswap yields with automatic compounding strategies. With over $1 billion in locked-in value and close to $450 million in market cap, Pancake Bunny has a lot to offer. The protocol started as a dual-chain yield aggregator for BSC and ETH but is now focused on the former.

Thanks to their partnership with PancakeSwap, liquidity providers can also stake their $CAKE on Pancakeswap to earn $BUNNY.

5. Autofarm

Autofarm is on a mission to aggregate yields and facilitate decentralized exchange in the most seamless way possible on Binance Smart Chain.

The two-month-old protocol has witnessed unprecedented growth, with a total value locked of $1.3B, more than $20.7M 24-hr trading volume, and a $124M market cap.

As you would predict, its yield farms are plentiful. There are over 30 liquidity pools with substantial APYs.

The Bottom Line

As with any project, yield farming is laden with risks — ranging from smart contract risks to liquidation and exit scams. DeFi users must be well aware of these risks to avoid preventable losses.

Also, as much as APY is a valid index for assessing a DeFi yield farm, it is volatile and token prices can fluctuate aggressively.

But you are happy to take risks, yield farming may be something for you.

Before you start make sure you have a defi wallet that supports your targeted liquidity pool.

So, Here we go. ONE FINAL STEP BY STEP…

  1. Buy your crypto you want to FARM
  2. Utilize it on one of these platforms and provide liquidity and receive LP TOKENS.
  3. STAKE your LP TOKENS and EARN 30%-500% APY returns.
  4. UNSTAKE your LP TOKENS.
  5. WITHDRAW YOUR LIQUIDITY.
  6. CONGRATS YOU ARE A FRIGIN FARMER.
  7. Repeat.

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