Investors with a strong desire to use capital as efficiently as possible often gravitate toward proactive financial products allowing them to increase earnings and influence potential returns instead of relying on fixed rates offered by conservative instruments like bonds and, to a certain degree, staking platforms. Yield Farming requires capital holders to be involved in the money-making process and rewards them for smart decisions.
The volatile nature of the crypto market forces conservative investors interested in novel asset classes to remain very cautious and abstain from trading when conditions become too uncertain. Recognizing this limitation, many DeFi (decentralized finance) platforms started focusing on promoting staking as a good choice for token holders to support blockchains and earn rewards simultaneously.
The shift toward more energy-efficient proof-of-stake consensus protocols is apparent in the current landscape of the crypto industry. PoS is better for the environment and easier for investors without technical know-how to participate in.
Staking and crypto farming vs mining is not even a fair fight. Miners have to pay sizeable chunks of their capital upfront to purchase highly specialized hardware and software that do not have a strong secondary market. Electricity costs also affect returns.
Staking has several advantages:
With APYs ranging from 5% to over 50%, it seems that staking is a perfect choice for anyone. Why does yield farming in cryptocurrency attract so many investors?
First, we need to address some risks associated with staking:
You may build a source of passive income with crypto farming to counteract some of the risks. For example, slashing is less impactful and you don’t have to limit returns to just fixed rates.
Yield farming is an adventurous approach to investing as it involves taking on debt or locking up funds for prolonged periods to earn much higher returns compared to just staking available tokens. Since many DeFi platforms require liquidity, they are willing to offer competitive rates just to keep investors happy.
One of the simplest examples of this investment strategy is the use of borrowed funds to increase a staked position. It is known as leveraged yield farming. You can also borrow funds against a stake by using it as collateral. Most methods involve taking on debt in one form or another. This means that yield farming is inherently risky for inexperienced users.
Despite the dangers of using this investment approach, its popularity keeps growing thanks to several factors:
The idea behind hunting high yields is that an investor can effectively double or triple potential earnings by increasing the size of their stake. Searching for the best rate is quite important and investors quickly switch platforms when they see advantageous conditions somewhere else. Since many DeFi protocols allow users to keep their funds liquid via LP tokens, it is quite easy for many experienced capital holders to jump ship whenever they want.
You must be flexible to keep earning more than what you would have if you simply staked tokens directly on layer 1. Seeking opportunities and regularly reassessing your portfolio is a skill that you must perfect to be a successful yield farmer.
Here are tips to learn the basics:
An average yield farmer is an undergraduate male under 34 years living somewhere in the US or Europe. This image painted by soulless statistics is quite telling. These are adults entering their prime earning years. They are interested in investment opportunities capable of generating life-altering returns.
Users of DeFi protocols have access to a wide range of yield generation including:
One of the most popular approaches in this field is to farm yields on specialized DeFi protocols that allow users to use LP tokens and stake them to further increase gains. Below is a simple step-by-step instruction.
Note that this particular system has significant vulnerabilities that a newcomer must be aware of:
The issue of perpetual inflation is still unsolved. If you want to engage in this investment strategy, you have to remember that switching platforms and monitoring the market have to become habits. This way of generating income is not a laidback experience.
Getting started is not too hard even for complete newbies. One thing that you must remember is that some DeFi protocols are compatible with specific software wallets. For example, all Dapps deployed on the Ethereum blockchain allow users to connect through MetaMask.
Here are the steps you need to take to become a real crypto farmer:
A successful investor must acquire some specific knowledge and skills to navigate the world of crypto without any issues.
Here’s what you need to learn:
Remember that this investment strategy should be included in a portfolio that includes different classes of assets. Ideally, you should have real estate, bonds (fixed return rate investments), stocks, cryptocurrencies, and stakes. Unfortunately, the vast majority of contemporary retail investors do not have the resources to cover so many types of holdings.
