What is Crypto Yield Farming?
Yield farming, occasionally also referred to as liquidity mining, is one of the latest hype trains within the DeFi space. The core idea of yield farming is generating passive income with your existing crypto. Essentially, what you have to do is lend out the crypto you own, and earn increased returns in exchange. Yield farming is already revolutionizing the way crypto traders operate, by replacing the strategy of ‘HODL’ing on to one’s digital assets instead of putting them to use.
The History of Crypto Yield Farming:
The sudden hype surrounding yield farming is owed almost entirely to the launch of the COMP token – the governance token of the Compound Finance exchange. Governance tokens – in case you were unaware – allow holders to vote in the governance decisions of a particular exchange platform, or suggest a certain change.
Compound, an Ethereum-based credit market, developed a functional decentralized blockchain system by distributing the COMP tokens with liquidity incentives; users were given the opportunity to earn rewards by adding liquidity to the various liquidity pools (more on that later) on the Compound platform and ‘farm’ COMP.
Compound Exchange started distributing the COMP tokens to the protocol’s users on June 15, 2020. As demands for the token rose high and Compound rose into a leading position within the DeFi space, the platform also helped bring the concept of yield farming to the mainstream. Since then, quite a few other DeFi protocols have integrated the yield farming strategy with varied economic incentives to convince users to lend out their cryptocurrency.
How Does Crypto Yield Farming Work?
As mentioned before, in yield farming, a group of users put their own crypto assets into liquidity pools and generate yields. These users are known as the LPs, or the liquidity providers.
Now you might be wondering what a liquidity pool is. Well, they are sort of like marketplaces where you can borrow or lend out digital assets, and trade out one crypto for another. Liquidity pools are, in fact, smart contracts on a DeFi exchange platform that are programmed to hold funds. When a liquidity provider deposits their crypto into one of the liquidity pools, the code in the smart contracts makes sure they earn rewards in return. Usually the yields are a share of the trading fees the DeFi exchange hosting a liquidity pool charges.
So when liquidity providers deposit their funds into a liquidity pool of their choice, a fraction of the overall trading fees the exchange platform earns goes to them – in proportion to their share in the pools, of course. Plus, at some exchanges, funding a liquidity pool means liquidity providers get to earn that platform’s native token, which can not otherwise be bought in the open market.
The token distribution rules are as varied as the number of DeFi exchange platforms out there. For instance, some exchanges give out tokens to liquidity providers that represent the assets deposited. Take Compound for example: if you deposit the stablecoin USDT into a Compound pool, you’d get cUSDC in return. Some platforms even pay out the rewards in the form of several tokens, which can then be deposited to other liquidity pools, and so it goes.
However, the basic idea of yield farming is always the same – liquidity providers will enjoy yields directly proportionate to the volume of the liquidity deposited by them. Yield farmers usually move their coins about between different liquidity pools, seeking out whichever one provides the best anticipated interest rates.
Now, your next question would probably be this: how do these people know which pool might provide the best interests? To answer your question, APY is the method most traders use to compute the approximate yields out of a particular liquidity pool.
What is the APY Method?
APY, or annual percentage yield, is an annualized method that predicts the amount of returns one could get over a year. The APY is the rate of return earned on an investment when you account for the effect of compounding interest, presuming the money remains deposited for one year.
The formula for calculating APY is:
APY= (1 + r/n )n – 1
Where r = period rate, and n = number of compounding periods.
Now, it’s important to remember that the calculations made through the APY method are only predictions, and the anticipated returns are not guaranteed. The volatility in the prices of cryptocurrencies can affect yearly returns, since the price of a particular token can fall at any given moment. As of right now, crypto yield farming is also an uncertain and competitive space, and therefore any estimations can always be proven wrong.
What are the Top Projects Which Provide Higher APY on Crypto Farming?
