Yield Farming in DeFi peaked in popularity in 2020 but remains relevant today. Many investors continue to place digital assets into various liquidity pools and significant passive income.
Are you considering getting into Yield Farming? Then, this guide is for you. We’ll cover topics such as:
What is income farming?
How to maximize earnings with DeFi Yield Farming strategies.
How to manage risks.
Practices and methods to use.
Platforms to work with.
How to correctly choose a suitable aggregator.
How to start yield farming and avoid beginner mistakes.
What is DeFi Yield Farming?
DeFi Yield Farming is lending your digital assets to earn rewards. The process is simple:
Investors lend their cryptocurrency to decentralized exchanges.
Aggregators issue smart contracts utilizing these borrowed assets.
After a certain period, investors receive their capital back along with the earned rewards.
What does an investor need to do? Very little, especially if they work with automated aggregators. All that’s required is to:
Choose a DeFi platform.
Acquire crypto tokens that are used for yield farming.
Provide liquidity to the platform and earn interest
Collect and reinvest your rewards to compound earnings.
Yield farming is accessible for beginners because it does not require constant control and adjustments. This makes it different from other trading strategies.
Yield Farming vs. Staking: Which is More Profitable?
There is another method of acquiring passing income called staking. It supposes that you provide crypto assets to support a crypto network. Two main methods of validating transactions in cryptocurrency are Proof-of-Work and Proof-of-Stake. For instance, Bitcoin uses Proof-of-stake. This means that users provide hardware to conduct complex calculations for transactions recording and mining new coins. This process is hardware-intensive and energy-consuming.
As a result, an alternative method was developed. In proof-of-stake cryptocurrencies, users provide crypto to generate new blocks. They receive rewards in proportion to their input. The most well-known example of PoS currency is Ethereum. When staking, users lock their crypto in the staking pool. They cannot withdraw assets for a certain period but earn interest on the staked amount.
To stake funds, follow these simple steps:
Set up a crypto wallet. Take into account, what cryptocurrencies you plan to work with, and what protocols are supported.
Choose a staking pool.
Lock your funds for a chosen period.
Collect your rewards.
There are several differences between yield farming and staking
Staking
Yield-farming
Pros
More accessible for beginners. Lower volatility.
Allows to withdraw funds or change strategy. Higher rewards and faster profit acquisition.
Cons
Locks funds for a long period.
Higher volatility and risks. Requires more thorough research.
If you are looking for a source of stable passive income in the long term, try staking. If you are open to higher risk levels but want to get higher profits faster, explore the opportunities of DeFi yield farming. To diversify your investment, you can combine both methods in the portfolio.
Top Yield Farming Strategies for 2024
Investors in 2024 employ various Yield Farming strategies and techniques, often combining and refining them to maximize profits. The most efficient methods include lending and farming, staking, and liquidity mining. By combining these investment methods, one can build a flexible portfolio capable of performing well. It is hugely important to create flexible portfolio compositions and avoid overly concentrated positions.
Yield Farming Strategies for Beginners
Automated strategies are ideal for novices. They are based on algorithms that automatically manage assets, determining when to enter the market, which protocols to invest in, and other crucial nuances. Applying algorithmic strategies has the following benefits:
They are easily accessible, as many platforms offer one-click investment opportunities.
They do not require constant monitoring and adjustments.
They remain viable even in a volatile environment.
They allow an investor to create a balanced portfolio, combining more conservative and more aggressive strategies.
Specialized platforms — DeFi aggregators — help beginners earn with minimal knowledge of yield farming by reducing various risks. They offer time-tested strategies and are the safest option for newbie investors. Some popular DeFi investment approaches include:
Staking — locking cryptocurrency to support blockchain operations.
Liquidity mining — providing liquidity to pools to receive rewards.
Lending — locking tokens in lending protocols to lend them out at a certain interest rate to other investors.
These strategies offer a good earning potential and do not require extensive knowledge of digital currency. Staking and liquidity mining are considered the safest for beginners, as they help new investors understand how protocols work.
