What exactly is Yield Farming?

April 24, 2022

What exactly is Yield Farming?

The most discussed topic at Defi Summer 2020 was yield farming.

The overall value of locked liquidity pools is likely to hit new highs in 2021. What exactly is yield farming, how does it work, and where can you do it?

Yield farming is the activity of using or leasing cryptocurrency assets in order to generate large returns or rewards in the form of additional cryptocurrency.

This novel, but dangerous and unexpected, use of decentralized finance (Defi) has lately gained traction as a result of other findings, such as liquidity mining. Yield farming has emerged as the most important development engine in the fledgling Defi sector, which is predicted to grow from $500 million to $10 billion by 2020.

In a nutshell, yield farming strategies encourage liquidity providers (LPs) to contribute or lock their crypto assets in a smart-contract-based liquidity pool.

These incentives may take the form of a percentage of transaction fees, loan interest, or a governance token. These findings are expressed as a percentage yield each year (APY).

The value of the supplied returns lowers as more investors add funds to the related liquidity pool.

Most yield holders initially relied on the well-known stablecoins USDT, DAI, and USDC. The most widely used Defi protocols, on the other hand, run on the Ethereum network and award governance tokens for so-called liquidity mining.

Tokens are farmed in these liquidity pools in exchange for liquidity to decentralized exchanges (DEXs).

Liquidity mining occurs when a Yield Farming member receives token rewards as additional remuneration. It gained traction after Compound began issuing the increasing COMP, the platform's governance token, to users.

Most yield farming systems now compensate liquidity providers with governance tokens, which may be traded on a number of marketplaces, including the decentralized Binance and Uniswap.

what exactley is yield farming

What exactly is APY in yield farming?

Yield farming, as well as the vast majority of protocols and platforms, calculate returns in terms of annual percentage yield (APY). The annual percentage yield (APY) is the return on investment over the course of a year. The APY comprises compound interest, which is calculated and applied on a regular basis to the amount.

Since the Defi summer of 2020, yield hunters have been chasing amazing thousand-percent APYs. These logs and coins, on the other hand, can be extremely harmful and prone to outliers.

Furthermore, the income is earned in log tokens, which are subject to highly volatile price fluctuations.

The 10 most popular yield farming protocols

Yield farmers usually use many Defi systems to maximize the return on their investment. These systems offer a variety of incentive-based lending and liquidity pool borrowing options. The following are seven of the most commonly used yield farming techniques:

Aave is an open-source, non-pledged, decentralized lending and borrowing protocol that allows users to borrow assets and earn compound interest in the form of the AAVE token for lending (formerly LEND).

With almost $21 billion in TVL as of August 2021, Aave has the highest TVL of any Defi protocol. AAVE customers can earn up to 15% APR on lending.

The Compound is a lending and borrowing asset money market where you can earn algorithmically adjusted compound interest and the governance token COMP. It is audited and evaluated on a regular basis to ensure the highest level of security. The total offering (as of August 2021) is $16 billion, with APYs ranging from 0.21% to 3%.

Curve Finance is a DEX that employs a novel market-making algorithm to enable users and other decentralized protocols to exchange stablecoins for low fees and with minimal slippage.

It is the largest DEX in terms of TVL, with around $9.7 billion locked up. The base APY may be as low as 10%, while the reward APY may be as high as 40%. Stablecoin pools are generally safer because the value of their peg does not degrade.

Uniswap is a well-known DEX and AMM that allows users to exchange virtually any ERC20 token pair without the need for a third party. To obtain a percentage of transaction fees and the UNI governance token, liquidity providers must use both sides of the liquidity pool in a 50/50 split.

The current live versions are Uniswap V2 and V3. The most recent version, Uniswap V3, is a growing protocol ecosystem with over 200 integrations. The TVL for V2 is $5 billion as of August 2021, and it is more than $2 billion for V3.

Instadapp is the most advanced platform for harnessing the power of Defi in the world. Users may manage and enhance their Defi portfolio, while developers can use their platform to build Defi infrastructure. As of August 2021, more than $9.4 billion had been locked up on Instadapp.

SushiSwap is a fork of Uniswap, a coin that generated quite a stir in the cryptocurrency community during its liquidity migration process. It has matured into a Defi ecosystem with multi-chain AMM, loan and leverage markets, onchain mini dapps, and Launchpad. TVL on the platform is worth $3.55 billion as of August 2021.