Now that we have been through the basics of crypto yield farming, next you might want to find out about some popular DeFi exchange platforms where you can try out yield farming and see how it suits you. To make that easier for you, below we have rounded up a list of some of the most hyped up platforms that currently provide some of the highest APY as well!
Please Note: APY Data is subjected to change when more users join the pool. The data we mentioned for APY in this article is based on the publication date of this article.
PancakeSwap is a decentralized exchange built on the Binance Smart Chain. When liquidity providers deposit their crypto into one of the pools, they receive liquidity provider/LP tokens in return. For instance, if you added BETH (Binance ETH) and ETH to the pool, you’ll get BETH-ETH LP tokens in exchange. You can use these LP tokens to reclaim your deposit, as well as a portion of the trading fees.
PancakeSwap also gives you the opportunity to farm its native governance token, CAKE. Some of the liquidity pools on PancakeSwap that provide the highest APY at the moment are:
- PancakeSwap DAI-BNB (APY 13731.33% yearly),
- PancakeSwap YFII-BNB (APY 1290.59% yearly),
- PancakeSwap BCH-BNB (APY 563.36% yearly), and
- PancakeSwap XTZ-BNB (547.60% yearly).
Bella Protocol is an ecosystem project launched by ARPA, the Ethereum-based layer 2 multiparty computation (MPC) network. The platform is the very first project to be hosted on Binance’s Launchpool platform. The core concept behind the Bella Protocol product design is 1-Click; the platform provides a suite of DeFi products for a comfortable and seamless crypto banking experience.
The native token of Bella Protocol is BEL. The Bella Protocol liquidity pools to provide the highest APY currently are:
- BEL-USDT (APY 565.00% yearly),
- ARPA-USDT (APY 359.00% yearly), and
- BEL-ETH (APY 161.00% yearly).
Saffron Finance is a web3 protocol that allows the tokenization of on-chain assets. The tokenized ownership of on-chain assets gives liquidity providers better flexibility as well as uninterrupted access to their underlying collateral, all the while enabling leveraged staking and providing increased security against risks. The Saffron smart contracts are implemented in standby mode on the Ethereum mainnet.
The native tokens of Saffron Finance are the SFI tokens – or the Spice tokens, that drive all of the platform’s features, products, and incentive structures. The Saffron Finance liquidity pools providing the highest APY at the moment are:
- The SFI/ESD Uniswap Pool (APY 110.21% yearly),
- the SFI/GEEQ Uniswap Pool (APY 85.21% yearly),
- the SFI/BTSE Pool (APY 80.38% yearly), and
- the rSFI Staking Pool (APY 61.65% yearly).
The Ethereum-based DeFi platform PerlinX is a decentralized finance interface protocol with the objective to bring real-world assets to the DeFi ecosystem. PerlinX allows users to trade all sorts of real-world assets through incentivized liquidity mining and synthetic asset generation. The PerlinX liquidity pools and crypto farming offerings are powered by the Balancer protocol, and PerlinX makes use of the UMA protocol for the generation of synthetic assets.
Participants on the protocol can stake PERL tokens – the network’s native tokens- to provide liquidity and be rewarded for doing so. All synthetic assets on PerlinX have the prefix px (like pxGold or pxCarbon), and they require PERL as collateral.
The PerlinX liquidity pools to provide the highest APY include:
- Balancer BUSD-PERL 50/50 (APY 161.41% yearly),
- Balancer DAI-PERL 50/50″ (APY 142.04% yearly), and
- Balancer WETH-PERL 50/50 (APY 125.79% yearly).
BakerySwap is a decentralized AMM or automated market-making protocol based on Binance Smart Chain; it also happens to be the very first NFT (non-fungible token) trading platform on BSC. BakerySwap was launched by an anonymous group of developers with the aim to be a swifter and more cost effective version of Uniswap.
