Yield farming is something we can’t stop talking about right now. Its popularity won’t just let us stop talking about it. Yield farming on DeFi can be bountiful with users getting yield as high as 100% APR on trendy stablecoins. As bountiful as the harvest from yield farming can be so the loss from it could be devastating. However, the potential of such a high and profitable harvest has got many users enticed to the prospect of DeFi yield farming.
To think you can just deposit funds into a smart contract and start earning yields on them is something that bodes well for lots of users. However, yield farming is not a new thing for DeFi. Nevertheless, the popularity of yield farming has certainly gone up in recent months as more DeFi protocols are introducing their projects to the market. Users get to pick from several options of hot tokens in the market while earning yields on their investment.
Exploring the root of Yield Farming
Yield farming didn’t just start out of thin air. Before we had the yield farming frenzy that we have now, which was aided by the introduction of COMP, the honor of introducing protocol token reward goes to Synthetix. The protocol introduced one of the earliest strategies of increasing the liquidity pool, which it did for its sETH token on Uniswap decentralized exchange. Users were able to stake their sETH tokens on Uniswap thereby adding to the sETH/ETH liquidity pool. In return, users get to earn the protocol native token called SNX in addition to transaction fees generated on Uniswap. This strategy was duplicated across several other tokens.
Yield Farming on Anyswap
Talking of yield farming on DeFi, Anyswap is a Swap protocol where you can farm yields through the incentive schemes it offers. The incentive schemes are of two types, which are trade mining and liquidity mining. Through trade mining users earn 250 ANY for every 100 blocks relative to the trading volumes of users. On the other hand, liquidity mining earns you a 9900 ANY reward for liquidity providers per every 6600 blocks. Therefore, making the two schemes run side by side make sure the takers and market makers are rewarded properly. This leads to a robust ecosystem for liquidity utilization.
Time to examine what top DeFi investors have to say about the strategies they use and information that new investors or users should have at hand before farming.
Tips and Tricks to Yield Farming
Going by the words and strategies of the top yield farmers in DeFi, we look at what they are doing to get a profitable harvest.
A DeFi investor called Degen Spartan unveiled the strategy that has gotten him a consistent 20 percent or more APY in SNX since early 2019. What he does is to use stablecoins and toss them into the sUSD Curve pool, then deposit the LP token into the Synthetix Mintr incentives scheme.
Degen mentioned that the rush for DeFi Protocol like Compound has left a space in behind for other smaller and more niche strategies to thrive. This lead to an overall increase in yield in the space.
The managing director and founder of CoinFund, Mr. Jake Brukhman also had something interesting to say about yield farming. He talked about the ranging opportunities available that can yield small APY to ones that yield more than 100 percent APY. There are even opportunities that can yield several hundred percent APY, based on the assets that you hold as well as the risks you are ready to take on.
Another DeFi investor called the SNX Professor shared his strategy in which he borrows USDT using collateral then lending the USDT back. After BAT started dissing out more COMP, he shut the positions and changed over to borrowing and lending BAT in the same way as above. His recommendations include daily monitoring then only make the change when it is sensible to do so. In addition, it takes time to make inroads for yield farming considering you have to take into account things like slippage fees or transaction fees, among others.
A smart DeFi investor also shares his early-bird investment strategy for Anyswap using platform trade mining. He outlined a simple trade mining strategy that can get you a handsome harvest. As you already know, trading on the Fusion chain, on which Anyswap is built, is very cheap and rewards you with ANY for trading on its platform. Take, for example, the fact that you can easily perform back and forth trading of ANY to FSN per every 100 blocks, which is about 21 minutes. Doing that 66 times per day will probably cost you 359 FSN in gas price over the course of all the transactions but will earn a sizable trading reward as a result. The reward depends on the total market volume, which means that your ROI including rewards is high on early low volumes but once the trading volume picks up, the rewards reduces. That is why it is called the early bird strategy.
