Yield Farming has been a buzzword in the cryptocurrency community and in the blockchain world in general. Yield farming really emerged when the community witnessed investors make annual profits (Annual Percentage Yields – APY) in excess of 100% on the Compound platform.
Profits earned through Yield farming, abundant as they may seem, in fact, come from many factors and also come with many risks.
The following article is the must-read guide for beginners to learn how to increase profit per year by at least 100% from cryptocurrencies.
Moving on, let’s talk about the focus of the article. That means it’s time to answer the burning question you all have been asking – What is yield farming?
A Brief Introduction to DeFi
When learning about Yield Farming, first we need a little bit of background information about DeFi – a very hot topic recently. DeFi refers to the covering financial products operating on Ethereum. These products are implemented in the form of code (smart contract) and this code is deployed on the Ethereum platform.
Some of DeFi’s famous products are products to swap between tokens, for instance: Uniswap, or a Vietnamese product called Kyber network.
In addition to the above platforms, there are other services that have emerged on the Defi wave recently, such as:
- Crypto lending and borrowing platforms such as Compound, Aave (widely used in the UK)
- The stable coins correspond to the USD, Euro …
- PoolTogether no-loss lottery
It can be seen that the current DeFi products are not merely swapped tokens but have expanded a lot and will grow more in the near future.
What is Yield Farming?
Yield farming is a form of profit from the use of DeFi applications, the yield is usually brought about by providing liquidity to platforms. These rewards often come from exchange costs on platforms (Uniswap, Kyber network), interest rates (lending), and also from paid tokens (sometimes this is what makes up the majority of profits).
How to make a profit from Yield Farming?
In the DeFi platform, there will be a lot of farming protocols. Having that said, in this section I will introduce some of my favorite methods, from simple to complex.
The first and simplest is to provide liquidity to Automated Market Maker (AMM) platforms – This is a platform that allows users to switch between Cryptocurrencies. Each transaction on Uniswap costs a 0.3% fee, which will be transferred to your Liquidity providers – So in order to profit from this platform, we must become Liquidity providers.
So what are Liquidity providers? These are the people who provide the liquidity for large pools. In the case with Uniswap, with ETH-DAI trading pairs, the ETH or Dai providers will be Liquidity providers, who will split the fee when trading pairs between ETH-DAI are made.
This is the simplest and also least risky method in Yield Farming, suitable for those who want to keep tokens long term.
Farmers have many ways to increase the yield. By finding the difference between lending and borrowing in the two platforms, they can both get a bonus token amount and interest in lending. A most basic example with 2 lending & borrowing platforms is Compound and Balancer. Some people have realized that the profit paid when lending on Balancer is higher than the interest paid when borrowing on Compound -> Thanks to this difference, they have just got the difference in interest and COMP ( tokens are generated when lending or borrowing on Compound).
The use of leverage is expanded on the Compound platform to be able to recoup COMP tokens because lending and borrowing on Compound are rewarded with COMP tokens.
Note: COMP token has increased in value from $ 60 to $ 330 in just 1 week
Using leverage on Compound can be explained simply with the following steps:
- Provides USDC lending (lending)
- Borrowing USDT from the amount USDC just provided
- Swap from USDT to USDC
- Continue to lend USDC
- Get more loans from USDT from USDC just lending
Just like that, the user can repeat the above steps many times. The number of COMP tokens collected can be 30 times as much as simply lending in step 1.
However, this method was stopped by Compound.
Most of the current Defi platforms offer compensation tokens, so it is a strategy that is to make a profit from staking new tokens farmed on different platforms. This method can be simply explained as being able to generate different tokens from a single liquidity supply thanks to the platforms:
First, with the Curve platform, this is a place that allows users to exchange BTC types on ETH (sBTC, wBTC, renBTC). By providing liquidity to the platform, users will gain newly born tokens, CRVs, and pool fees.
Staking Curve LP Tokens: After acquiring CRV tokens, this amount of tokens can continue to staking on the Synthetix platform. Thanks to this staking, we are getting new tokens REN and SNX.
Balancer: The final bet is that we can easily get BAL tokens from staking the amount of REN and SNX obtained from the above step.
After a chain above we have obtained a significant amount of tokens while only providing a certain amount of liquidity are BTC on ETH. However, there is a risk that users will have to balance cost and price volatility between the amount of liquidity initially provided (BTC on ETH) and the value of the newly generated tokens.
Risks of Yield Farming
Farming risks can come from technical issues such as:
- Error on smart contract
- Error on Oracle
- Rate of change
Smart contract risk
As mentioned, Defi products have the advantage that there is no need for 3rd party intervention, everything is executed by code (Executed on smart contract), so it will potentially error when the smart code. the contract is not carefully audited. These can be mentioned as Daos on ETH or a recent incident that caused the YAM token to drop by 99% because the smart contract’s code forgot a division, which made the number of tokens generated much larger than expected.
To prevent this threat, we need to audit the smart contract code before running them on the main net, there are a number of reputable audit organizations that can include:
- Trail of Bits
Error on Oracle
Oracle is the point that connects smart contracts with real-world information, so hackers can take advantage of Oracle’s latency on the prices of cryptocurrencies to benefit.
To prevent this problem, people are using Oracle of Chainlink, this is a relatively stable oracle and the token price is aggregated from many different major sources.
Rate of change
Although staking on Defi platforms is very flexible in depositing because the account is not locked at all, with the fierce exchange rate with the coin market (maybe down a few tens of% in 1 2 candles), withdrawal from Staking platforms will also be a bit difficult in cases where real loads need to be sold quickly.
These are risks that not only Defi but any economy will face, these are risks that cannot be expected. For example, the corona epidemic has also had a huge impact on the crypto market.
Above are the methods I have come up with to be able to increase the profits from Yield Farming and the risks that each platform brings. I hope this has given you enough information and background knowledge on the topic, as well as give you the basic guide to safely invest in Yield Farming.
Now, let’s go get some money from DeFi!