Yield farming is one of the best ways to earn passive income in the crypto space, but it’s not risk-free. Smart contract vulnerabilities, rug pulls, fickle loss. These are risks you should consider.
But if you manage risk properly and diversify across multiple protocols, you should be fine.
What is yield farming?
Yield farming is a process in decentralized finance (DeFi) where cryptocurrency assets are loaned or deployed to generate returns or rewards in the form of additional cryptocurrency.
This is typically achieved through various decentralized applications (dApps) or protocols such as automated market makers (AMMs) and liquidity pools.
To better understand yield farming, here is an analogy:
“Imagine you are growing crops on a farm to make a profit. Just as a farmer invests time and resources in growing crops and then sells them for a profit, a yield farmer invests in cryptocurrency assets and earns returns in the form of additional cryptocurrency. However, just like a farmer faces risks like inclement weather and pests that could damage or destroy his crops, yield farmers face risks like smart contract vulnerabilities and temporary losses that could negatively impact their yields.”
Without further ado, here are the four best, lowest-risk protocols to try yield farming in 2023.
PETH-ETH pool on ConvexFinance
Convex Finance is a revolutionary DeFi platform that allows individuals to stake their wealth and receive incentives in the form of CRV, CVX and trading fees. Additionally, the platform offers its users liquidity mining opportunities via the Curve LP pools.
pETH is an ETH derivative supported by the JPEG protocol. It is minted when a user borrows against an NFT on JPEG. If you deposit liquidity into the PETH-ETH pool at Curve and stake your LP tokens on Convex, you will receive 29% APY rewards with no volatile loss.
But there are some risks: since pETH is minted when a user borrows against an NFT, a massive crash in NFT prices used as collateral would result in bad debt for JPEG. The chances are slim, but if this were to happen, pETH could lose its bond.
VLP on Vela Exchange
Vela Exchange is a decentralized platform that offers sophisticated perpetual currency trading capabilities, prioritizes community-driven incentives, and has a highly scalable infrastructure.
Since the launch of Vela last month, the massive trading volume has surpassed all expectations. VLP is the Vela liquidity provider token and can be minted with USDC. VLP minters receive rewards based on trading volume, with the staking APY currently exceeding 120%.
The Vela exchange is already doing a volume of USD 3 billion. When they started, they were just small fish and could not have imagined reaching $3 billion in volume so quickly.
VLP players earn 60% of platform fees and 10% of perpetual fees in esVELA. However, remember that if Vela traders win too much, VLP players will suffer a loss. But as long as trading volume stays high, VLP appears to be a good USDC return opportunity.
The Vela team has been constantly shipping products, and the roadmap includes a large trading competition that may lead to a further increase in trading volume.
They are currently in beta phase 3 of their roadmap and will include two trading competitions, a beta airdrop and an official launch announcement
FrxETH on Stake DAO
Built on decentralized blockchain protocols, Stake DAO is a no-custodial platform that allows individuals to grow their cryptocurrency portfolio with ease. It offers users a convenient way to increase, monitor and manage their wealth right from their wallet.
FrxETH is another great ETH return opportunity at 22% APR. FrxETH is the liquid staking derivative of Frax. The return is mainly paid in the form of CRV rewards. When you deposit frxETH on Stake DAO, the protocol puts it in the curve display and amplifies it thanks to the CRV locked in the CRV Liquid Locker. The 30-day moving average APY is 15%, according to DeFiLlama.
LUSD-MAY Pool on Velodrome Finance
Velodrome, launched on May 31, 2022, is an Automated Market Maker (AMM) that serves as the primary trading and liquidity hub for Optimism. It represents an evolution of the Solidity model previously introduced by Andre Cronje.
If the past few months have made anything clear, it’s that there is a need for truly decentralized stablecoins. They don’t depend on centralized ones. Both LUSD and MAI fit into this category, with LUSD fully backed by ETH.
The return for this strategy is currently 17.5%, with a 7-day moving average APY of 14%. Not as good as the predecessors, but at least the LUSD and MAI stablecoins should actually be “stable”.
Final Thoughts
Yield farming is a great source of passive income. Many large investors have invested millions of dollars in major bluc-chip DeFi protocols such as Aave and Compound. These have much more stable APRs since their income streams are established. Make sure to do your own further research on each of these protocols before investing.
Vincent Munene is a freelance writer and a huge blockchain enthusiast. Blockchain has changed his life in terms of financial freedom and in return he likes to educate people and update them on everything blockchain related. He is a biochemist by profession and also enjoys playing the piano.
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