Yield farming is a lucrative crypto investment strategy to earn passive income with a promise of massive returns at high risk. Here, we showcase the DeFi liquidity pools that promise the best APY, with short reviews of each.
In the beginning, HODLing and mining were the main options for making money with cryptos. But with the evolution of the ETH platform and a diverse array of altcoins and DeFi apps, you have more aggressive opportunities to generate profits with crypto investments.
Many crypto investors are particularly keen on passive income opportunities where you can put your current coins to “work.” As a result, yield farming has exploded in popularity in recent years, promising high-interest rates (APY) and the chance to make more crypto as a bonus.
What is Yield Farming?
In traditional securities trading, a market maker acts as the facilitator, providing liquidity and trading services to investors. However, such central authorities to hold funds do not exist in the world of cryptocurrencies and decentralized finance (DeFi).
Instead, automated market makers (AMMs) provide liquidity for crypto trades directly on-chain. They rely on liquidity pools, which are smart contracts made up of a collection of funds. Crypto investors who lock their funds into these pools get a share of the platform fees.
Platforms pay out the rewards in the form of their native tokens. As an additional incentive, many pools reward investors with newly minted tokens. Yield farming involves investing your cryptos in this manner to earn a passive income.
When you lend fiat currency to a bank, you only earn between 0.1% – 3.5% in interest, depending on the currency. However, with yield farming, the APY can range from 15% to as high as 200% in some instances. This high-risk/high reward form of crypto investing is also known as liquidity mining.
Top 3 Best DEX Platforms for Yield Farming
Now that we have covered the bare bones of yield farming, let’s take a look at the exchanges with the best yield farming rates (updated Q4 2021):
With close to 20% of the total market share by volume of trades, Uniswap is one of the top DEXs on the Ethereum blockchain in 2021. Two versions of the platform are currently active – the older V2 still going strong with a 15% market share and the upgraded V3 that launched on May 5, 2021.
Continuing the trend of incremental upgrades, V3 of Uniswap came with new options like setting price ranges for asset allocation (concentrating liquidity), flexible fees, and improved security features. It is based on Ethereum and deals only in ERC20 tokens.
Uniswap gives you the freedom to invest in liquidity pools of any available token. With 471 coins and 953 potential pairs, you have no shortage of choice. This also comes with some degree of risk – there are plenty of scam coins in the crypto wilderness.
Nevertheless, with daily trading volumes close to $1.5 billion and a total value locked (TVL) of $3.6 billion, Uniswap is a great option for investors looking to capture high yield farming rates. Here is a quick look at some of the best performing coin pairs:
|Liquidity Pool||TVL (in millions $)||APY|
|USDC – ETH (0.5% fee)||$334.71m||25.55%|
|DAI – ETH (0.05% fee)||$59.32m||16.47%|
|DAI - ETH (0.3% fee)||$85.77m||16.79%|
|ETH – USDT (0.05% fee)||$37.86m||28.84%|
|SHIB – ETH (1% fee)||$48.93m||68.26%|
An alternative to Uniswap that is NOT based on the Ethereum blockchain, PancakeSwap, was launched in September 2020. This DEX is based on the vastly popular Binance Smart Chain (BSC), a hard fork from the Geth protocol.
It is the largest AMM platform on the Binance blockchain, with daily trading volumes exceeding $1.3 billion. It is also the second-largest DEX in terms of market share by volume of trades.
In terms of liquidity pools, PancakeSwap offers more coin pairs than UniSwap, with 2508 coins and a whopping 6299 pairs. However, since many of these are obscure coins without much demand or activity, the advantages over UniSwap are minimal at best.
The V2 pools of PancakeSwap were launched in April 2021. Suppose you stick to relatively well-established coin/token pairs. In that case, you can expect annual rewards ranging from 5% to 200% or more on PancakeSwap V2. Here are some examples:
|Liquidity Pool||TVL (in millions $)||APY/APR|
|WBNB – BUSD||$182.91m||21.64%|
|USDT – WBNB||$140.12m||30.12%|
|USDT – BUSD||$28.84m||6.55%|
|ETH – WBNB||$21.34m||7.88%|
In stark contrast to platforms like Uniswap and PancakeSwap, Curve Finance has opted for a more conservative approach to liquidity pools. For example, it does not offer hundreds of token/coin pairs – instead, you get to pick from around 23 coins and 61 pair pools.
These include stablecoins – cryptos that are pegged to an external asset like gold or fiat currencies – as well as wrapped tokens like WBTC. This gives the Curve DEX a sizable advantage over other AMMs in terms of stability: less volatility, lower fees, and lower risk of impermanent loss.
And it must be said that this conservative approach has paid off handsomely when you look at the numbers. Curve had the highest TVL of all similar platforms, peaking at $19 billion. However, this has come at the cost of lower market share by trade volume (4.4%).
The native token on the Curve DEX is called CRV – liquidity farming on the Curve DEX gives you a chance to win CRV. Ownership of CRV has many benefits, including voting rights on the DeFi protocol.
Here is a quick look at some of the best Curve pools for yield farming:
|Liquidity Pool||TVL (in millions $)||APY/APR|
Risk vs. Reward in Yield Farming
As you may have noticed from the stats, the projected rewards are much higher on platforms like Uniswap and PancakeSwap. The tradeoff here is relatively straightforward – the risks also increase drastically when you start yield farming in pools of highly volatile cryptos.
Suppose you deposit cash in a bank to earn passive income. In that case, that deposit is backed by authorities and agencies like the FDIC and SIPC. However, cryptocurrency deposits are entirely at the mercy of the market.
Investments in liquidity pools can be affected by the following factors:
- Any crash in the value of the token/coin (impermanent loss)
- Decrease in the volume of trading
- Software vulnerabilities to hacking
- High gas costs (for smaller investments)
- Liquidation risks due to crash in the price of the collateral token
Successful yield farmers often engage in complex investing strategies, using the reward tokens from one pool to invest in another. These chains can usually generate a 100-fold increase in passive rewards. Still, if there is a significant market crash for one key token, the whole thing can fall like a house of cards.
Further, there is the issue of opportunity cost. If there is a significant movement in the market, traders and HODL investors can move quickly to create a profit. But since AMMs do not update prices instantly to reflect the changes in the market, you cannot do the same if your coins are locked in the pool.
Ultimately, it all boils down to your risk appetite or aversion. If you have cryptos lying inactive in a wallet, yield farming is one of the options available to generate some passive income. Staking is another option we have covered in detail here.
As long as you stick with established cryptos (BTC, ETH, etc.) or stablecoins and pick out pools with a high trading value relative to the TVL, you may stand a good chance of generating decent returns from yield farming. However, be wary of pools that promise 100% – 200% returns – only invest in them if you are willing to shoulder the high risk.
To learn more about Yield Farming, crypto ETFs, and staking, and discover the latest news from the blockchain world, consider subscribing to the Bitcoin Market Journal. We also have an in-depth guide on investing in ETFs here.