In the beginning, there were only a few ways to generate wealth via crypto: either mining tokens or HODLing until the value of your crypto went up.
But with the evolution of the Ethereum platform and a diverse array of altcoins and DeFi apps, investors have more proactive opportunities to generate profits with their crypto.
One of these, 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?
Yield farming is locking crypto into a specific DeFi app to earn rewards from that crypto. Many platforms provide these rewards to investors to encourage liquidity in their token market.
In traditional securities trading, a market maker is an individual or organization that provides liquidity and trading services to investors in a particular market or set of markets. However, these central authorities to hold funds do not exist in cryptocurrencies and decentralized finance (DeFi).
To fill this critical role in DeFi markets, automated market makers (AMMs) provide liquidity for crypto trades directly on-chain. They rely on liquidity pools, smart contracts comprising 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 yield.
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 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 Q3 2023):
With close to 50% of the total market share by volume of trades, Uniswap is one of the top DEXs on the Ethereum blockchain in 2023. Two platform versions are active – the older V2, which is still going strong with a 15% market share, and the upgraded V3, which 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 allows you to invest in liquidity pools of any available token. With 920 coins and 1,744 potential pairs, you have no shortage of choice. This also comes with some risk– plenty of scam coins in the crypto wilderness.
Daily trading volumes hit a high of $1 trillion in May 2022 but have since declined to a modest $136.2 million, while the total value locked (TVL) is $3.2 billion. Still, as it controls nearly 50% of the total DEX trading volume, 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:
An alternative to Uniswap (not based on the Ethereum blockchain) is PancakeSwap. 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 around $13.6 million daily trading volumes. It is also the second-largest DEX in terms of market share by volume of trades.
Regarding liquidity pools, PancakeSwap offers more coins but fewer pairs than UniSwap, with 1001 coins and 1233 pairs. PancakeSwap once offered five times the number of pairs, but the platform has scaled back considerably as many of those were obscure coins with nearly zero liquidity.
PancakeSwap launched their V2 pools in April 2021. Suppose you stick to relatively well-established coin/token pairs. In that case, you can expect annual rewards ranging from 2.5% to 20% on PancakeSwap V2. Here are some examples:
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 104 coins and 222 pair pools.
These include stablecoins – cryptos pegged to an external asset like gold or fiat currencies – and 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.
This conservative approach has paid off handsomely when you look at the numbers. Curve has the second largest TVL of all similar platforms, currently $2.1 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:
Yield Farming Platforms to Watch in 2023
Venus is a DeFi platform on the Binance Smart Chain, making this platform stand out. Their competitive advantage lies in their ability to mint their synthetic stablecoin, VAI, and fast, low-cost transactions through the Binance Smart chain. Users can participate in platform governance through its native token, XVS.
Founded in 2018, Compound Finance is another popular yield farming platform that has carved out a niche in the crypto industry with their algorithm-based smart contract approach, which creates dynamic interest rates for investors. These interest rates are determined algorithmically based on supply and demand.
Yearn Finance is a group of DeFi lending and yield protocols that offer lower transaction fees than other platforms. Their liquidity pools, more commonly called yVaults in the Yearn community, accept deposits and route the funds to strategies seeking higher rewards in DeFi. Based on the platforms’ reports, their products typically offer yields of 25%-35%.
SuShiSwap is a decentralized exchange that initially forked from UniSwap but has added many additional features and initiatives since then. Apart from their native SUSHI token, the platform is unique for allowing new tokens to be added to the exchange without requiring liquidity from the token’s team.
Harvest Finance is a yield aggregator that aims to provide users with efficient farming opportunities. It combines features like auto-farming vaults, liquidity mining, and lending to simplify the investment process and make it more accessible, especially for beginners.
Aave is a decentralized money market protocol. It was first deployed on the Ethereum network but has since expanded to Polygon, Avalanche, and other Ethereum Virtual Machines and L2 scaling solutions. Aave is known for flash loans, allowing users to borrow assets without collateral.
What Are the Risks and Rewards 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. 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. There are no guarantees as to your return, if any.
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 a 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 generate a 100-fold increase in 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 wealth. Staking is another option we have covered in detail in our Beginner’s Guide to Staking.
If you stick with established cryptos (BTC, ETH, etc.) or stablecoins and pick out pools with a high trading value relative to the TVL, you can generate 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.
Crypto yield farming explained?
Crypto holders leverage yield farming by lending their tokens to a decentralized finance platform via a liquidity pool. In return, users earn interest in the form of additional tokens. Smart contracts determine interest rates and reward systems.
What is the best yield farming app?
The best yield farming app is based on your preference, risk tolerance, and the specific features you’re looking for. Popular platforms include Uniswap, PancakeSwap, and Compound. Make sure to understand each platform's associated advantages and risks while paying special attention to the security features that keep your fund safe.
Does Coinbase do yield farming?
Coinbase currently does not offer yield farming as a feature.
Is yield farming still profitable?
While yield farming can still be profitable, the exact figures fluctuate depending on factors, including interest rates, token prices, and supply and demand. Security exploits and news events could also affect returns.
Does Binance have yield farming?
Binance can support yield farming through the BSC platform. They offer options to add liquidity to over five dozen liquidity pools.
How risky is crypto yield farming?
While it offers higher returns than staking pools, yield farming has downsides, including complexity, security risks, and impermanent loss, requiring users to be more hands-on and proactive with their investments.