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Yield Farming

Lending cryptocurrency is also known as yield farming or liquidity harvesting.

Yield farming is a DeFi-exclusive method for maximising ROI.

To increase their yield, Yield farmers can employ an array of complex tactics. For example, constantly shifting their cryptos between multiple loan platforms to optimize gains.

  • token holders maximise rewards across various DeFi protocols
  • provide liquidity to token pairs in return for cryptocurrency rewards

Yield farming is a riskier practice due to the fast-paced industry with rapidly changing incentives.

  • rug pulls
  • price volatility
  • impermanent loss
  • highly competitive and complex
  • smart contract hacks
  • regulatory risk

Protocols​

Now a saturated market, top historical yield farming protocols include:

  • Curve Finance
  • Aave
  • Uniswap
  • PancakeSwap

Strategies​

Yield Farming strategies

Successful strategies have limited time horizons as other farmers will flock to take advantage of it, canceling significant returns.

  • Lending
  • Borrowing
  • Liquidity provider
  • Staking
caution

Successful strategies have limited time horizons

Lending​

Coin or token holders can lend crypto to borrowers through a smart contract and earn yield from interest paid on the loan.

Borrowing​

Farmers can use one token as collateral and receive a loan in another cryptocurrency. Users can then farm yield with the borrowed coins.

This way, the farmer keeps their initial holding, which may increase in value over time, while also earning yield on their borrowed coins.

Liquidity Provider​

Users deposit two coins to a DEX to provide trading liquidity. Exchanges charge a small fee to swap the two tokens which is paid to liquidity providers. This fee can sometimes be paid in new liquidity pool (LP) tokens.

Staking​

AKA - Liquidity Mining?

Users can staking Liquidity Provider (LP) tokens obtained by providing liquidity to a DEX. Enabling users to earn interest twice since they are compensated in LP tokens for supplying liquidity, which they can reinvest to gain more yield.

Metrics​

tip

Limitations on effectiveness to yield farming due to volatility