The crypto industry allows its participants to diversify within the isolated ecosystem by spreading capital across an assortment of financial instruments including:
We hate to bring the bad news, but it is close to impossible to build a reliable source of passive income using only yield farming. Focus on creating a balanced portfolio that can produce consistent returns instead of relying on a single strategy.
The biggest question a conservative investor must ask themselves is whether engaging in yield farming brings more to the table than simply staking tokens in L1 blockchains. The devil is in the details. Here are reasons to pick the former rather than the latter:
Otherwise, it is a much better idea to stick to safer options and hold long market positions on established coins like $BTC, $ETH, $USDT, and others.
Before we dive into our list of the best yield farming platforms in 2024, let’s sum up the advantages enjoyed by their investors:
We can also mention global reach, 24/7 schedule, and the ability to engage in governance as additional perks.
Making the right choice is the first step toward success. We do not want to sway you toward one option or another. These are platforms that offer competitive rates, reliable infrastructures, and caring customer or community support.
This DeFi protocol is deployed on the Ethereum blockchain and works with all ERC-20 tokens (Ethereum’s native smart contract standard). We have mentioned before that over 50% of Uniswap liquidity providers lose money. The cool part about this statement is that the other half of users don’t. UniSwap offers dynamic rates that can be calculated using services such as APY.vision.
This platform is quite reliable and has been around for a while earning itself a good reputation among crypto enthusiasts. Despite the lack of transparency, it is a good choice for people who are interested in yield farming.
Yearn.Finance is deployed on the Ethereum blockchain and has a massive digital infrastructure. One of its flagship products is yield farming using a variety of instruments including Vaults, Vaults 2.0, Gimme, yETH, and ePRISM among many others.
Unlike many other tokens, $YFI has not lost value since its launch and continues trading at healthy prices to this day. As of the time of writing, the market cap is above $160 million, and daily trading volumes routinely exceed $40 million.
Thanks to the variety of yield farming opportunities, it is one of the best platforms to go if you want to build a diverse portfolio.
As one of the oldest and most well-developed DeFi protocols with yield farming, Aave is a good choice for investors who want to work across multiple chains as it supports Ethereum, Gnosis, Polygon, Arbitrum, Avalanche, and others. With over $21 billion in TVL and a native token that did not tank as hard as many others, it is a solid choice for newcomers and veterans alike.
Aave does have a learning curve that is steeper compared to other less complicated platforms, but it is a transparent DeFi protocol that offers a good product.
One of the pioneers of the yield farming industry, Compound is an excellent example of a DeFi protocol that focuses strictly on specific types of operations to enhance lending and borrowing within the crypto industry. $COMP is a token that has versatile utility as it can be staked, lent, or used for governance purposes.
Recently, the development of Compound III was finalized ensuring that the protocol is more secure, reliable, and trustworthy. The $COMP token has succumbed to inflation and lost a significant chunk of its value throughout the years. Nevertheless, it is still an actively traded digital asset with a potential for appreciation if anti-inflationary measures are implemented sometime in the future.
As Polygon’s leading DEX, QuickSwap has been working hard to build a sustainable ecosystem by introducing some policies to combat inflation. Recently, the $QUICK token was redenominated to a new 1:1000 ratio in an effort to increase the attractiveness of the token to users with unit size bias. As of the time of writing, the old token has a $21 million market cap against the $18 million of the new one.
Polygon itself has not been doing well in 2024. However, the network continues deploying new features and evolving. If you have a strong belief that this blockchain is destined to thrive in the future, investing in QuickSwap is a good idea.
Yield farming gives you many opportunities to build a strong portfolio, but you must be careful when engaging in investment strategies that you don’t fully understand. This article serves an educational purpose and provides a surface-level overview of yield farming, its advantages, and risks. We strongly encourage you to learn more about the subject matter before fully committing to any DeFi protocol offering such investment products.
Product updates, DeFi tutorials and insights from our community
