Yield farming is one of the prime incentives that pull new traders to the DeFi or decentralized finance world and encourage them to trade in cryptocurrency. With the help of yield farming, one can essentially earn super impressive returns on their crypto investment. Depending on the platform one invests on, one can even find as much as 100-200% APYs offered in the DeFi market! In this post, we explain some yield farming strategies you can use to earn attractive APYs, but first, let’s take a brief look at what yield farming consists of.
In yield farming, a user has to lock their tokens on top of a DeFi platform- which can be done by
In return for their investment, users are rewarded by the various platforms they chose to ‘yield farm’ on. As for the aforementioned liquidity pools, they are simply smart contracts on DeFi platforms that let users exchange one crypto token for another for a minimal fee. Liquidity pools are one of the root components of decentralized finance; they are permissionless and require no intervention from any centralized figure or institution to conduct these transactions.
Liquidity pools need LPs, or liquidity providers, to lend liquidity to them. Therefore, users can lock up a portion of their holdings of a certain coin in a liquidity pool to earn excellent returns after a certain period of time. LPs of course receive a percentage of the transaction charges the pools accrue from all users- that is, in proportion to the amount of liquidity they supplied. Rewards are earned in LP tokens, native crypto tokens, or both.
Yield farming has a good number of benefits, including but not limited to:
There’s a lot of ways to earn profits with yield farming; however, you do stand to lose part or all of your investment if you are not careful or knowledgeable enough. That’s why, in this section, we take a look at some yield farming strategies, so you can decide how you want to go about your investment.
The native token on a yield farming platform can be of either of the two basic types- endless supply tokens, or fixed supply tokens. While endless supply coins must keep up a burn mechanism to keep the price at a healthy level, fixed supply platforms have to find a good enough use case for their native coin so as to create a buy pressure to lessen the instantaneous dumping for profits. Purchasing a DeFi platform’s native token and staking it up for rewards is, despite being an incredibly risky approach, a strategy that provides the most exposure to that particular protocol’s success and no issues regarding impermanent loss (the price of a token changing after depositing it in a liquidity pool).
Stablecoin farming is a quite safe way to have some exposure to the success of a platform. Usually, DeFi platforms need some representation of the USD so as to let traders exit their speculative positions. Therefore, stablecoins are present in liquidity pools on any DeFi platform. What’s more, a volatile token is usually combined with a stablecoin in a pool to halve the exposure to the asset. Now, if the volatile token’s value goes up, the liquidity pool would need to sell more of the volatile token to maintain a 50/50 value ratio between both coins in the pool. You would thus end up with less of volatile coin and more stablecoin. This is a good yield farming strategy if you want to acquire USD on a token you believe would go up in value.
This one of the yield farming strategies mentioned here would be utilizing stablecoin + stablecoin LP tokens, and while that won’t provide as many returns as any of the two mentioned above, it would still be much more than a traditional financial investment. In the case of a dual asset stablecoin LP token, both assets are almost the same despite the varied stabilizing mechanisms. Therefore there is an almost ignorable impairment loss, providing you very little exposure to any price movements.
On Delta Exchange, you can trade in derivatives and earn passive income on the crypto you already own. Further, on Delta Exchange, you can perform yield farming through options!
The future of yield farming already looks bright with newer innovations and trading strategies being brought into the field every day. It’s never too late to join in on the fun, but do remember to conduct proper research and be aware of all the associated risks before you do so!
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