Yield farming can make you rich if you’ve got the appetite for risk. Here’s how.
Imagine if you could grow your money without putting in too much work. That’s the allure of yield farming, a coveted source of passive income among cryptocurrency enthusiasts. As Daniel R. Hill, President of Hill Wealth Strategies, sums it up, “Cryptocurrency that would normally just be sitting in an account is instead lent out in order to generate returns.” Farmers lend or stake their cryptocurrency by placing it into a liquidity pool of a decentralized application, or dApp as they are popularly known. From there, the dApp gives out the currency to borrowers, who have to pay it back with interest. This process is facilitated by smart contracts.
Additionally, in return for them locking up their cryptocurrency into a dApp pool, farmers receive incentives, including governance tokens, interest on their assets and a part of the transaction fees. These returns are dubbed as the “annual percentage yield” (APY) and play an important role in luring yield farmers or investors. Hill adds, “As crypto becomes more popular, yield farming will become more mainstream. It’s a simple concept that has been around for as long as banks have existed and is just a digital version of lending with interest for profit to the investors.”
Given that, we look at the top crypto platforms for those interested in yield farming and how profitable it really is.
What are the best platforms for yield farming?
While most yield farmers switch from one platform to another, or prefer dipping their feet in multiple at a time, here are some of the most popular picks:
1. PancakeSwap
At the time of writing this article, PancakeSwap has the highest APY (of 1065871.07% yearly) according to CoinMarketCap. It is a decentralized exchange (DEX) on Binance Smart Chain that lets you stake cryptocurrency and earn CAKE rewards. You stake two tokens in exchange for liquidity provider (LP) tokens that you can stake further to earn rewards, such as more tokens or lottery games.
2. Curve Finance
As of July 2021, DEX Curve Finance, or Curve.fi, offered an APY of 21%, which attracted farmers to stake on the platform. Located on Ethereum, the platform was launched in January 2020 and is known for providing rewards, such as more native tokens and voting powers. Bolstered by its stablecoin liquidity, the platform has grown in popularity with farmers staking across the many Curve pools, like Compound, PAX and more.
3. UniSwap
UniSwap is another popular DEX for yield farming. It’s a protocol that allows you to swap ERC20 tokens on the Ethereum blockchain. It uses an automated market maker (AMM) model, which means there is no order book. Instead, it relies on liquidity pools that consist of users’ cryptocurrency assets. When you deposit your tokens into the pool, you become a liquidity provider (LP) and earn a share of the trading fees. UniSwap also has its own token, UNI, that you can stake to earn more rewards.
4. Venus Protocol
Launched in October 2020, Venus is a renowned stablecoin protocol on Binance Smart Chain. It is dedicated to the lending and borrowing of crypto assets in exchange for interest. The best part is that users can unstake their crypto funds at any time to invest in other projects. So, if the project you are invested in turns out to be a dud, you can quit. With the native token XVS, you also get voting rights with which you can decide on product improvements, new collateral and more.
5. Aave
With a market worth more than US$3.4 billion in February 2022, the open-source liquidity protocol Aave is among the most well-known platforms for yield farming. Based on Ethereum, you convert the coins to Aave’s native token, AAVE. Then, you can use this token for staking and lending. You also get to pick a stable rate of interest which will be different from the fluctuating rate, thus boosting your returns.
Is yield farming profitable?
Like with most things in cryptocurrency, it depends. While yield farming can help you earn 1,000% APY, it can also be terribly risky. For one, there is no accounting for cryptocurrency’s constant volatility. The price of your pegged tokens might rise and fall at any time and will affect your overall yield. Additionally, you can become the target of frauds and rug pulls (read: PancakeSwap getting hacked in 2021).
There’s also the case of smart contracts being susceptible to bugs, thus affecting your yield farming experience. Moreover, the continued lack of regulatory clarity in the cryptocurrency market still leaves gaps in its safety. The Vice-President of Marketing at smart contracts platform Ava Labs, Jay Kurahashi-Sofue, advises, “It’s all about minimizing the risk enough for you to be comfortable with using them, based on your own research. Users should always look into the team behind the application and its transparency and diligence with security audits.”
In the end, if you can bear the risk and afford to have a high stake, yield farming can prove extremely lucrative for you.
Header Image by Flickr
Note: This article is not to be construed as financial or investment advice. It is for informational purposes only.
