Decentralized finance, or DeFi, has exploded atop the Ethereum blockchain this year. In doing so, the sector’s top apps, like trading protocols Uniswap and Curve, have never been more used or popular.
In recent months, this DeFi boom has been rapidly accelerated by the arrival of the new hit “yield farming” phenomenon. But what is yield farming, how does it work, and how can you participate?
In today’s post, we’ll be breaking down the ins and outs of yield farming for beginners so you can eventually start harvesting crypto on your own
What Yield Farming Is
DeFi apps are fledgling, and they need users to grow and actualize.
To this end, this year DeFi projects have been increasingly turning to yield farming. This process involves protocols distributing governance tokens to their users to bootstrap activity and incentivize the support of key early stakeholders.
Let’s take the example of major DeFi borrowing and lending project Compound, which rolled out farming around its COMP governance token earlier this year. Compound distributed COMP retroactively to its past lenders and borrowers and offered ongoing COMP rewards to its current ones.
In other words, you could earn COMP — and thus a future say in Compound’s governance — just for using Compound. That’s yield farming in a nutshell.
What You’ll Need to Start Farming
To start yield farming, your checklist is pretty simple. You’ll only need:
And that’s all! Once you have your wallet and ETH prepared, you’ll be ready to move on to analyzing and identifying which yield farming opportunities are right for you.
Finding Farming Opportunities
New yield farming campaigns are popping up everyday at this point. Figuring out which ones are worthwhile to participate in is half the battle.
The good news is that plenty of resources have recently popped up that make this process a lot easier. Some of these include:
Etherscan’s new Yield Farms page offers an unfiltered and extensive list of projects that have ongoing yield farming campaigns.
The yieldfarming.info site provides a curated list of yield farming opportunities as well as detailed wallet-based stats, such as your estimated annual percentage yield (APY) and more
Crypto market data site Coingecko also has a new Farms page that hosts top yield farming opportunities and provides tools like an APY calculator, an impermanent loss calculator, and more.
Keep in Mind APY + Gas Prices
You won’t want to use or participate in a protocol for yield farming without having a general idea of what kind of APY you can expect for doing so. Some of the sites mentioned above are great for this. Here, a few other things to keep in mind:
Yield farming projects will show APY stats for their pools on their own sites. These can be deceptive or confusing at best, so don’t take these stats as the final word.
Pools with high APYs are high risk, high reward. Tread cautiously.
APYs shift over time, as yield farming campaigns typically have different distribution phases and so on. Be aware of how these distributions are set up and change (e.g. dwindling token rewards over a period of 4 weeks).
Then another important consideration is gas. On Ethereum, users have to pay a fee, or “gas,” to have their transactions processed.
Since Ethereum’s DeFi arena is currently booming, demand for Ethereum blockspace has never been higher and gas prices have skyrocketed accordingly.
That said, it can be really expensive to enter and exit yield farming positions lately. Make sure you’re taking into account these gas costs as you try to figure out which opportunities are most feasible for you.
Jumping Into Liquidity Pools
Yield farming centers around liquidity pools. When you deposit crypto assets to these pools, you receive LP tokens (and thus the possible upside of earning a cut of the pool’s transaction fees) in return.
Luckily, it’s never been easier to provide liquidity to the hottest farming pools using DeFi dashboards like Zapper.fi or Zerion. These services let you add your assets wherever you like and essentially with the click of a single button. Then, it’s time for staking.
Staking for Making
Once you have your LP tokens for your farm of choice, you’ll want to go stake them in order to start farming your target project’s governance token. Let’s take Uniswap’s new UNI farming for example.
One of Uniswap’s first four UNI rewards pools is its ETH/DAI liquidity pool. Let’s say you hypothetically get your ETH/DAI LP tokens ready. Then you’d simply head over to Uniswap and follow these steps:
Click on the UNI tab
Click on the ETH/DAI Deposit button
Click on the Stake button
Complete the transaction, and there you have it: you’ll start earning UNI automatically for as long as the farming campaign continues. Moreover, you can follow this same general process when it comes to participating in other farms, too.
Yield Farming for Beginners: yEarn Vaults
yield aggregator protocol yEarn has become a major hit in DeFi because it automates yield farming and makes it simple. One of yEarn’s early stars have been its Vaults, which are DeFi products that let you automatically long the collateral you put in.
For example, consider yEarn’s yETH Vault. You deposit ETH into the Vault, and then the system starts doing its magic in leveraging that ETH. In doing so, you earn more returns in ETH all the while. It’s simple, straightforward, and you don’t have to do anything else besides depositing an asset into the Vault.
yEarn also offers a variety of Vaults, e.g. a yLINK Vault for those wanting to long Chainlink.
The Prospects of Governance Tokens
At the end of the day, yield farmers are farming governance tokens. These tokens can be dumped on the market for immediate gains, sure, but they also offer the chance for holders to own and collaborate on the very protocol’s they use going forward.
This is all quite new territory, not just within the cryptoeconomy but also the world. Governing these protocols is a huge ongoing experiment. It’ll be interesting to see how farming and governance play into each other in the years ahead.
Bitcoiners Can Join In, Too
Just because your portfolio is BTC heavy doesn’t mean you have to sit on the sidelines when it comes to yield farming.
In fact, the most popular farming pool in all of DeFi right now is Uniswap’s ETH/WBTC pool, which currently has over $400 million in Value Locked (VL) according to Coingecko. So here’s what you could think about doing:
Convert some of your BTC to WBTC
Deposit your WBTC into Uniswap’s ETH/WBTC pool
Farm UNI (and sell it for more BTC if you want!)
Beware Risks and Scams
There are many risks around yield farming. First off, don’t go chasing every single yield farming opportunity in trying to find the next big thing. Scammers are popping back up to take advantage of the buzz.
There’s also the risk of bugs, hacks, and impermanent loss (which simply means you would’ve been better off holding your asset, e.g. ETH, rather than serving as an LP for it in a particular pool).
Once you have your head wrapped around these risks, the fields are yours for farming.