Advanced Yield Farming Strategies for Experienced Investors
More advanced strategies for experienced investors who possess larger amounts of funds and understand the intricacies of the market include:
Protocol management — holding project funds and receiving rewards for managing them.
Leveraged yield farming — using borrowed capital to increase the size of the yield farming position. The strategy amplifies profits and risks, so it should be used carefully.
Mining — providing liquidity to pools by using specialized software and hardware to perform computations for validating transactions and supporting the cryptocurrency network.
Advanced arbitrage strategies, such as triangular, spatial, or statistical arbitrage. Triangular arbitrage involves trading between a minimum of three pairs of coins, spatial arbitrage benefits from regional price discrepancies, and statistical arbitrage heavily relies on mathematical equations and statistics, often with the help of specialized software.
Experienced investors often combine different strategies. The main goal of this practice is to maximize profits in DeFi.
The key advantage of using advanced approaches is earning high passive income quickly. The drawback is the high risk of asset loss. To mitigate the issue, investors can apply best practices for Yield Farming in defi, including the following methods:
Apply risk management techniques such as stop-loss orders or reducing position sizing, to determine when at which price assets should be bought or sold to minimize or prevent losses.
Diversify the investment portfolio by acquiring different types of assets and using a variety of investment methods.
Employ specialized software to analyze the market and adjust the strategy when needed.
Even if an investor uses algorithmic strategies, they bear ultimate responsibility for the outcome.
How to Choose the Best Platform for Yield Farming
To choose the best yield farming platform, use the following guidelines::
Compile the list of potential platforms.
Gather information about each platform.
Write out your goals and preferences.
Choose the platform that suits them the best.
When gathering information about the platform, pay attention to the following characteristics:
Security measures and protection of user data.
Performance metrics, such as market capitalization of its signature token and its price dynamics.
Pricing policies and service fees.
Supported asset types.
Interfaces and functionality.
Supported crypto wallets.
Legal compliance, considering the location of the service and local regulations.
The availability and quality of technical support.
Use multiple sources of information when possible. Check documentation and the knowledge base of the service, as well as user reviews and other external resources.
High-Yield Farming Platforms
Below is a list of the top Yield Farming aggregators and protocols for 2024.
Aave
A non-custodial, open-source protocol that facilitates decentralized borrowing and lending. Users lend assets and earn compound interest in AAVE tokens.
Pros:
Over $21 billion is locked as of August 2024.
Features include instant loans, liquidity pools, over-collateralized loans, sTokens, and algorithmic interest rates.
Strategies like mining and staking.
High loan limits.
Compatible wallet for storing AAVE and other digital assets.
Free access to the token exchange.
Ninth in market capitalization.
Compound
This platform is a trustworthy lending and borrowing market that offers algorithmically complex interest rates. It is based on the Ethereum blockchain and provides users with the opportunity to earn a compound interest which helps to maximize the profits. Users also earn COMP tokens as rewards.
Pros:
Regular audits.
Instant loan issuance.
High liquidity, free asset lock-up in Compound pool.
Automatic adjustment of profit rates.
Instant asset withdrawal.
Quick integration with WEB3 wallets like MetaMask, Tally Ho, and Ledger.
Asset prices in the liquidity pool are input into the protocol using the Open Price Feed system based on Chainlink (LINK) oracles.
APR up to 5-6%, depending on the protocol and asset type.
Interest earned can be reinvested.
Minimum loan amount of 0.01ETH.
No trading commissions and minimized slippage.
Con: Supports only 20 cryptocurrencies. The interface may be too complicated for beginners.
PancakeSwap
This platform is a profitable DeFi project on Binance Smart Chain (BSC) that trades BEP20 tokens using an automated market maker (AMM).
Pros:
Minimum trade amount from $1.
Easy-to-use interface accessible for beginners.
Supports multiple crypto wallets such as MetaMask, Trust Wallet, and Binance Chain Wallet.
