Also known as liquidity mining, yield farming is a strategy for achieving high returns on crypto-assets by providing liquidity to decentralized finance (DeFi) protocols. Users participating in yield farming deposit their assets in liquidity pools on DeFi protocols, enabling them to obtain reward tokens in exchange for their participation. These reward tokens can be exchanged for other assets or sold on crypto-asset markets, offering users a return on their investment.
Yield farming has become a particularly popular trend in the DeFi space not least thanks to the possibility of generating high returns. But beware, as it also involves significant risks due to market volatility and the possibility of losses in the event of protocol breaches. It is therefore essential for users to be vigilant.
But what exactly is yield farming? How profitable is it? What are the different methods, and where can you go to learn more about this strategy?
What is yield farming?
Yield farming involves using liquidity tokens to create new smart contracts on decentralized platforms (DEX) based on blockchain technology, in exchange for which users receive a reward in liquidity tokens. This strategy aims to maximize the returns (or “yields”) obtained using these tokens.
Yield farming has become particularly popular with the explosion in the market for decentralized financial protocols (DeFi), which allow users to deposit their assets on a DEX and use them to participate in loans, borrowings, exchanges, and other financial transactions without having to go through a traditional financial institution.
To understand yield farming, it’s important to be familiar with a number of key terms:
- Liquidity tokens: these are tokens created and used within a DEX to represent each user’s share of a liquidity pool. These tokens can be exchanged for other assets on the DEX.
- Liquidity pools: these enable users to deposit assets on a DEX to make them available for exchange. Users who add liquidity to the pool receive liquidity tokens as a reward.
- Smart contracts: these are autonomous programs that run on the blockchain and can carry out transactions without human intervention. They are used in yield farming to create new liquidity tokens.
How profitable is yield farming crypto?
The profitability of yield farming depends on various factors, such as the reward rates offered by DeFi protocols, demand for liquidity tokens, and fluctuations in DEX asset prices.
But the reason yield farming is so successful today is its high profitability, which its annual percentage yield can measure. Where banks offer an average annual return of 0.5% and 1%, yield farming routinely offers triple-digit yearly returns. Of course, these exceptionally high yields are often short-lived and involve considerable risk. But they go a long way to explaining why investors are so interested in this strategy.
Risks: As DeFi protocols are still relatively new, they can be subject to rapid and unpredictable change. In addition, there is a risk of losing funds in the event of intelligent contract bugs or DEX hacking.
The different yield farming methods
There are three main methods of yield farming:
Cryptocurrency lending allows users to lend their digital assets to other people or businesses and earn interest in return. Lending generally takes place on online platforms that take care of connecting lenders and borrowers. It can be used for various purposes: lending one’s digital assets to a company in exchange for interest to finance the development of new products or services, generating additional income, etc.
Yield Farming vs Staking
Cryptocurrency staking involves cryptocurrency holders blocking their assets to receive rewards. It is a process enabling users to participate in the validation of transactions on a blockchain by pledging their assets. In return, they usually receive new tokens of the cryptocurrency in question. Staking is an effective way of generating passive income by earning higher interest than that offered by traditional banks.
Another effective yield farming method is liquidity pools. Liquidity pools involve investors making pools of digital assets available on an exchange platform to facilitate the buying and selling these assets. Liquidity pools are created to provide liquidity in a market and make it easier for investors to buy and sell cryptocurrencies. Users who participate in a liquidity pool make their digital assets available to the pool and can thus collect part of the transaction fees generated by the pool.
The best yield farming crypto platforms
The choice of a yield farming platform should be based on each investor’s objectives, their risk profile and their level of cryptocurrency knowledge. Our in-depth research on the subject has enabled us to select the five most reputable yield farming platforms on the web…
Founded in 2018, yield farming platform Compound has since built a solid reputation in the blockchain world. It offers the opportunity to choose from a wide variety of digital assets to lend or borrow, such as Ether (ETH), Basic Attention Token (BAT), Dai (DAI), and many more. The market determines interest rates and varies according to each digital asset’s supply and demand.
Advantages of Compound:
- Intuitive, easy-to-use application.
- A wide choice of digital assets to lend or borrow, making portfolio diversification easy.
- Particularly attractive interest rates.
- Interoperability with other cryptocurrency platforms
Disadvantages of Compound
- Transaction fees charged for each loan or borrowing
Aave is a cryptocurrency lending and borrowing platform that allows users to generate returns by lending their funds. The Aave platform also offers yield farming for some of its tokens, notably the LEND token. It is compatible with various assets such as USDT, DAI, and BAT. The platform has the advantage of clearly displaying the amount of annual interest.
Advantages of Aave:
- Well-established reputation, with many users.
- Intuitive platform.
- Wide variety of lending protocols and tokens.
- Experienced development team.
- Active community of supporters.
Disadvantages of Aave:
- Potential yield farming returns on Aave vary enormously from crypto to crypto and from period to period.
- Highly dependent on the stability of the Ethereum blockchain.
Yearn.finance is an automated yield farming platform that uses artificial intelligence to find the best yield opportunities for users. It aims to facilitate access to yield farming for beginners. Launched in 2020, the platform stands out for its complex strategies, seeking to align yield with risk-taking to maximize gains potentially.
Advantages of Yearn.finance :
- Use of artificial intelligence to potentially maximize yields.
- Yield farming more accessible for beginners.
- Multiple token choices for yield farming.
- Platform in full expansion.
- Recent platform, with little hindsight.
- Profit AND risk maximization.
Uniswap is an automated exchange platform based on the Ethereum blockchain. It enables users to exchange Ethereum tokens without using a centralized exchange. Uniswap uses an automated protocol called “constant product market maker” (CPMM), which ensures that token prices remain stable thanks to the automatic adjustment of exchange rates. Uniswap offers a yield farming protocol called “liquidity mining”. Users can add funds to a liquidity pool on Uniswap by purchasing liquidity tokens, such as UNI-V2 or UNI-V3. They can then receive reward tokens based on their contribution to the liquidity pool.
Advantages of Uniswap:
- Automated exchange platform: not controlled by a single company, so less prone to manipulation.
- High liquidity: easy buying and selling of tokens.
- No transaction fees.
- Open to new projects, including little-known ones.
Disadvantages of Uniswap:
- Little filtration at project level, so more risk, especially for new projects.
- No fund custody service: users must manage the security of their funds themselves.
- Highly dependent on the stability of the Ethereum blockchain.
Cryptocurrency yield farming: our opinion
Crypto-currency yield farming involves earning returns by lending or depositing funds on a yield-farming platform. This can be an attractive activity for users looking to generate additional returns on their funds. Still, it’s important to remember that it involves risks, and it’s essential to understand these risks before deciding to participate in yield farming.
When it comes to yield farming platforms, Compound stands out. Secure, easily accessible, and reliable, it has a solid reputation in the blockchain world. But others are close on its heels, offering increasingly innovative services such as Yearn.finance and its use of artificial intelligence.
Yield farming is a big hit with cryptocurrency users, who see it as a more secure way to earn interest easily. This activity offers almost guaranteed profits, unlike dal trading, which is far riskier. With yield farming, the significant risk is to witness the devaluation of a cryptocurrency, which would, in any case, have had the same consequences if the crypto in question had remained in the portfolio.
Yield farming is an essential way of earning effortless interest on your assets, generating additional returns without taking on too much risk. However, you should choose your yield farming platform with the utmost care, giving preference to well-established companies such as those mentioned above.
Don’t forget that we also offer investment advice on NFTs.