Yield Farming Basics and Ten Platforms to Consider

Yield Farming, at first, was the most overwhelming thing in crypto I have gotten involved with.  Honestly, the concepts are relatively simple but my mind needed to go over the concepts many times to fully grasp them and for me to be somewhat comfortable jumping in.  In reality, I'm not sure if it is any more difficult than mining crypto or dealing with nodes, perhaps those high APYs made it seem just to scary.

At its most basic level, yield farming is simply using DeFi (Decentralized Finance) to maximize crypto rewards.  It is a way for your crypto to earn more crypto.  It is akin to lending your crypto to others and earning rewards via a smart contract.  For me, it really revolves around being a "Liquidity Provider" or simply staking two cryptos to provide liquidity so others can swap in and out of the coins.  I get rewarded with a percentage of the transaction fees and via other rewards including interest from lenders and governance tokens.  Staking, lending and borrowing can be forms of yield farming but those are fairly straight-forward methods. 

A liquidity pool can be something like ETH/USDT where you are lending an equal amount of both Ethereum (ETH) and Tether (USDT).  When other people exchange one of these two cryptos for the other, it generates transaction fees in which you get an equal part based on your overall percentage of liquidity (amount of LP tokens) provided.

My biggest concern when getting started was "impermanent loss", a term I heard over and over and sounds a bit scary.  Since you typically hold two different coins or tokens, impermanent loss occurs when there is a price fluctuation between the coins after you initially start with an equal dollar value of both coins.  Price changes can mean you lose out on the gains if lets say one of the coins goes up in value as you will now have a different composition of coins in order to keep the pools overall ratio 50:50.

That said, you only truly lock in an impermanent loss when you exit the liquidity pool so it is like gains or losses on crypto that are only on paper until you actually convert it to something else.  There are strategies that can be used to offset this like using two stable coins or coins/tokens that will move more in unison to one another like a coin paired with its wrapped version ( for example ETH/WETH).  The downside pairing coins that don't mover together, is you could end up with a lower total value than if you would have simply held onto the coins in the first place - or impermanent loss - but that can be offset by the rewards gained as well.

Ten Yield Farming Platforms to Consider

Picking the best yield farming platform for you depends on what you find most important in terms of features, risks and rewards.  There are many items to consider such as which blockchain does the the platform sit on, how much Total Value Locked (TVL) exists within the platform, the number of different pools (coin pairings) offered, fees (both deposit fees and transaction fees), the reward payouts in the platforms native token or other coins, the APYs or returns offered by the pools, potential impermanent loss, and all the different utilities and features offered within the platform.   

The platforms listed below are among the biggest and most well known in the yield farming world.  There are many other newer options, however, those require quite a bit of research before becoming a user.  These platforms can susceptible to hacks and fraud due to vulnerabilities in the protocols’ smart contracts so I'm steering clear of these below.  You will find a link to each platform (none are referral links) as well as the coin market cap link to the associated native token.  These are listed in alphabetical order.

AAVE (AAVE) - is a decentralized, open-sourced, and non-custodial liquidity protocol built on Ethereum.  AAVE offers one of the largest stablecoin yield farming platforms available.  Its AAVE coin is used for governance voting power like many others, but also can be used to save on fees within the platform.  Being open-sourced allows any third-party service or application to interact with the protocol.

Anchor Protocol (ANC) - is a decentralized finance (DeFi) platform built on the Terra blockchain protocol.  It is known for its high staking interest rates including UST (Terra’s U.S. dollar-pegged stablecoin) where depositors are rewarded with a 20% APY.  This is really the platforms sweet spot in the yield farming space.

Beefy Finance (BIFI) - is a decentralized, multi-chain yield optimizer that allows its users to earn compound interest on their crypto holdings.  The platform automatically maximizes the user rewards from various liquidity pools ,‌ ‌automated market making projects,‌ ‌and‌ ‌other yield‌ farming ‌opportunities in the DeFi ecosystem.

Compound Finance (COMP) - is really where yield farming all started in June of 2020 when the platform first offered their COMP token.  It is a is an algorithmic, autonomous interest rate protocol built for developers in order to unlock a world of open financial applications.  

Curve Finance (CRV) - is the largest yield farming platform based on Total Value Locked.  Curve  is a decentralized exchange liquidity pool on Ethereum designed for extremely efficient stablecoin trading.  The popular automated market maker platform offers a highly efficient way to exchange tokens while maintaining low fees and low slippage by only offering liquidity pools made up of similarly behaving coins/tokens thus reducing impermanent loss probability and overall risk. 

Osmosis (OSMO) - Osmosis is a decentralized peer-to-peer blockchain that people can use to create liquidity and trade IBC enabled tokens.  It is a automated market maker, which is built on the Cosmos blockchain network.  There are some exciting things happening on this blockchain so I've included it on the list. 

PancakeSwap (CAKE) - is similar to Uniswap below, however, it is the largest yield farming platform on the Binance Smart Chain and has the most users of any decentralized platform.  The transaction fees are lower than those on Ethereum and PancakeSwap has some gamification-focused features such as guessing the price of the BNB coin.  It also has interest earning staking pools and NFT options.

SushiSwap (SUSHI) - is a software platform running on the Ethereum network seeking to incentivize users to operate a platform where users can buy and sell their crypto assets. Similar to the other platforms listed, SushiSwap uses a collection of liquidity pools to help it achieve this goal.

Uniswap (UNI) - is a very popular platform that allows for trades with no trust built on the Ethereum Network.  Risks in their liquidity pools include market fluctuations resulting in impermanent loss and smart contract failures.  Their native UNI coin has the highest market cap of any yield farming coin and is the only one ranking in the top 25 overall.

Yearn Finance (YFI) -  is a yield farming platform with an intuitive interface.   Yearn is a decentralized ecosystem of aggregators offers group of protocols running on the Ethereum blockchain that provides lending aggregation, yield generation and insurance for its users.

Final Thoughts

Yield farming can be complex and confusing to the novice and those with some crypto experience as well.  Please be careful to not put in more than you can afford to lose.  I allocate a certain amount of my personal "risk capital" to it because I enjoy learning in the crypto space and it can offset down markets by earning returns on transactions and other activities.

I would suggest doing a lot of research on yield farming in general and then dig deep into a couple of different platforms before investing.  Start small and learn as much as you can because yield farming is a high risk high reward venture.  

Everyone involved has their favorites - what are yours?