Summary:
- Yield farming logs can offer APYs of up to 3,000% in 2022.
- Yield farming is a very high risk, high return investment strategy; you can make fortunes with it, but lose them just as easily.
- If you are interested in getting into yield farming, creating a yield farming crypto list that lists the highest yield farming rates and the yield farming risks for each protocol is a good place to start.
As crypto and decentralized finance become more popular, it has become more difficult to make big bucks quickly as a larger number of investors and the growing number of coins makes the once-standard 100x crypto prices less achievable. In addition, there is a risk of fraud, cyber attacks and carpet pulls.
With increasing competition and ever-present threats, how can an investor make a fortune in crypto in 2022?
Yield farming is one of Crypto’s high-risk, high-reward investment strategies, with investors switching between protocols with the highest yield farming rates to maximize returns.
Yield farming can mean Annual Percentage Yields (APYs) of 3,000% and more, but is by no means guaranteed.
To help today’s yield farmers answer questions including how do I start yield farming, how much can you make from yield farming, and of course, what are the risks of yield farming? ’, this article discusses how to generate crypto farm yield and answers the biggest question of all – ‘Is Yield Farming worth it?’
But first a short summary.
What is yield farming?
Yield farming is the process of leveraging multiple DeFi protocols to maximize return on investment. This usually involves staking or lending crypto assets across protocols to generate high returns or crypto rewards.
Because it involves switching between protocols and exchanging cryptocurrencies in a highly volatile asset class, yield farming DeFi is considered a high-risk, high-return strategy.
Although not as high as in DeFi summer 2020, the total value (TVL) in yield farming logs remains above $6 billion in 2022, showing that yield farming is still an attractive avenue for generating profits in 2022 is – even during a crypto bear market.
To get maximum profits from yield farming crypto, a yield farmer will look for the best yield farming strategy and choose the best yield farming crypto platforms with lower yield farming risks.
Chart depicting TVL in yield farming DeFi protocols from July 2021 to October 2022. (Source: stelareum)
How does yield farming work? And how do yield farms make money?
Yield farming works by alternating between lending, staking and providing liquidity across cryptocurrency protocols to continue generating the highest yields. This process is called “crop rotation”.
Each yield farmer chooses the best yield farming strategy for them. However, there are two core yield growing methods that remain the most popular and offer the best return on investment (ROI). This is how they work and earn their money:
liquidity reduction
This yield farming method uses any protocol that rewards coin holders for adding liquidity to their liquidity pool (LP). In addition to the crypto rewards, the yield farmer will receive the usual ROI for holding a crypto that is increasing in value.
An emerging example can be found in the Cardano protocol DJED stablecoin. Here, yield farmers receive rewards for holding SHEN, the stablecoin’s reserve currency, which adds value to their LP.
In addition, as the LP fills with more value, the protocol and thus the SHEN token also increases in value. This would mean that the yield farmer would earn the crypto yield farming reward and additional value added from SHEN since the initial investment.
Leveraged yield farming
Leveraged yield farming is another popular yield farming crypto method with potentially ultra-high ROI. It consists of using borrowed money to maximize potential returns. Here, a yield farmer deposits coins as collateral on a lending platform such as AAVE or Compound to borrow money.
Then they use the borrowed funds as collateral on another platform to earn more interest than they pay to the lending platforms to maximize their returns.
By repeating this process several times, the yield farmer can multiply his initial capital many times over with leveraged yield farming.
Some may consider this to be the best yield farming strategy, but it goes without saying that the yield farming risks here are extraordinarily high – so high, in fact, that some are wondering, “Is crypto farming legal? “
What are the risks of yield farming?
Another element that contributes to the sky-high returns a yield farmer can achieve is the very high yield farming risks they face. These include:
- Collateral Liquidation: Whenever a trader borrows funds from platform A to farm income on platform B, they must first deposit collateral on platform A. If the value of his security falls in value, it can be immediately liquidated by the lender to cover the trader’s risk of default.
