At the time of writing, the cryptocurrency market is in the midst of one of its deepest periods of realized losses in years. Fear and pessimism are extremely high, which has caused many investors to lose interest and exit the cryptocurrency market.
However, despite the doom and gloom, there are some strategies you can employ to keep making money during the bear market. Yield farming – one of these strategies – is one of the most lucrative opportunities in the cryptocurrency sector. It involves the process of using decentralized finance (DeFi) to maximize returns. It’s a way to make more crypto with your idle crypto assets, but it takes a little research to use effectively and safely. Choosing the best yield farming cryptos for you is an important step to take before you get started.
The following article will examine how yield farming works and discuss the best yield farming cryptos currently available in the market.
How does yield farming work?
Yield farming works by incentivizing liquidity providers to invest their crypto assets in a smart contract-based liquidity pool. This pool brings to life a marketplace that allows users to lend, borrow, or exchange tokens.
In exchange for using these platforms, users have to pay transaction fees. Liquidity providers receive a large percentage of these transaction fees. Typically, as more investors add funds to the relevant pool, the value of returns issued decreases accordingly.
In addition to fees, liquidity providers can also issue a new token for providing liquidity. This form of inducement is known as liquidity mining and occurs when a yield farming participant earns token rewards as additional compensation. The distribution rules depend on the unique implementation of the protocol, but the bottom line is that liquidity providers receive a return based on the amount of liquidity they provide to the pool.
Best Yield Farming Cryptocurrencies
At the time of writing, you can choose from numerous of the best yield farming cryptos, each with unique features and value propositions. However, there are some cryptocurrencies that offer the best of both worlds in terms of rewards, but also decentralization and security. Some of the best yield farming cryptocurrencies on the market are:
Uniswap
Uniswap is a Decentralized Exchange (DEX) protocol – more specifically, an automated liquidity protocol – built on top of Ethereum. Making trades does not require the use of an order book or central hub. Instead, Uniswap gives users the ability to conduct trustworthy, highly decentralized, and censorship-resistant cryptocurrency trades among themselves.
The automated execution of trades on Uniswap largely depends on the liquidity provided by the stakeholders. In exchange for maintaining liquidity, providers are rewarded with a share of trading fees as well as newly minted UNI, the native token of the Uniswap protocol. The amount providers earn is based on a percentage of the trading fees for each swap, and with a large enough deposited capital, providers can earn significant interest. Interest rates on Uniswap vary by pool and market fluctuations.
The best cryptocurrencies for Uniswap are USD Coin (USDC), Ethereum (ETH) and DAI Stablecoin (DAI). USDC and Ether have the highest TVL (Total Value Locked) values. At the time of writing, both cryptocurrencies have over $800 million in TVL.
TVL is a metric used to measure the overall health of a DeFi ecosystem through the total amount of cryptocurrency deployed on its network.
Spirit
Aave is an Ethereum-based money market that allows users to lend and borrow a variety of digital assets, from stablecoins to altcoins. The Aave Protocol is governed by holders of AAVE (the Aave Protocol’s native governance token). The rate of interest fluctuates depending on the utilization rate of the assets in a pool. When almost all of the assets in a pool are used, the interest rate rises to entice liquidity providers to deposit more capital.
Aave has over $5 billion in TVL. The best crypto assets to stake on Aave are Ethereum, Avalanche (AVAX), and Polygon (MATIC). The market size for Ethereum on Aave version 2 is around $4.5 billion.
pancake swap
PancakeSwap is a DEX built on the Binance Smart Chain (BSC) network for swapping BEP20 tokens. PancakeSwap operates on an automated market maker (AMM) model where users trade against a pool of liquidity.
At the time of writing, PancakeSwap has the highest TVL among all BSC protocols, with approximately $3 billion locked as of November 2022. PancakeSwap mainly focuses on gamification components like team fights, NFT collectibles, and sweepstakes. APYs can reach up to 400%.
The best cryptocurrency to use on the PancakeSwap platform is CAKE (the protocol’s native token). CAKE has the most liquidity pairs on the platform. Users can earn up to 57% APR on the CAKE/BNB yield farm or up to 38% on the CAKE/BUSD yield farm.
