Yield farming is one of the best ways for capital allocation in the DeFi ecosystem. However, it works well only for creative investors who can be proactive with their investments and extract the most value out of moving assets constantly seeking higher gains and lower risks. Finding the right platforms for such activities can be challenging even for people with enough experience to easily navigate the cryptocurrency market.
There are several straightforward ways to allocate capital in the DeFi sector to make money without actively trading tokens:
These are methods of capital allocation where you receive interest paid in base tokens invested in the pool. Investors must be careful when using them since you often put assets into two-sided pools with high interest paid primarily in a cheaper coin. For instance, if you put money into the SOL-XYZ pool at Orca DEX (Solana), the majority of rewards will be paid in XYZ which is a cheaper token than SOL.
Many protocols are offering identical pools on different layer 2 chains or for different purposes. However, holders of target assets still can invest in all of them. Finding the right combination of pools to invest in can be difficult even for experienced investors due to the sheer number of available options.
Using yield optimizers like Beefy Finance or Yearn Finance can be a good solution to identify a good approach to capital allocation. For instance, Beefy has a slightly higher return on USDC holdings on the Optimism chain through Compound compared to many other options. You can expect a 4.6% base APY with a 30-day mean average reaching 5.72%. While these numbers are below what investing directly with Compound yield, Beefy will move assets if APYs fall below a certain threshold.
It is also important to work with protocols that have auto-compounding features since rewards will be noticeably higher with daily compounding. While some platforms have such features baked into their architecture, you might still need to use highly specialized services that do the whole compounding thing in your stead.
Optimizing yields is one of the most important priorities for an investor seeking success in the DeFi sector. Due to various factors, the long-term profitability of pools can diminish, and switching between them to keep APYs high is hugely important. Employing yield aggregators, compounders, and optimizers significantly reduces the workload of any individual investor.
We strongly recommend focusing on learning a variety of different tools available to contemporary crypto enthusiasts and using them as frequently as possible to achieve consistent returns. In some cases, it is a better idea to use platforms like Rivo.xyz. It offers a wide range of strategies allowing you to focus on certain types of protocols or find the best yield on specific digital assets.
Yield farming is a distinctively DeFi thing. The novelty of an instrument allowing investors to receive rewards in native or governance tokens to increase gains attracted the bulk of newcomers to the crypto industry back in 2021. The peak of the DeFi sector was reached in 2022. While the contraction of the ecosystem throughout the next two years was notable, the core audience stayed and created the necessary foundation for many projects that are currently performing well.
Many DEXes need liquidity and try to entice potential providers by offering high interest rates and various boons:
The problem with these investments is that you will be receiving the bulk of earnings in tokens that are inflationary by nature due to constant emissions and regular selloffs. It means that investors must time their existence correctly to outpace yields from other protocols. In many cases, you will be also subjected to inactivity periods where you cannot liquidate tokens for some time.
The vast majority of these projects are concentrated on Solana. This blockchain network is known for its many memecoins and potential scams. The proliferation of questionable projects on this chain is quite noticeable. On the other hand, Sui, Ethereum, Base, and Arbitrum also have protocols with incredibly high interest rates.
We will discuss some interesting platforms that offer huge rewards to their users:
To give you a better picture of the DeFi sector, we compared three massive protocols offering rewards to their users.
| Protocol | Aerodrome | Curve DEX | Orca |
| Native chain | Base | Ethereum | Solana |
| Supported chains | Base | Ethereum, Polygon, Fantom, Arbitrum, Avalanche, Optimism, Gnosis, Fraxtal | Solana |
| Total Value Locked | $1.2 billion | $1.59 billion | $286.3 million |
| Number of pools | 254 | 523 | 725 |
| Average APY | 56.49% | 12.09% | 662.58% |
| The biggest pool (TVL) | USDC-AERO ($120m) | FRAX-SDAI ($201m) | SOL-LOPE ($225m) |
| Base APY | – | 1.65% | 0.06% |
| Reward (APY) | AERO (47.81%) | – | – |
| Reward token price | $1.08 | $0.24 | $164.53 |
| Reward token price change (since launch) | +1,200% | -98% | +18,333% |
| Reward token Mcap | $735 million | $282 million | $77.4 billion |
The DeFi sector has many advantages compared to tradfi and CeFi. However, the ecosystem also presents unique dangers to investors and protocols. Below are some of the risks that you should be aware of:
Some contemporary protocols have the so-called flash loan vulnerability. One of the novel financing methods in the sector is through flash loans which must be returned and settled before the finalization of the transaction itself. While these can be useful to many users who want to be proactive in the DeFi sector, protocols can be exposed to flash loan attacks that utilize potential shortcomings of the system and may cause massive losses.
While the vast majority of protocols offering rewards are DEXes, other protocols may offer similar reward structures to attract liquidity providers. DEXes can operate across multiple chains allowing users to invest in pools without switching platforms. For instance, UniSwap offers pools on 26 blockchains including Ethereum, Arbitrum, Base, Optimism, and many others. Investors using all these networks can easily invest in various pools and receive rewards for their participation.
Cross-chain bridges can be generous too. Synapse, Hop Protocol, and Across are examples of bridges that have liquidity pools and offer high rewards. Here are examples of profitable pools available in this particular segment of the DeFi ecosystem:
These are good options for people interested in diversifying investments across multiple platforms. However, these are not even close to some protocols that offer outrageous interest rates.
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