The co-founder of 1kx, Lasse Clausen also has this to say about yield farming. When you contribute to liquidity on protocols like Curve, it can be easy and exciting. The strategy you use is similar to the primary strategy of uncovering tokens of early stages protocols at a cheaper price. This offers more potential compared to protocols already at the high-end of the market with steep prices.
DeFi Astronomical rise
To tell you how profitable DeFi can be, you just need to look at the locked-in value, which is presently at $10.99B. The hype around DeFi has seen it perform better than BTC in 2020. This has led to exchanges rushing to list some of these projects. We have Binance, which is actively enticing DeFi projects to come on board its Binance chain. The momentum of DeFi has prompted the likes of Binance to device means to thrive alongside the DeFi innovation.
OKEx is not left behind either as they added eight DeFi protocols to their exchange recently. Coinbase has also been in support as it declared its support for Compound back in June. You will also find exchanges like Huobi and Poloniex in the mix of things.
Even with this astronomical rise, market experts have identified some problems that could derail the DeFi space if not addressed. These issues could affect the mainstream adoption of DeFi and their user-friendliness and security.
The discussion of the rise of DeFi yield farming won’t be complete if we don’t make mention of where to earn a sizable harvest. The three avenues for yield farming in DeFi are money markets, liquidity pool, and incentive schemes. The money market yields profit through lending and borrowing, which is something you will find in DeFi protocols like Maker. Liquidity pools often provide a better harvest than money markets, although, at a higher level of risk. Examples of protocols here include Anyswap. Lastly, we have the incentive schemes, here you get incentives as yield in the form of the platform native token. DeFi protocols like Synthetix operate in this manner by giving the SNX token to users as rewards for their input. Another similar protocol is Ampleforth, which dish out its native AMPL as the yield for users’ effort.
What are the risks with Yield Farming?
One of the things to watch out for on your way to a profitable harvest is the gas price. As you know, most DeFi protocols are based on ethereum and the high gas price of ethereum is something you must consider carefully when planning your yield farming strategy. When you look at protocols like Nexus Mutual, the smart contract covers it provides is a good place to start. However, those utilizing leverage have to be careful of the ways in which they can get locked out, particularly when dealing with an unstable asset such as BAT. Finally, be wary of irreversible vulnerabilities, for example, the ETH that was trapped in bZx worth $2 million is something nobody saw coming.
The crucial point is don’t be rest assured on yield and just like any investment, the bigger the yield is, the bigger the risk that comes with it. Additionally, it could be difficult for DeFi yield farming to maintain a 20 percent APY over a long period.
As mentioned earlier, the issue of security is a risk that needs to be addressed in the DeFi space. We have seen security flaws resulting in defective protocols and turning these protocols into a target for malicious attacks. Most of the smart contracts on the DeFi protocols are launched hastily and often not audited. That means loopholes are bound to be found as we saw with the Yam.finance protocol. Even protocols that were audited are not completely safe from security flaws as we saw with bZx.
Questions have also been asked on the sustainability of the Ethereum chain on the back of pressure from increased transactions. The issue of scalability of the ETH chain has surfaced as well. All these risks dictate that you thread with caution and make well-informed decisions concerning DeFi yield farming.
A former 16z investor and founder of venture fund variant, Walden mentioned that even though yield farming can boost short-term use, creating a fruitful DeFi protocol is based on the long-term stay of developers and the users on the platform. Another short-term boost is yield hacking, which helps push the user growth upwards. However, for larger gains, the key is to create long-term wealth that stems from owning or building a product or service that is useful for billions of users daily.
Yield farming is here to stay. At least for now, it is going strong and shows no sign of stopping. So, we expect that more and more users will troop into DeFi space to get their share of the bountiful harvest. Therefore, try to have a strategy that you can devise from the tips and tricks offered by top yield farmers in the industry.
Edward is a finance expert that experienced the 2007 stock market crash first hand. In 2010, he discovered Bitcoin and has been a cryptocurrency advocate ever since.