What is Yield Farming? Details of this High-Risk DeFi Practice

2022-06-06, 16:21

What is yield farming? Yield farming is the crypto strategy where investors make use of several different crypto platforms to maximize their asset-allocation investment returns.

What skills does a yield farmer need?

Patience to research projects and platforms for their safety and return potential.

High-risk appetite as yield farming is extremely volatile and perilous, even for crypto standards.

Able to be quick on the trades/swaps and efficiently multitask with precision to avoid any human error that may arise from switching platforms.

Pros and cons of yield farming

Pros

The possibility of really high earnings

Flexible and available regardless of market sentiment

New opportunities always around the corner

Cons

Very active investment strategy, not passive at all

Really high risk

New opportunities is also a con, as you are never satisfied with just one framework

Most popular yield farming platforms

1inch

AAVE

Balancer

Compound Finance

Convex

Curve Finance

PancakeSwap

SushiSwap

Synthetix

UniSwap

The world of Decentralized Finance (DeFi) is one full of investment opportunities and decentralized crypto services where investors can make the most out of their portfolios. The most popular one is of course staking, where holders usually lend their assets to the platform with the intention of earning passive income while also benefitting from a few perks depending on the project - airdrop and governance rights, for instance.

The second most popular DeFi strategy, which mixes several different services and platforms, is Yield Farming. In this article, we summarize everything about crypto yield farming; what it is, the required skills, its pros and cons and the main platforms to utilize this novel passive income strategy.

What is Yield Farming?

In a nutshell, yield farming is the crypto strategy where investors make use of several different crypto platforms to maximize their asset-allocation investment returns. Usually, such strategies are executed in the form of lending and borrowing assets - users borrow or lend their cryptocurrencies to optimize their profits through several decentralized apps (dApps). There is no such thing as one single Yield Farming strategy; they can range from very simple to extremely complex. There is a general consensus that practitioners have; yield farming is extremely risky, even for the educated crypto investor.

In order to earn the most out of their crypto, yield farmers hunt for protocols that are offering the most APY out of the cryptocurrencies they are interested in. It’s not uncommon for yield farmers to hop from platform to platform buying and lending assets that provide Annual Percentage Yields (APY) or Annual Percentage Rates (APR, does not compound) of 200, 500, sometimes over 1,000%. There are often ludicrous offerings of very small crypto projects that offer APYs and APRs of over ten thousand per cent per year.

What skills does a Yield Farmer need?

Much like any investment strategy, there are several skills that a yield farmer needs in order to conduct their operations. It’s important to note that none of these qualities is a guarantee of success, but you will definitely need them if you want to get anywhere in such a volatile environment.

Patience to research

This is the biggest quality a yield farmer, or really any investor, should have; the patience to research the projects that they are investing in. When it comes to yield farming, however, this quality takes a much higher position of relevance. That’s because the projects and platforms that offer the highest yield are usually young and not yet popular amongst the crypto communities. Therefore, it is the yield farmers’ job to deeply research and understand if they are not at risk of security breaches, algorithmic failures, hacks or worst of all - rug pulls.

High-risk appetite

Yes, the crypto market, in general, is already high-risk compared to traditional investments such as stocks and real estate. However, even the general crypto market’s volatility pales in comparison to how risky yield farming is. Strategists are not only at risk of hacks, breaches, rug pulls, or even how volatile these assets and platforms are. They can also make incorrect transactions or use the wrong wallets when trying to take advantage of different dApps - which brings us to the third skill.

Quick, yet precise

An odd mixture for sure; patience to research yet quick at the same time. While yield farmers have to be certain of what they are investing in, they must have the ability to continuously multitask between platforms and know when to let go of particular assets. They also must make sure to be using the correct wallets and platforms to transfer assets at all times; misplaced transactions in yield farming are just as common as bad investments. Needless to say, this is a very stressful practice and definitely not for the faint of heart.

Pros and Cons of Yield Farming

Pros

The possibility of really high earnings: That’s a no-brainer. Like any other investment with really high risks and volatility, the possibility of making large gains are equally present. Successful yield farmers can expect to often double or triple their initial investment in a matter of weeks or even days.

Flexible and timeless: Yield farmers don’t care if the market is bearish or bullish, and it doesn’t really matter what project they are investing in. What matters is the possibility of high gains and if the assets/platforms are safe. Yield farmers can farm anywhere, at any time.

There is always a new opportunity around the corner: Yield Farming can be quite exciting, as their research will show that there’s no such thing as “running out of options.” Farmers have and will always find something new.

Cons

There is nothing passive about it: While APY and APRs reference passive income, yield farming is almost as active as trading; you are constantly shifting between different platforms and protocols, with the extra worry of using the proper wallets and platforms for each strategy.

Really high risks: Forget crypto volatility and investing in small projects; yield farming is the real deal when it comes to risks. As previously mentioned, farmers have to worry about several layers of the investment process that range from security concerns to bad strategies and down to just plain simple human error.

Again, there is always a new opportunity around the corner: That’s both a pro and a con, as you will most likely never be fully satisfied with one particular yield farming strategy. As it goes with other financial strategies, constantly hopping from one structure to the next because of greed almost always leads to loss.

Most popular yield farming platforms

We cannot recommend the particular details of each platform because, as determined, yield farming strategies and how to best implement them depend solely on the farmer and each one has its own perspective on how to make the best out of these dApp portals. With that said, here are the most used dApps for yield farming:

1inch
AAVE
Balancer
Compound Finance
Convex
Curve Finance
PancakeSwap
SushiSwap
UniSwap
Synthetix

Author: Gate.io Researcher: Victor Bastos
* This article represents only the views of the researcher and does not constitute any investment suggestions.
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement.