April 14, 2024

Yield Farming

We have prepared an informative guide that thoroughly explains what yield farming is all about and how it differs from crypto staking.

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Yield Farming Calendar

Dates Recent and Upcoming Staking Announcements
8th September 2021 End of limited-time 10% increase in curve (Polygon) mining's annualized yield on AscendEx
1st September 2021 Limited-Time 10% Increase in Curve (Polygon) Mining's Annualized Yield on AscendEx
25th August 2021 Permission Coin (ASK) yield farming begins at 10:00 AM (UTC) with an APR of 90%!
12th August 2021 Two new yield farming pools open up on Bitrue at 12:00 (UTC) with JAM/JAM and BTR/JAM yielding APRs of 90% and 50% respectively!
11th August 2021 HT/DFA and ETH/DFA yield farming promotions end on Huobi Primepool
6th August 2021 Earn an APR of 265% on HT/DFA and 135% on ETH/DFA on Huobi Primepool.
3rd August 2021 7 New Liquidity Pools open on Binance today: BAKE/BNB, BAKE/BTC, BAKE/USDT, TRX/USDT, TRX/BTC, TRX/ETH, TRX/BNB.
30th July 2021 Tune.fm (JAM) yield farming is now available on Bitrue with a 90% APR!
27th July 2021 Earn 90% on WOO/USDT with Bitrue. Deposits accepted from 10:00 AM (UTC) today.

🔎 If you are searching for more stable returns then check out our crypto staking page, where it is possible to find APRs of up to 100% (and ocassionally even higher).

🔎 We are also tracking the annualized yield on crypto savings accounts.

🔎 If you are interested in less price volatility, visit our stablecoin savings page.

Introduction to Yield Farming: the unique properties of Defi applications

In traditional finance custodians (middlemen) play an important function by ensuring the safekeeping of assets to prevent them from being stolen or lost.

Unlike traditional finance, Decentralized finance (‘DeFi’) applications are completely open and permissionless, which means anyone from anywhere in the world with an Internet connection and a supported wallet can interact with them.

DeFi cuts out the middlemen completely through the use of smart contracts. Since Defi applications do not require trust in any middleman or custodian they are trustless!

These unique properties give rise to new use cases – and one of them is Yield Farming.

What is Yield Farming?

Yield farming is a popular way for crypto investors to earn passive income by placing funds into a DeFi protocol. At face value, yield farming may be mistakenly viewed as a form of crypto staking although the processes and algorithms are completely different. Yield farming is far more complex and risker than crypto staking!

We explain the difference between yield farming and crypto staking below, so keep reading.

How does Yield Farming work?

For yield farming to work there needs to be Liquidity Providers (‘LPs’) which are effectively crypto investors or lenders that lend money to a ‘lending pool‘ or ‘liquidity pool‘. Then there must be borrowers that use that liquidity.

A yield farming protocol is essentially a highly advanced mechanism that aims to create deep pool liquidity by stimulating digital asset supply and demand.

The concept resembles old-fashioned banking except the borrowed funds aren’t going towards the purchase of a home although instead, it may go towards other things such as the distribution of a new token, enabling leveraged products or margin trading, crypto arbitrage, or even moved to various other liquidity protocols in search of attractive yields. It is very easy to see how complex these DeFi yield strategies can become.

Ultimately, the LPs or crypto investors that lend their digital assets to the liquidity pool expect to receive a return that comes from the borrowers and sometimes a proportion of the fees that are generated by the platform. The fee depends on how much liquidity the LPs contribute to the platform.

Essentially, the liquidity pool enables a marketplace that allows users to lend, borrow, or exchange tokens. And of course, the platform receives fees, which are then paid out to LPs according to their share of the liquidity pool.

In addition to rewards, LPs might be interested in a particular liquidity pool for its ability to gain access to a new hot crypto token. Let’s say the entry requirement to invest in a new popular token is equivalent to a lot of $1,000. Crypto investors may decide to aggregate digital assets into a liquidity pool for the purpose of gaining entry to that hot new crypto investment opportunity.

Now that you understand the rudimentary concept of how yield farming works let’s dig a little deeper.

