Crypto token yield farming

Decentralized finance (DeFi) is more popular than ever. Since last year, blockchain-based DeFi crypto assets have reached $95.28 billion – nearly triple the $32 billion in 2021. The largest market share, 17.8% (according to DeFi Pulse), went to the Ethereum-based Maker protocol.

A special strategy of return on investment is one of the main incentives for such active development of this sector. It is this that attracts such a large number of users.

But to begin with, it is worth recalling that the biggest bonuses from platforms are received by the owners of the so-called management tokens. They give to their owners the right to vote when choosing the direction of the platform’s development. There are many ways to use this opportunity. However, governance tokens impeded the development of yield farming and liquidity mining.

What is yield farming?

Using decentralized finance (DeFi) to make big profits is yield farming. To make significant earnings on their chosen DeFi platform, users often lend cryptocurrency and make money from providing their own services. Or users can earn by constantly flipping their currency from one platform to another.

Yield farms are different ways for token holders to get the most plushies and rewards from DeFi platforms. Such users can also provide liquidity to different pairs of tokens, for which they receive rewards in crypto.

Yield farming is associated with many risks. Smart contracts can get hacked, the price of crypto is extremely volatile (can change dramatically and quickly), and other nuances.

How does yield farming work?

Investors earn income from a decentralized application (dApp) by investing in coins or tokens. Among dApps, you can find cryptocurrencies, decentralized social networks, DEX (Decentralized exchange – a peer-to-peer (P2P) marketplace where transactions occur directly between crypto traders.), and others.

Yield farmers typically need DEXs to lend, borrow funds, or place coins, which are then used to earn interest and speculate on price fluctuations. At DeFi, this process is automated thanks to smart contracts, which allow financial agreements between two or more parties to be executed without intermediaries.

Types of yield farming

Liquidity providers can place coins on the DEX to provide trading liquidity (A liquid asset can be defined as an asset that can be exchanged very quickly for money.) Exchanges charge a small fee for exchanging two tokens, out of which a fee is paid to liquidity providers. Sometimes the reward can be paid in the form of new liquidity pool tokens (LPs).

Owners of coins or tokens can lend their cryptocurrency to borrowers via smart contracts. They then receive income from the interest that the borrower pays on the loan.

Stakes. DeFi has two forms of them. The most common is the consensus proof-of-stake blockchain, where the user is paid a percentage for putting their tokens into the network and leaving them to maintain security. The second form is a bet on LP tokens earned by providing liquidity to DEX. In this way, the user makes twice: they are paid in LP tokens for providing liquidity, which they can use to gain more money.

Risks of yield farming

There are risks everywhere. Therefore, investors should weigh the pros and cons before starting work. Fraud, hacks, and losses due to volatility are common companions of profitable farming. Therefore, those wishing to earn in DeFi should choose the most reliable platforms to work with. Which one is most suitable depends on your selected yield (we wrote about them above).

But there are still many pitfalls. So before you get into yield farming, we recommend familiarizing yourself with the possible advantages and disadvantages.

Pros

• Decentralized income farming is open to everyone and is completely independent of the beliefs of the parties involved.
• Numerous apps and exchanges allow you to participate in yield farming.
• All you have to do to start yield farming is to have a cryptocurrency and a wallet.

Cons

• Profitability can be erratic.
• Profitable strategies can be too complicated for beginners.
• When working with Ethereum-based blockchain networks, you must unbundle a large gas fee when making transactions.

Why is yield farming so hot right now?

Liquidity mining increases the profitability of farming. Liquidity mining is when a mining farmer receives a new token and the usual profit (aka mining) in exchange for liquidity. Thus, incentivizing the use of the platform increases the token’s value, attracting even more users. But these are just a few examples.

The liquidity of Compound or Uniswap allows a small fraction of the business that runs on these protocols. 

But Compound announced in 2020 that it wants to transfer a large share of ownership to the people who have most actively used and popularized the platform through the COMP token. As of September 12, the token is worth $54.32, with developers and big investors owning more than half of the equity. 

Until 2024, Compound will give users a fixed number of COMPs daily until they run out. These tokens control the protocol just as shareholders of publicly traded companies do.

Compound’s protocol controls the number of tokens issued according to how much money the user has borrowed or lent. COMPs are awarded proportionately to the user’s share of total business for the day.

In 2021, COMP was worth more than $900. 

Yield farmers are finding ways to add up returns and even earn multiple management tokens at once

According to some, its high price was due to the small number of COMPs freely traded on the market. But since then, the price has fallen 16.5 times).

The crypto market almost always imitates successful projects. So Balancer became the next Compound protocol, with a BAL governance token. It was then followed by flash credit provider bZx and Curve.

Eventually, most notable DeFi projects will announce sooner or later they will start issuing some kind of coin that can be mined by providing liquidity.

Best yield farming crypto platforms

We’ve selected the five most reliable and popular DeFi platforms for yield farming in 2022. Each has its strengths and weaknesses, offering different annual percentage yields and transaction fees. 

Here they are:

• PancakeSwap (CAKE) is a DEX exchange launched in 2020, powered by Binance Smart Chain. Two tokens must be placed to receive farm yields. For this, the user gets LP tokens. The platform has several different farms to choose from. With LP tokens received in exchange for depositing tokens in their liquidity pool, it is possible to receive rewards in the form of CAKE tokens. As of September 12, its value is $4.53.
• Uniswap is one of the largest DEX and DeFi platforms. Users can earn interest on their crypto holdings through liquidity pools. Uniswap is based on Ethereum and allows a member to exchange ERC-20 tokens. Gas fees can be quite high, but you don’t need identity verification or registration to use the app.
• Curve Finance is an Ethereum-based decentralized exchange created to trade cryptocurrencies of equal value efficiently. Liquidity providers receive high annual interest rates. The platform has informative columns with different APYs (annual percentage yield) that can be obtained by providing liquidity to each pool or asset.
• Aave is a cryptocurrency lending protocol whose users can earn interest on deposits and borrow assets. For depositing stablecoins on the platform, you can achieve yields ranging from 4.78% to 13.49%. It can be added to income through the AAVE Stab Fund. The credit pool is open source so that developers can customize it to their preferences. The cost of AAVE is $93.45.
• SushiSwap. This decentralized exchange uses an automated market maker (AMM) to trade cryptocurrency tokens between users. Liquidity providers receive SushiSwap Liquidity Pool Tokens (SLP) for providing their assets. You can also get revenue from swaps, liquidity pools, stacking, and more.

Before you start, check how much will be blocked on each of these platforms to see where it will be safer and more profitable to receive your interest.

Bottom line

If you have tokens, and you don’t intend to sell them, you can put them into business and earn an annual income. For best results, beginners should diversify their portfolios (that is, get hold of different tokens).

Income farming is quite a risky income strategy, but the risks pay off with high returns and the potential for large profits on an ongoing basis.

The most reliable and large cryptocurrency platforms allow you to earn interest on idle digital assets in various ways. Investors can choose the one that suits them best.