Yield farming is a lucrative crypto investment strategy to generate passive income with the promise of massive returns at high risk. Here we present the DeFi liquidity pools that promise the best APY, with brief reviews of each.
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In the beginning, HODLing and mining were the main options to make money from cryptos. But with the development of the ETH platform and a plethora of altcoins and DeFi apps, you have more aggressive ways of making a profit from crypto investing.
Many crypto investors are particularly interested in passive income opportunities where you can put your current coins to work. As a result, yield farming has exploded in popularity in recent years, promising high interest rates (APY) and a chance to earn more crypto as a bonus.
What is yield farming?
In traditional securities trading, a market maker acts as an intermediary, providing liquidity and trading services to investors. However, in the world of cryptocurrencies and decentralized finance (DeFi), there are no such central authorities to hold funds.
Instead, automated market makers (AMMs) provide on-chain liquidity for crypto trades. They rely on liquidity pools, which are smart contracts made up of a collection of funds. Crypto investors who lock their funds into these pools get a share of the platform fees.
Platforms pay out the rewards in the form of their native tokens. As an added incentive, many pools reward investors with newly minted tokens. Yield farming involves investing your cryptos in this way to generate passive income.
When you lend fiat currency to a bank, you only earn between 0.1% and 3.5% in interest, depending on the currency. However, in yield farming, the APY can range from 15% to as much as 200% in some cases. This high-risk/high-reward form of crypto investing is also known as liquidity mining.
Top 3 Best DEX Platforms for Yield Farming
Now that we’ve covered the basics of yield farming, let’s take a look at the exchanges with the best yield farming quotes (updated Q4 2021):
Uniswap (V3)
With nearly 20% of the total market share by trading volume, Uniswap is one of the top DEXs on the Ethereum blockchain in 2021. Two versions of the platform are currently active – the older V2, which is still going strong with a 15% market share, and the updated V3, which launched on May 5th, 2021 was introduced.
Continuing the trend of incremental upgrades, Uniswap V3 came with new options such as setting price ranges for asset allocation (concentration of liquidity), flexible fees and enhanced security features. It is based on Ethereum and only trades ERC20 tokens.
Uniswap gives you the freedom to invest in liquidity pools of all available tokens. With 471 coins and 953 potential pairs, you have no choice. This also comes with some risk – there are many scam coins in the crypto wilderness.
Nonetheless, with nearly $1.5 billion in daily trading volume and $3.6 billion in total locked value (TVL), Uniswap is a great option for investors looking for high-yield farming rates. Here is a quick look at some of the top performing coin pairs:
| liquidity pool | TVL (in million $) | APY |
|---|---|---|
| USDC – ETH (0.5% fee) | $34.71 million | 25.55% |
| DAI – ETH (0.05% fee) | $59.32 million | 16.47% |
| DAI – ETH (0.3% fee) | $85.77 million | 16.79% |
| ETH – USDT (0.05% fee) | $37.86 million | 28.84% |
| SHIB – ETH (1% fee) | $48.93M | 68.26% |
Pancake Swap (V2)
An alternative to Uniswap that is NOT based on the Ethereum blockchain, pancake swapwas introduced in September 2020. This DEX is based on the hugely popular Binance Smart Chain (BSC), a hard fork of the Geth protocol.
It is the largest AMM platform on the Binance blockchain with over $1.3 billion in daily trading volume. It is also the second largest DEX in terms of market share by trading volume.
In terms of liquidity pools, PancakeSwap offers more coin pairs than UniSwap, with 2508 coins and a whopping 6299 pairs. However, since many of these are obscure coins with little demand or activity, the benefits over UniSwap are minimal at best.
PancakeSwap’s V2 pools launched in April 2021. Let’s say you’re sticking with relatively well-established coin/token pairs. In that case, you can expect annual premiums ranging from 5% to 200% or more with PancakeSwap V2. Here are some examples:
| liquidity pool | TVL (in million $) | APY/APR |
|---|---|---|
| WBNB – BUSD | $182.91M | 21.64% |
| USDT-WBNB | $140.12 million | 30.12% |
| USDT – BUSD | $28.84 million | 6.55% |
| DogeZilla-WBNB | $27.78 million | 318.75% |
| ETH – WBNB | $21.34 million | 7.88% |
curve financing
In stark contrast to platforms like Uniswap and PancakeSwap, curve financing has opted for a more conservative approach to liquidity pools. For example, it doesn’t offer hundreds of token/coin pairs – instead you can choose from around 23 coins and 61 pair pools.
These include stablecoins — cryptos tied to an external asset like gold or fiat currencies — as well as wrapped tokens like WBTC. This gives the Curve DEX a significant advantage over other AMMs in terms of stability: less volatility, lower fees, and less risk of temporary loss.
And it has to be said that when you look at the numbers, this conservative approach has paid off well. Curve had the highest TVL of any similar platform, peaking at $19 billion. However, this came at the cost of a lower market share by trade volume (4.4%).
The native token on the Curve DEX is called CRV – Liquidity farming on the Curve DEX gives you a chance to win CRV. Owning CRV has many benefits, including voting rights for the DeFi protocol.
Here’s a quick look at some of the best curve pools for yield farming:
| liquidity pool | TVL (in million $) | APY/APR |
|---|---|---|
| Aave (aDAI+aUSDC+aUSDT) | $28.1 million | 18.41% |
| Compound (cDAI+cUSD) | 15 million dollars | 8.11% |
| LUSD (LUSD+3Crv) | $70.7 million | 5.51% |
| Y (yDAI+yUSDC+yUSDT+yTUSD) | $18.2 million | 4.74% |
| USDN (USDN+3CRV) | $2.1 million | 4.14% |
Risk vs. Reward in Yield Farming
As you may have noticed from the stats, the predicted rewards are much higher on platforms like Uniswap and PancakeSwap. The trade-off here is relatively simple – the risks also increase dramatically when you start yield farming in pools of highly volatile cryptos.
Suppose you are depositing cash in a bank to earn passive income. In this case, this deposit is secured by government agencies and agencies such as FDIC and SIPC. However, cryptocurrency deposits are completely at the mercy of the market.
Investments in liquidity pools can be influenced by the following factors:
- Any crash in the value of the token/coin (impermanent loss)
- Decrease in trading volume
- Software vulnerabilities for hacking
- High gas costs (with smaller investments)
- Liquidation risks due to a crash in the price of the collateral token
Successful yield farmers often employ complex investment strategies, using the reward tokens from one pool to invest in another. These chains can typically generate a 100x increase in passive rewards. However, when there is a significant market crash for a key token, the whole thing can come crashing down like a house of cards.
There is also the problem of opportunity costs. When there is significant movement in the market, traders and HODL investors can act quickly to make a profit. However, since AMMs do not update prices immediately to reflect changes in the market, you cannot do so if your coins are locked in the pool.
Ultimately, it all boils down to your risk tolerance or aversion. If you have cryptos dormant in a wallet, yield farming is one of the options available to generate some passive income. Staking is another option that we’ve covered extensively here.
As long as you stick to established cryptos (BTC, ETH, etc.) or stablecoins and select pools with a high trading value relative to TVL, you may have a good chance of earning decent returns from yield farming. However, be wary of pools that promise 100%-200% returns – only invest in them if you are willing to take the high risk.
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