If a bank does not have liquidity from lenders then it cannot loan out funds to borrowers. Similarly, a DeFi platform requires digital assets to lend out. So how does it do that?

It stands to reason that liquidity is the lifeblood of a liquidity pool!

In order to attract funds (liquidity) from the LPs, the DeFi platform will develop a mix of strategies that can become very complex and risky.

Remember, the higher the risk the higher the return – there are no exceptions! This is a fundamental concept in traditional finance that also applies to crypto.

To compensate for a given level of risk, DeFi platforms must find an appropriate level of reward that will attract additional digital assets (liquidity) from crypto investors – the LPs.

If the level of reward is too low then crypto investors will deploy their digital assets elsewhere and the existing liquidity pool will dry up and fail.

If the rewards are sufficiently sizeable then liquidity pools stand a better chance of attracting additional liquidity from other crypto investors. However, if the rewards are too high then borrowers may decide that it is too expensive and go elsewhere.

Clearly, there is a delicate balance that the algorithm of the underlying DeFi protocol must maintain to establish deep liquidity in a pool. This may partially explain why there is such a high level of volatility in the yield (APR) offered by certain pools.

You must have noticed by now the large periodic changes in the Annualised Percentage Rate (‘APR’) of certain pools. On occasion, the yield (or APR) might be as high as 200% and a few hours later it may change 30% followed by another spike to 250%. Sometimes these fluctuations are more subtle occurring daily or weekly rather than hourly.

It is also worth noting that the fluctuations in the APR may be due to other yield farmers jumping onto an opportunity, and thereby lowering the returns.

The bottom line is that the level of rewards (i.e. the yields or APRs) that are paid to the LPs must be delicately balanced in a way that is commensurate with the level of liquidity and risk.

Now that you understand the delicate interplay between the yield (APR) and liquidity it should be quite intuitive to you as to why measures such as Total Value Locked (TVL) are seen as an important barometer of the overall health DeFi yield farming.

TVL measures the aggregate level of liquidity in liquidity pools and is a useful measure of the health of the DeFi and yield farming market as a whole.

How do you track TVL?

Defi Pulse is a good place for you to track TVL. It provides an excellent overview of the current state of the yield farming market.

Naturally, the greater the locked value, the greater the level of yield farming activity. It’s worth noting that you may measure TVL in various assets such as ETH, USD, or even BTC. Each will give you a perspective of the state of the DeFi money markets.

How are yield farming returns calculated?

The estimated return that you could expect to achieve is nearly always quoted in terms of an Annual Percentage Rate (‘APR’) or Annual Percentage Yield (‘APY’). Often these terms are used interchangeably

Always keep in mind that the quoted APR or APY on platforms are only estimations.

The risks of yield farming

As you may have understood by now yield farming is very complex. Yield farming strategies may change by the hour and each platform and strategy will have its own rules and risks. Furthermore, the most profitable yield farming strategies are highly complex and therefore more suitable for advanced participants that have a lot of capital to deploy (i.e., whales).

But the risk doesn’t only depend on the complexity of the underlying strategy. Bugs in smart contracts could also result in a loss of your capital. Remember, many protocols are developed by small teams with limited budgets and even in the case of bigger protocols that are audited by reputable auditing firms, vulnerabilities can still be present.

Also remember, these DeFi protocols are reliant on numerous other DeFi protocols (so not only do you have to trust the protocol you deposit your funds into but also all the others it may be reliant upon!).

Risks of Yield Farming vs Staking

Yield farming and crypto staking are not the same. They differ in terms of processes and the complexity of the algorithms.

Yield FarmingCrypto Staking
Yield farming is high risk. You can lose all of the capital invested in a yield farm.

Yield farms deploy complex strategies that may involve collateralization and leverage.

Remember, higher returns = higher risks!.

Crypto staking is risky although when compared to yield farming it is considered to be of a lower risk category.

Basically, with crypto staking, if you are the sole owner of the private key of the staked assets then it is risk-free at token level. However, you will still suffer from underlying price volatility in the crypto you are staking in dollar terms (especially if your stake is locked for a long period of time.)

We have prepared a thorough guide that discusses crypto staking risks in more detail.