If there’s one term most associated with DeFi, it’s “yield farming.” The term encompasses a variety of strategies that involve making your money work for you. This is done by “farming” or accumulating the best yield across many different protocols within DeFi.
So how does one become a “yield farmer”? Let’s talk about what it takes to sustain your operations and keep your crops healthy.
Yield farming showcases some of the best aspects that make DeFi unique. To get started, you need to become familiar with the various protocols in the ecosystem: from decentralized exchanges to lending protocols to staking and more. All of this provides a yield of your precious coin, allowing you to collect and increase that crop.
That being said, most yield farmers have gotten their start Provision of Incentive Liquiditycolloquially called “Liquidity Mining”.
When DeFi was just getting started in 2020, many protocols like Yearn took the innovative first step of booting their liquidity via farms. This meant that users could provide liquidity, stake liquidity tokens on the protocol and earn a portion of the protocol’s governance token. The APR was often very tempting.
Providing liquidity already gives you a significant discount on trading fees – but if you keep your eyes peeled, you can still often find new protocols that increase your liquidity by offering additional incentives. Protocols are known to lure users into depositing with a high APY in their native token. These are commonly referred to as “farms”. And that’s prime real estate for a farmer.
The most common decentralized exchanges used to provide stimulus liquidity are Uniswap, PancakeSwap, Sushiswap, and 1inch.
But of course there is a significant risk. A new project could suffer from a smart contract bug, or worse, it could experience a rug pull — and that means the project is losing its liquidity. Always be wary of projects that are anonymous, especially if they don’t have a good reputation.
Farms were once “wild west” and sometimes offered a 4-5 digit APY for providing liquidity. Today the market is not as exuberant as it was then. Still, yield farmers can find good opportunities by providing liquidity in the current market. Nowadays, agriculture has become more sustainable.
Chasing high-digit APRs isn’t the only way to earn agricultural yields. Some farmers are opting for more conservative strategies.
For example:
- You can use AAVE or Compound to deposit stablecoins or any popular cryptocurrency to earn income. The protocol lends your tokens to other users and you get a share of the interest.
- Sometimes other chains offer incentives to use their network. Optimism, for example, often incentivizes protocols on their chain that use their native OP tokens. This can be a prime opportunity to generate agricultural yields.
- Staking offers another return opportunity. For example, you can now stake ETH, which is an easy way to make money. This staked ETH (stETH) can also be used in other DeFi protocols, for example as collateral for a loan.
These are some of the basics, but if you want to experiment, things can get pretty complicated.
For example, you could take out a loan from AAVE and then use that loan to farm a token that you think has potential. The complexity can go even further – nowadays you can long and short tokens on the chain, meaning you can earn higher returns through margin trading. However, keep in mind that this can be incredibly risky and is not for the faint of heart.
If you’re just starting to tend to your crops, it’s best to start by providing liquidity first. If you discover a protocol that offers a sustainable APY (~20-50%) by incentivizing its liquidity, then it might be a good idea to jump into it and earn some returns.
You should familiarize yourself with the leading DeFi tools so that you can better monitor your earnings. Some of the most common include Zapper — which lets you “zapper” your liquidity pair into an incentive farm with just one click — and DeBank, a general-purpose dashboard for DeFi.
Of course, one yield farming protocol that hasn’t been mentioned yet is… Vespers! Vesper provides you with a return in tokens of your local deposit and you earn a VSP governance token. One day, Vesper hopes to be the go-to provider for all yield farming newbies.
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