Curve
Curve Finance is an automated market-maker protocol designed for low-slip, low-fee stablecoin exchanges. Users can add their assets to multiple different liquidity pools and earn fees. It is currently one of the most popular AMMs based on the Ethereum blockchain. CRV is the governance token of Curve DAO – a decentralized autonomous organization (DAO) that runs the protocol. CRV is distributed to liquidity providers on an ongoing basis, with rates decreasing annually.
The best liquidity pools on Curve are the 3pool USD and the tricrypto2 pool. Both pools have the highest TVL and daily trading volume in the Curve ecosystem – 3pool USD has over $650 million in TVL and Tricrypto2 has around $150 million in TVL.
Before diving into the best cryptocurrencies, it’s important to cover a few key terms. The first is the base APY, which refers to the rate of return you receive for providing liquidity to a pool. After providing liquidity, you can choose to place your Liquidity Provider (LP) tokens into the meter. This practice allows users to earn rewards for their LP tokens in addition to the base reward.
As the name suggests, the 3pool USD is a basket of DAI, USDC and USDT. The base APY for this pool is 0.67%; However, the CRV liquidity provider reward is up to 0.91%. The “tricrytop2” pool consists of ETH, Wrapped BTC (WBTC) and USDT. The base APY for this pool is 1.65%; However, the CRV liquidity provider reward can reach up to 15%.
Connection
Similar to Curve, Compound is an Ethereum-based algorithmic money market protocol. Users can deposit cryptocurrencies to generate interest or borrow other crypto assets against them. The protocol is powered by smart contracts that automate the management and storage of capital added to the platform.
Positions (provided assets) in Compound are tracked in tokens called cTokens – Compound’s native tokens. The cTokens in Compound are ERC-20 tokens that serve as claims to a share in an asset pool. For example, if you deposit the stablecoin DAI, it will be converted into cDAI in the same way deposited Ethereum is converted into cETH. Each coin earns interest based on its unique interest rate.
The best cryptocurrency to stake on Compound is Ethereum. Users can earn up to 1.99% by investing Ethereum in Compound’s ETH/USDC liquidity pool.
Risks of yield farming
Despite the possibility of earning passive profits, you face great risks with yield farming. Although it may seem simple, in reality yield farming is a highly complex strategy that is recommended for advanced users. It is basically also suitable for investors with a lot of capital.
A central risk of yield farming are smart contracts. Many DeFi protocols are built by small teams with limited budgets that pose an increased risk of smart contract bugs. Blockchain immutability can result in permanent loss of user funds.
Another key risk of yield farming is composability, as the DeFi industry relies heavily on each of its building blocks. In crypto terms, composability refers to the connectedness of different blockchain protocols.
Why is that a risk? When a protocol doesn’t work as intended, the entire ecosystem can suffer. Many DeFi protocols are integrated with other DeFi pro tools. Therefore, when it comes to yield farming, it is important to understand that you must not only trust the protocol that you are depositing your funds on, but also on everyone else that it can rely on.
Where crypto can be safely stored
Hardware wallets and software wallets can be used to store cryptocurrencies like bitcoin. Hardware wallets are considered the safest way to store cryptocurrencies. With a hardware wallet, you are the only person who can access your crypto as it keeps your private keys offline.
Software wallets allow crypto holders to securely store their digital currencies and tokens in one place. These types of wallets allow users to buy, exchange, lend, and earn cryptocurrency in an efficient manner. The Coinbase wallet is an example of a software wallet.
Best Hardware Wallet: Ledger
Ledger claims to offer the highest level of protection for crypto assets, making it an excellent option for a hardware wallet. In addition to Bitcoin, Ledger hardware wallets are compatible with more than 1,800 altcoins including Uniswap (UNI), Aave, Compound (COMP) and all ERC-20 tokens.
Current crypto prices
The cryptocurrency market is volatile by nature, often fluctuating by large amounts in a short space of time. Prices are volatile due to their dependence on investor sentiment and market emotions. As a result, prudent investors will actively track prices in the cryptocurrency market.
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