- Temporary Loss in Yield Farming: Assets deposited in an LP may lose value while locked up. These price swings are common with crypto, but the fall in value can seriously hit a yield farmer as they often have to repay their loans from their leveraged yield farming. This loss of value during the crypto yield farming process is known as Permanent Loss Yield Farming.
Additionally, risks such as smart contract bugs and yield farming DeFi attacks on LPs make yield farming a high-risk, high-reward investment strategy.
Is yield farming still worth it?
You may be wondering how profitable yield farming is? Or is yield farming still profitable at all? To know how much you can make from yield farming, you must first determine how much work you are willing to put in and what your risk tolerance is.
Even in 2022, some yield farms offer APYs close to 3,000%, with over 100% APY easy to find. Compare this to a standard Central Savings account in 2022, which rarely offers above 2.5% APY (and it’s high), and the answer becomes a resounding “yes.”
However, despite this potentially high ROI, a yield farmer must not forget the associated yield farming risks. So the question to ask might not be whether it is profitable, but “Is yield farming worth it for you?”
In the end, whether yield farming DeFi generates profits depends on how much research and strategic planning the farmer is willing to invest, how high his risk tolerance is and of course a portion of luck.
A yield farming list on PancakeSwap with the highest APYs.
How to start yield farming: 3 tips
If the answer to “Is yield farming worth it for you?” is yes, here are some steps you can take:
1) Choose a farm with a good yield and the highest farming rates
To choose a good yield farm or yield farming protocol, a yield farmer should create a yield farming crypto list.
Good places to start researching for this list are CoinMarketCap and Stelareum, where a yield farmer can find the current yields from the best crypto yield farming platforms like Convex Finance, Alpaca Finance, and Yearn Finance.
Top Yield Farming Tokens on CoinMarketCap (Source: CoinMarketCap)
Grow logs with peak yields on Stelareum (Source: Stelareum)
Here they list the highest yield farming rates available for each protocol, the associated yield farming risks, and the best yield farming strategy for each.
For example, a yield farmer might find a new LP that offers the highest yield farming rates on the yield farming crypto list. However, as a new LP, it could have increased yield farming risks such as attacks or price volatility. This could mean that the risk outweighs the reward, so ask yourself, “Is yield farming worth it on this protocol?”
Likewise, the same scenario can be worthwhile if the fall in value from volatility is offset by the sheer volume of crypto rewards. This is why it is very important to create a comprehensive yield farming crypto list before starting to choose a good yield farm.
2) Avoid yield farming risks
There are several ways to avoid yield farming risks, but none of them are fail-safe as crypto is extremely volatile. In addition to creating a comprehensive yield farming crypto list, the yield farmer should determine their individual risk tolerance as yield farming risks can be completely avoided.
Similar to stocks and bonds, yield farming offers different risk/reward tradeoffs. If the yield farmer finds that their risk tolerance is low, the best yield farming strategy for them is staking or lending to established coins like Ethereum (ETH). This means less risk but less reward.
If a yield farmer has a higher tolerance for risk, newer, more volatile protocols may be the best yield farming strategy for them. This is where yield farming will have the highest yield farming rates. Additionally, leveraged yield farming, where risk is higher due to secured lending, will increase the power of initial capital, which means higher rewards (if all goes well).
3) How often should one harvest yield farming to make money?
How often you farm depends on your yield farming strategy and risk tolerance. If providing liquidity to a specific pool or lending and staking assets for crypto rewards on a specific protocol is still lucrative, then it might be worth moving on.
However, yield farming risks are multiplied due to crypto price volatility, so it is important to know when to farm your yield and switch yield farming strategies.
In order to do this while maintaining the highest yield farming rates and avoiding yield farming risks, a yield farmer must research their assets. Using technical analysis tools and expert advice are two ways to ensure a yield grower is rotating their crop on time.
The answer to “how often should you harvest yield farming to make money?” therefore depends on each protocol and whether your research tells you it’s time to switch strategies and protocols.
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