Users can earn BAKE tokens – native governance tokens of the platform – by providing liquidity on BakerySwap, and BAKE can be used for governance voting, as well as receiving the transaction fee dividends. Additionally, with BAKE you can compose a random ‘combo meal’, which is basically a unique NFT. This unique NFT can work as a BAKE farming tool, since each NFT combo can be staked to generate more BAKE.
The BakerySwap liquidity pools to provide the highest APY right now are:
- Waffle (APY 114.29% Yearly),
- Doughnut (APY 113.46% Yearly), and
- Croissant (APY 72.66% Yearly).
Venus is a Binance Smart Chain based algorithmic money market protocol that facilitates the lending and borrowing of assets, as well as the generation of synthetic stablecoins. The collateral provided to the platform is represented by vTokens (like vETH) which will allow users to redeem the collateral or borrow against it.
Venus allows the generation of VAI, the protocol’s very first synthetic stablecoin, pegged to the value of the USD. The native governance token of Venus is XVS, which allows holders to participate in voting on or suggesting new platform initiatives.
The liquidity pools that give the highest APY are:
- VAI Mint (APY 66.41% yearly), and
- vXVS-XVS Lending (APY 13.60% yearly).
Based on the Tron ecosystem, SUN is described by the team as ‘a social experiment dedicated to the advancement of Tron’s DeFi’. Along with the other DeFi projects, SUN benefits the overall Tron ecosystem, and also takes part in decentralized lending, insurance, stable coins, etc.
All SUN’s functionalities are implemented by open-source smart contracts, and being decentralized, the network is operated entirely by the SUN community. The governance token of the platform is also called SUN.
The SUN liquidity pools currently providing the highest APY are:
- The WIN/TRX LP Pool (APY 47.58% yearly),
- the SUN/TRX LP Pool (APY 42.34% yearly), and
- The USDJ/TRX LP Pool (APY 36.50% yearly).
The Ethereum based Curve Finance is a DeFi exchange platform meant for stablecoin swaps at low transaction costs. By focusing on stablecoins, Curve offers all traders fairly low slippage, and liquidity providers get to enjoy little to no impermanent loss.
Curve Finance supports DAI, USDC, USDT, TUSD, BUSD and sUSD, as well as BTC pairs, and users are allowed to trade between these pairs swiftly and efficiently. The native token of the platform is CRV.
The Curve liquidity pools to provide the best APY are:
- sUSD (APY 12.20% yearly) and
- Compound (APY 11.49% yearly).
Another Ethereum based protocol, Yearn Finance is one of the most famous players within the DeFi market. The protocol aims to optimize token distribution by algorithmically looking for the liquidity pools that will provide the highest returns.
Yearn Finance provides users with the opportunity to automate crypto farming of the maximum yields with ease, all the while also cutting down on transaction expenses. The native token of the platform is YFI.
The Yearn pools providing the best APY at the moment are:
- the TUSD Vault (APY 44.21% yearly),
- the DAI Vault (APY 40.03% yearly), and
- the yCRV Vault (APY 32.85% yearly).
Yet another Ethereum based protocol, Harvest Finance is a cooperative of crypto yield farmers from across the globe who pool their crypto together so as to earn DeFi yields. This is how it works: After yield farmers deposit their funds, Harvest automatically farms the highest yields utilizing the latest crypto farming techniques.
The native token of the platform is FARM. The Harvest liquidity pools with the highest APY are:
- FARM Profit Sharing (APY 32.37% yearly), and
- the USDC Vault (APY 21.30% yearly).
(all information as of March, 2021. Source : https://coinmarketcap.com/yield-farming/)
And there it is, everything you need to know about yield farming, all in one place! If you’d want to read more insightful posts on DeFi and cryptocurrencies in general, do visit our website here!
Hitesh Malviya is the Founder of ItsBlockchain. He is one of the most early adopters of blockchain & cryptocurrency enthusiast in India. After being into space for a few years, he started IBC in 2016 to help other early adopters learn about the technology.
Before IBC, Hitesh has founded 4 companies in the cyber security & IT space.
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