More than 3000 trading pairs.
Offers other options to earn rewards in addition to common staking and yield farming methods, namely a lottery, IFOs, predictions market, and NFT trading.
Supports multiple BEP-20 tokens such as USDT, USDC, BNB, and many others.
Low trading fees (0.25%).
Cons: Doesn’t have a mobile app.
Other high-yield DeFi projects include SushiSwap and Balancer.
Managing Risks in DeFi Yield Farming
Yield farming is a profitable way to earn from assets but it comes with risks. Some of the most important ones are:
Legal changes. Governments introducing new regulations can restrict cryptocurrency operations and influence the value of your assets.
Fraud and hacker attacks. You can lose money due to the vulnerabilities of the platform you use or through your own negligence. Carefully check the details of each transaction and follow crypto security guidelines.
Aggregator malfunctioning or dishonest actions. When you invest crypto through DeFi aggregators, you entrust a service provider with money, thus be cautious when choosing the investment platform.
Market volatility. The crypto market is generally more volatile than a traditional stock market. Prices fluctuate often and can be influenced by multiple factors.
To avoid losses, apply the following techniques of risk management in Yield Farming:
Diversify your portfolio to make it less sensitive to market fluctuations. Combine assets with different risk levels.
Learn what influences the market trends and monitor the news. Global political and economic events can cause drastic changes in crypto markets.
Devise your investment strategy and follow it thoroughly. Do not let emotions lead you, especially in situations when you are losing money. Acting with a cold head will help to minimize losses even in unfavorable conditions.
Set measurable goals such as profit levels or other performance indicators and use them to evaluate your strategy objectively.
Understand, that crypto investments involve an inherent risk. Take it into account when planning your finances. Remember that higher rewards are usually tied to higher risk levels.
Educate yourself about cyber security and follow at least the basic guidelines, such as enabling two-factor authentication.
All these tips and recommendations will help you minimize losses.
How to Get Started with Yield Farming: A Step-by-Step Guide
To start yield farming, use these steps as a basis:
Learn the basics and operation of DeFi aggregators.
Select a platform that meets liquidity, security, and profitability parameters.
Register on the aggregator’s website.
Create a wallet compatible with the selected platform.
Deposit cryptocurrency.
Choose an optimal pool, considering your strategy, risk tolerance, liquidity, yield, and transaction fees.
Deposit assets into the chosen pool.
Start earning tokens or interest.
Monitor the aggregator’s operation.
Regularly keep an eye on the market.
Adjust your strategy if necessary.
Transfer funds to other pools if needed.
It’s important to remember that there may be technical issues on the platform, and the chosen strategy does not always guarantee income. Skillfully manage risks. Use proven practices. Consider expert advice.
The Future of Yield Farming in DeFi: Trends and Prospects
Yield farming in DeFi continues to evolve. This method of earning on cryptocurrency allows for high passive income, keeping it trendy among investors. For instance, in Q1 2024 the capitalization of liquid staking protocols reached an all-time high of $63 billion, with the TVL (Total Value Locked) in DeFi over $190 billion. The user activity in DeFi also demonstrated a significant growth of 291% quarter-on-quarter, which is a clear positive trend.
Established protocols, such as Aave, Arbitrum, or MakerDAO continue to play a significant role in the market. However, with recent technological advances such as ones in AI and machine learning, the number of new strategies is rapidly increasing, with effective methods to reduce risks regularly emerging. Further developments may possibly include:
Integration with traditional finance.
Development of more sophisticated security measures.
Implementation of artificial intelligence.
Improvement of risk management methods.
Overall, the future of yield farming is promising but requires constant monitoring and adaptation to new market conditions. High earnings in DeFi Yield Farming are not a myth, they can be a reality. However, achieving substantial income requires not only collaboration with the right aggregators but also continuous improvement of one’s skills to fully realize set goals.
Subscribe to Rivo Newsletter
Product updates, DeFi tutorials and insights from our community
