Yield Farming: Profitability & Risks
Yield farming is the process of providing liquidity on decentralized exchanges, lending crypto, or a combination of both. You earn rewards for your contribution to these decentralized platforms. As more people realize the benefits of decentralized finance, such as crypto loans, P2P trading, and NFT trading, the popularity of decentralized platforms like Uniswap, PancakeSwap, and Compound continues to grow. Another reason for their growth could be their unique approaches to providing complex financial services that are not possible with traditional finance. For example, Uniswap utilizes an Automated Market Maker (AMM) system to enable high liquidity levels, facilitating seamless decentralized trading between crypto investors. Transaction fees are low due to the low operational costs.
On PancakeSwap, you can lock your assets in several liquidity pools to earn rewards, with APR (Annual Percentage Yield) influenced by factors like market demand and staking period. A crypto pair with high trade volume, such as USDT/ETH, would generate more transaction fees, resulting in a higher APR if your assets are deposited in that liquidity pool. Additionally, you can reinvest the earned rewards back into the pool using the Auto-Compound feature to generate more rewards.
1. Pancake Swap
Being one of the world’s largest decentralized exchanges, PancakeSwap offers a wide range of tradable crypto pairs, primarily supporting the BNB Chain. The high trade volume of many cryptocurrencies contributes to the substantial APR rates offered on this platform for liquidity farming. Another interesting feature is concentrated liquidity, which allows users to set a price range within which they want to provide liquidity.
Currently, PancakeSwap’s 24-hour trade volume stands at $2.64B, with $2.17B held in USDT, highlighting the dominance of USDT as a base trading currency. This also explains why liquidity pools involving USDT typically offer higher APR compared to those with other stablecoins.
2. Yearn Finance
It is a popular decentralized platform built on the Ethereum blockchain, dedicated to yield farming services. Yearn Finance innovates yield farming by strategically searching several DeFi protocols for the highest interest rates across liquidity farming, staking, and lending, providing the highest possible rewards.
Once users deposit their assets in Yearn Finance’s vaults, these assets are then used across different DeFi protocols to generate yields from liquidity farming, lending, and other activities. This allows users to capitalize on multiple DeFi protocols rather than rely on just one for yield farming.
3. Uniswap
Uniswap is the world’s largest decentralized exchange (DEX) by trading volume. Its sustained dominance can be attributed to several factors, with the most significant being the early adoption of the Automated Market Maker (AMM) model. This technology enables decentralized trading with low fees while maintaining good liquidity. Uniswap’s strategic partnerships with other platforms have also contributed to its growth and expansion of its user base.
A diverse range of crypto pairs is available for liquidity provision to earn yields. If you’re looking for advanced features like concentrated liquidity—the ability to set specific price ranges—then Uniswap would be a good choice.
4. Curve Finance
Curve Finance is a decentralized exchange enabling efficient trading of crypto, especially stablecoins, with reduced slippage. Liquidity providers (LPs) earn transaction fees by depositing their assets into liquidity pools, while experiencing lower impermanent loss compared to other decentralized exchanges. These features make Curve Finance a good choice among DEXs. Similar to Uniswap and Pancake Swap, Curve Finance also allows LPs to take advantage of concentrated liquidity to make better rewards.
Alongside providing trading and liquidity services, Curve Finance also ensures strong security measures. Its smart contracts have undergone multiple audits by security firms, and it has taken measures to prevent phishing attacks.
5. Compound
Compound Finance is one of the top DeFi platforms used for lending and borrowing crypto. It operates using a dynamic interest rate model, where borrowing and lending rates adjust automatically based on supply and demand, providing competitive rates for borrowers.
Lenders can deposit assets on the platform to earn interest, which compounds over time. Additionally, they receive COMP tokens as incentives for providing liquidity. COMP tokens can be used for governance, allowing token holders to vote on platform upgrades and policies.
As a highly audited DeFi protocol, Compound Finance is considered relatively secure for crypto lending and borrowing. Borrowers can access loans by depositing collateral, with no KYC requirements, making the process fast and globally accessible.