Yield farmers earn up to 100% APR on popular stablecoins on a good day in the field. Losses can be steep on a bad day, but the potential for big gains has attracted hundreds of millions to DeFi over the past week.
While depositing capital into a smart contract to earn a return is nothing new for DeFi, yield farming has become more attractive in recent weeks as protocol teams increasingly incentivize liquidity providers (LPs) by distributing their native tokens. This means traders can get the hottest tokens on the block in addition to earning interest on their deposits.
We asked top farmers about their strategies and key takeaways for new traders to consider as they head to the fields.
Roots of yield farming
But first, let’s take a quick look at how it all started. Before there was yield farming, there was Synthetix. As one of OG’s yield farming strategies, users could (and still can) participate in one of Synthetix’s dozens of incentives to earn a return on capital injected into various liquidity pools.
Image source: Synthetix
One of the first strategies was developed to increase liquidity for the Synthetix synthetic ETH token, or sETH, on the Uniswap DEX. Traders who added liquidity to the sETH/ETH trading pool and then staked their Uniswap sETH LP tokens – which are tokens representing deposits on Uniswap – on the Synthetix platform will receive Synthetix’s native SNX token plus those of Trading fees charged by Uniswap.
The strategy has been emulated for many other tokens in various DEXs. The incentive to boost liquidity for sUSD, Synthetix’s dollar-pegged stablecoin, on the Curve DEX is currently offering the highest weekly SNX rewards at 48,000 SNX (~$70,000).
COMP fertilizer
When Compound started distributing its governance token last Monday, anything was possible.
Traders now had a chance to earn a share of the 2,880 COMP tokens distributed daily (out of a total of 4.23 million COMP or 43% of the total supply reserved for the users of the protocol) to those who capitalize on it deliver and lend to the protocol. Nearly $1 billion in new assets poured into the lending protocol from those looking to take advantage of the stimulus.
“I’m still amazed at the rate of growth in deployed assets,” said Matteo Leibowitz, an analyst at The Block. “To me, that suggests more professional involvement and is certainly a departure from the retail-dominated dynamic that we’ve seen over the short history of open finance.”
100% APR
Some farmers began increasing their revenue by building leveraged loans to borrow the tokens, which yield the most COMP (Compound’s token is distributed in proportion to the interest accrued by each market), and platforms like InstaDapp made this possible with one click.
This strategy quickly caught the attention of many thanks to an APR of over 100% when factoring in the profits to be made from selling COMP as it went from less than $20 when it was listed to over $300 increased in days.
DeFi investor Arthur Cheong said Compound’s relatively high liquidity also helped attract new investors. “The difference is that the size of the $COMP reward pool can hold a much larger capital allocation compared to previous yield farming strategies, which could only hold around $15 million at most,” he said. “The COMP reward pool can raise $500 million in capital while still offering a very high APR.”
Now we are seeing the crop rotation take shape as LPs move from USDT to more scarce assets like BAT, WBTC and ZRX. Over the weekend, the amount of capital provided and borrowed in the BAT markets rose over 20,000% as farmers raced around the daily distribution of 2,880 COMP.
Agricultural tips and tricks
Here’s what some of the most active DeFi investors are doing to manage returns.
DeFi investor who goes by the online name Degen Spartan:
The strategy of “taking stablecoins, throwing it into the sUSD curve pool, taking the LP token and depositing it into the Synthetix Mintr incentive contract” has earned him “a fairly consistent 20%+ APY in SNX” since he Started growing DeFi yields in early 2019.
He says COMP’s herd has “left a void in the smaller and more niche strategies, increasing yield across the board.”
Jake Brukhman, Founder and CEO of CoinFund:
“I see opportunities ranging from a few points APY to over 100% or even several hundred percent APY depending on the assets you hold and the risks you are willing to take. Most returns come from exuberance or inefficiency of these early protocols,” he said.
“Many of the lending institutions are currently offering capital at very low interest rates (sometimes 0%) compared to the APYs one could earn.”
DeFi investor who goes by the online name SNX Professor:
It uses “collateral” to borrow USDT and lend USDT back. Then BAT became the one giving more COMP, so he closed the positions and switched to borrow BAT and lend BAT again.” The professor recommends “check daily, only switch when useful -> Yield farming takes time since you have sunk costs like gas fees/hatch fees etc.”
Lasse Clausen, founding partner at 1kx:
“Bringing liquidity into Curve is simple but exciting as it’s pretty much the same as our main strategy of getting exposure to the tokens from protocols in the early stages and at lower valuations, which offers more potential upside than something already rated at 100 is over a million,” he said.
“Yield farming is a great new experiment trying to achieve”, network effects.
Risks in yield farming
For anyone who has engaged in yield farming, the cost of gas is something that simply cannot be ignored. While smart contract coverage on Nexus Mutual is a good place to start, those using leverage should be wary of how they can be squeezed out – especially when dealing with a volatile asset like BAT. Finally, the potential for irreversible vulnerabilities — like the $2 million worth of ETH locked into bZx — is something few saw coming.
The key takeaway here is that no return is guaranteed, and in general, the higher the return, the greater the risk.
“I would be surprised if yield farming yielded more than 20% APY over a longer period of time,” Clausen warned.
What’s the point?
Jesse Walden, founder of venture fund Variant and a former a16z investor, said that while yield farming can incentivize usage in the short term, a successful protocol still depends on developers and users staying on the platforms over the long term.
“Yield hacking in DeFi is a short-term incentive to drive user growth, but the bigger game is the long-term wealth creation that comes from building (and owning!) some of the products and services that billions of people will use every day.”
-From Cooper Turleywith assistance in reporting from Sebastian Aldasoro
[This story was written and edited by our friends at The Defiant, and also appeared in its daily email. The content platform focuses on decentralized finance and the open economy and is sharing stories we think will interest our readers. You can subscribe to it here.]
Disclaimer
The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment or other advice.
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