Put your crypto to work on protocols like Compound, HarvestFinance, Cake , Uniswap etc…
Have you heard about yield farming?
If not, then you should definitely check it out, as it is one of the hottest ways to earn a passive income with crypto right now.
But how much can you realistically earn with yield farming in 2021?
In this article, we will find an answer to the above question by calculating the potential profits at multiple providers, as well as introducing you to the basics of yield farming.
What Is Yield Farming?
Yield farming is a trending yet very new method to earn cryptocurrency that has appeared with the DeFi industry’s rise. Yield farming or liquidity mining refers to the practice of using complex strategies to lend, stake, and hold digital assets across multiple cryptocurrency or DeFi protocols.
As part of the strategy, farmers contribute liquidity to a project’s pool via lending or staking cryptocurrency to earn rewards.
In addition to the rewards, many DeFi protocols issue tokens representing the users’ share in the liquidity pool, which they can move to other platforms to increase their potential gains.
How yield farming works?
As mentioned above, yield farming is a new role in decentralized finance applications that contributes to required liquidity in DeFi platforms. It provides trustless opportunities for crypto holders to make passive income and returns by lending their holdings via smart contracts. Generally, when someone talks about passive income, its amount hardly achieves 5% or maximum 10% in lending and staking platforms. However, in yield farming, this return is maximized and investors are allowed to use strategies to make more than 50% return per year. As we mentioned earlier, this return is passive and investors can achieve it regardless market conditions and price performance.
4 Types of Defi Passive Income
You can lend crypto assets including Bitcoin, Ethereum and stablecoins to both centralised and decentralised lending platforms in return for yield.
Borrowers will put up cryptocurrency as collateral and borrow (usually up to 50%) on top of this. So someone will provide 1 ETH with a value of $1000 for arguments sake and can borrow $500 in stablecoins. They get to keep their exposure to ETH while raising capital without incurring capital gains tax.
As a lender you earn lending fees of between 1 and 30% APY on your holdings.
DeFi trading of crypto assets usually occurs on an AMM (Automated market maker). The most famous example is Uniswap which provides decentralised markets on Ethereum.
A liquidity provider will send a smart contract a pair of tokens such as ETH and USDT. These will go into a liquidity pool and the user will be sent liquidity provider tokens in return.
When a 3rd party user trades ETH for USDT or visa versa they add one cryptocurrency to the pool and take the other paying a fee which goes to the liquidity provider.
With Ethereum 2.0 around the corner staking is about to become a hot topic. Ethereum is moving from a proof of work algorithm like bitcoin uses to a proof of stake consensus mechanism.
Instead of ASIC miners doing SHA256 maths calculations, stakeholders in the platform will deposit ETH, run a node which will compute the block cycles and provide a consensus vote.
In practice for most participants this will mean depositing ETH to a platform like Binance where they will manage everything else.
Binance currently offers ETH2.0 staking but be sure to read up on the extended lock up period which could end up being very restrictive.
Yield farming can either be a manual or automated process of combining different DeFi protocols to generate the best yield on assets.
Often yield farming platforms such as Yearn Finance will supplement the yield by providing governance tokens in addition to the standard yield provided.
These governance tokens hold value in their own right which increases the rewards for the user.
Some yield farming strategies use leverage to amplify both risk and rewards.
Where can I do Yield Farming?
Yield farming is available on many DeFi platforms on different blockchains. In the world of DeFi, two blockchains, Ethereum and Binance Smart Chain, are hosting most of the active platforms. Each blockchain has specific pros and cons and has been successful in attracting developers to make DeFi platforms. We’ll discuss both blockchains and the DeFi platforms in them so you can choose the best option for your needs.
Ethereum Smart Chain
Compound was the first platform to introduce yield farming to users. It lets you lend and borrow tokens. Liquidy miners and yield farmers provide ETH or any ERC-20 token to the platform and receive trading fees. Besides, the COMP token is distributed between liquidity miners that incentivize them more. COMP is the Compound platform’s governing token and has experienced a rise in price in the past months.
UniSwap is one of the most popular decentralized exchanges that offer the ability to swap any tokens. The platform requires liquidity providers to lock an equal amount of two tokens in a pool. As a result, they” receive trading fees when any user swaps the tokens in a pool.
SushiSwap offers various yield farming options to investors. One of the most popular ones is Sushibar. You stake SUSHI tokens in this platform and receive xSUSHI tokens. The token distribution comes from 0.05% of the exchange trading fees. There are more options for yield farmers in SushiSwap that Onsen pools are among the most attractive ones.
Balancer liquidity mining includes supplying capital to liquidity pools in this platform. You’ll receive BAL tokens as a result of liquidity providing in Balancer. BAL is the governance token of the Balancer platform.
Aave provides the opportunity to lend and borrow tokens. It uses various algorithms to calculate the rewards of liquidity providing to users. Many professional yield farmers use Aave because it has some attractive features like flash loans. These loans sometimes result in a considerable return for yield farmers.
Binance Smart Chain
Binance Smart Chain is one of the most popular alternatives for those developers that need another blockchain sith support for smart contracts. They can build DeFi platforms in this blockchain that provide various opportunities for trading and swapping tokens. Some of the most popular DeFi platforms in BSC are:
PancakeSwap – another DeFi with a food-related name – provides many opportunities to liquidity miners. They can stake their tokens in liquidity pools or even participate in lotteries. NFTs are other options in PancakeSwap that attract many users. Liquidity miners sometimes stake their LP tokens and receive CAKE tokens in rewards that increase their earnings.
Venus is a decentralized money market for lending and borrowing tokens. You can deposit any tokens like BNB, ETH, and many stablecoins to receive rewards. Liquidity miners use their interests as collateral to receive loans. Some of them mint VAI stablecoin with their interests.
Harvest is an international cooperative of humble farmers pooling resources together in order to earn DeFi yields.
When farmers deposit, Harvest automatically farms the highest yields with these deposits using the latest farming techniques.
Bunny team is dedicated to support the underlying DeFi ecosystem by providing users with an easy way to automatically compound their yields through the Binance Smart Chain. The DeFi movement, and more specifically Yield Aggregators, have seen a huge surge in activity in 2020. The Rise of Yearn, which uses existing protocols such as Compound, DyDx, and Curve, has influenced the development of various other Yield Aggregator projects on the Ethereum Network. Our goal is to expand that same interest through the Binance Smart Chain Ecosystem.
Liquidity mining and yield farming are attractive opportunities for cryptocurrency investors. They can stake their holdings and receive earnings from traders. But the risks of investment are always there. You should be careful about choosing the best mining platform and also monitoring your holdings on vaults. Liquidity mining can become the first choice of investment for many people. It helps the DeFi platforms offer more features to end-users, and it’s why they always try to keep the miners.