Yield farming is an innovative crypto investment method. It allows the owners of crypto coins to steadily grow their funds. If successful, yield farming may turn into the source of a stable passive income. To use this approach to their benefit, one needs to learn what the best crypto yield farming strategy is, as well as stay on top of news and trends and swiftly react to changes. However, automation makes the benefits of yield farming available even to beginner investors.
Yield farming consists of providing your funds to DeFi projects and earning rewards for it. There are two main categories of yield farming strategies. They are based on lending/borrowing protocols and decentralized exchanges.
In the latter case, you act as a liquidity provider. You deposit your coins into a liquidity pool and earn LP tokens in return that represent your share. Depending on it, you gain a percentage of the profit it generates. In the most straightforward case, you claim rewards manually when it is necessary. To maximize yield farming profits, use DeFi aggregator platforms. They offer you a wide selection of liquidity pools. They claim and reinvest rewards automatically, which adds the effect of the compound interest to the sum of your profits.
Lending crypto belongs to the top yield farming strategies as well. In this case, you deposit assets so they can be lent to other users. For staking assets, i.e. providing them to the platform, you earn equivalent tokens, known as stacked or wrapped, such as WBTC or WETH. This strategy is considered safe and steady but is usually associated with low rewards.
If you want faster profits, use your crypto assets as collateral and borrow coins, which then can be used to acquire new assets. To minimize risk, keep your debt value lower than your collateral. One more strategy that may maximize your gains is leveraged yield farming. While this method is considered high-risk and high-reward, when successful, it allows an investor to amplify their returns, opening the way for faster profits.
More complex yield farming strategies can combine several types of investment, such as providing liquidity to a DEX (decentralized exchange), staking, and investing at crypto lending platforms. Each of the methods is characterized by a different risk profile, thus, combining them helps to build a balanced portfolio.
After learning the basics of DeFi investment, you may want to look into the ways of optimizing crypto yield farming. There are automated tools that maximize the efficiency of the process while minimizing the amount of required manual actions at the same time. Profit maximization becomes possible thanks to yield optimizers. They are decentralized apps that aggregate multiple DeFi protocols and constantly move funds deposited by liquidity providers to maximize the yield. In recent years, yield optimizers started to employ AI-powered solutions. Currently, they remain limited to secondary tasks, such as providing information through chatbots implemented by Solana or code readers developed by Etherscan. However, there is a wider range of possible applications in the near future.
According to the 1inch security whitepaper published in June 2024, the platform plans to implement 1inch AI Agent that will help to protect users privacy and security through detecting suspicious activity. It is expected to be able to monitor transactions, assess risks through an objective scoring system, and engage in peer-to-peer transactions. 1inch hopes it will be able to provide users with a seamless and safer DeFi experience, tailored to their needs.
Yield farming is associated with some risks. Here are several issues to keep in mind when you are selecting an investment strategy.
Impermanent loss occurs because the crypto market is volatile. It happens due to the volatility of the market prices. As a result, the liquidity provider earns less than if they had simply held the coins without depositing them in the pool. However, an unrealized impermanent loss becomes a realized one only if an LP decides to redeem its tokens when their value is low. Instead, it may be a good decision to postpone withdrawing the tokens until the prices recover.
Smart contract exploits can appear due to the bugs or vulnerabilities in the code the DeFi functionality is based upon. Malicious actors can use these bugs to steal funds or manipulate reward distribution. One of the infamous examples is the Solana wormhole exploit. In 2022, hackers found a vulnerability in the Solana Wormhole Bridge protocol and used it to mint 120,000 whETH (wormhole Ethereum) tokens, then redeeming them for $320 million in total. This risk cannot be fully eliminated but can be significantly reduced through independent code audits or open-source smart contracts.
Rug pull is a type of scam when a seemingly reliable new cryptocurrency project turns out to be malicious. In this case, malicious actors declare a new protocol with its native token. Then they create a liquidity pool pairing their token with one of stablecoins or other major cryptocurrencies. After enough users contribute to their pool the founders take out the stable cryptocurrency while adding a lot of their native tokens to the pool instead. The value of the latter drops. As a result, the holders of a native token remain with a now worthless asset, while the scammers retain more valuable tokens. To avoid such scams, use reliable DeFi aggregators that thoroughly review the projects they present to their users.
As you can see, avoiding the risks of DeFi yield farming requires being conscious about your decisions. Thoroughly research your options before deciding on an investment. It is also important to choose the best yield farming platforms, i.e. those that are reliable and can serve as a trusted intermediary between users and DeFi projects. In 2024, these are the platforms worth checking first:
To make your DeFi investment more efficient, use technology to your benefit. Explore various possible automation tools, as the analysis of a constantly changing market often requires processing vast amounts of data and reacting immediately.
The most important tools you will need for maximizing returns with yield farming were already mentioned above. Yield farming aggregator platforms, such as Beefy Finance and 1inch, provide investors with easy access to various DeFi protocols.
You may also need yield farming calculators and analytical tools. They help to estimate potential profits and compare several investment strategies. It is especially important if compound interest is involved. Some aggregators provide their own evaluation of strategies’ effectiveness, but in addition, you can use independent analytics tools, such as APY.vision or DeFi Rate.
If you invest on a large scale, you will also benefit from portfolio management tools. They help to monitor the performance of your vaults, even if you are using several platforms, and adjust your investment portfolio when necessary. An example of a portfolio management service is DeFi Saver. It provides investors with advanced tools for market analysis and DeFi Management, supporting integrations of 20 wallets, including MetaMask, Coinbase, Fortmatic, and others.
While yield farming techniques may seem lucrative, and often truly are, it is important to always act rationally and avoid making emotional decisions even when the market circumstances are not in your favor. Here are common mistakes beginner investors make and tips to avoid them:
Despite the risks associated with yield farming, it is a viable way to generate passive income. Through using efficient crypto income strategies, you will be able to start an investment journey. It is impossible to name a single strategy that will remain viable in the long term and provide guaranteed profits. The crypto market is constantly evolving, and the strategies must adapt. However, the approaches described above will help you maximize your gains with minimum manual effort.
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