PancakeSwap is a Binance Smart Chain (BSC)-based DEX that allows you to trade BEP20 tokens. PancakeSwap operates on the automated market maker (AMM) model, in which users trade against a liquidity pool.


PancakeSwap has the highest TVL among BSC protocols, at nearly $4.9 billion in TVL (as of August 2021). It focuses on gamification aspects like lotteries, team combat, and NFT collectibles. The annual percentage yield (APY) can reach 400%.

The Venus Protocol is an algorithm-based money market system that aims to provide a credit-based system to the Binance Smart Chain. Borrowers pay interest while users donate collateral to the network in exchange for APY.

Venus distinguishes itself by its ability to lend other assets using market collateral and issue synthetic stablecoins with overcollateralized positions that defend the protocol.

These fake stablecoins are supported by a number of cryptocurrencies. TVL is worth more than $3.3 billion as of August 2021.

The balancer functions as a trading platform as well as an automated portfolio manager. Its liquidity mechanism enables it to be deployed in a flexible manner. It does not oblige lenders to provide equal liquidity to both pools.

Instead, liquidity providers can create individual liquidity pools with varied token ratios. As of August 2021, more than $1.8 billion had been set aside.

Yearn. Finance is a decentralized automated aggregation protocol that allows yield builders to increase yield by utilizing multiple credit protocols such as Aave and Compound. Yearn. Finance uses rebasing to enhance profit by locating the highest-yielding farming services.

Yearn. Finance made waves in 2020 when its governance token, YFI, temporarily surpassed $40,000 in value. Yearn users can earn up to 80% APY, and the coin is valued at $3.4 billion.

Farming Bitcoin Yields

Most users are interested in Yield Farming for Bitcoin when it comes to crypto farming. While there are no protocols for Bitcoin Defi Yield Farming, Wrapped Bitcoin (WBTC) connects Bitcoin to the Ethereum blockchain and Defi applications.

Owners of Bitcoin can earn a few percent returns by learning how to package Bitcoin and lend it via protocols like Compound.

Yield Farming rankings on CoinMarketCap.

Are you seeking the highest yield farming pools for various Defi protocols? Don't bother looking any further! On CoinMarketCap, the Defi Yield Farming Rankings track liquidity pools across Defi protocols such as Venus, Curve, Sushi, Synthetix, Yearn, PancakeSwap, and others.

The crypto pair, total value locked (TVL), yield type, volatile loss, and annual percentage yield can all be viewed by yield farmers (APY).

The Risks of Yield Farming

Yield farming can be rather complicated, carrying significant financial risks to both borrowers and lenders. It usually has high Ethereum gas prices and is only worthwhile if hundreds of dollars are given.

Furthermore, when markets are volatile, users are at risk of volatility losses and price reductions. CoinMarketCap has a Yield Farming ranking page with an Impermanent Loss Calculator to assist you in identifying your risks. CoinMarketCap also has a website that tracks the values of the top Yield Farming tokens.

Most importantly, yield farming is vulnerable to hackers and scammers due to potential weaknesses in the protocols' smart contracts. These programming errors can occur as a result of severe competition across protocols when speed is critical and new contracts and features are frequently untested, if not copied from predecessors or competitors.

The Yam protocol (which earned over $400 million in days before a severe flaw was identified) and Harvest. Finance (which lost over $20 million in a liquidity hack in October 2020) are two examples of vulnerabilities that have resulted in significant financial losses.

Defi protocols are permissionless and rely on a variety of apps to function properly. Assume one of these underlying programs gets exploited or fails to function properly. In that instance, it may have a detrimental impact on the entire application ecosystem, culminating in a permanent loss of investor capital.

There has been an increase in risky protocols that issue so-called meme tokens with animal and fruit names, offering hundreds of dollars in returns.

These protocols should be utilized with caution because their code is largely untested, and the returns are subject to surprise liquidation due to market volatility.

Many of these liquidity pools are complex scams in which the creators drain the pool's liquidity and disappear with the money.

Defi losses are usually irreversible and cannot be undone because the blockchain is fundamentally unchangeable.

As a result, it is advised that consumers get acquainted with the risks of yield farming and conduct their own research.

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