What Is YIELD FARMING? DEFI Explained (Compound, Balancer, Curve, Synthetix, Ren)

Summary

Yield farming is a way to maximize returns by leveraging DeFi protocols. Farmers chase yields by rotating between strategies, moving funds between protocols, or swapping coins. Returns can reach 100% APY due to liquidity mining incentives, leverage through borrowing, and risk-taking. Common strategies involve lending, borrowing, supplying liquidity pools, or staking LP tokens. However, strategies can become obsolete quickly. While yield farming has potential, its complexity can negatively impact normal DeFi users through fluctuating rates. There are tools to calculate profitability of different strategies.

Takeaways

• 😲 Yield farming aims to maximize returns by switching between protocols
• 👨‍🌾 The term 'crop rotation' refers to moving funds between strategies
• 📈 APYs can reach 100%, much higher than traditional finance's 0.1-3%
• ⛽️ Liquidity mining rewards users with tokens for supplying protocols
• 😎 Leverage allows farmers to borrow and increase potential returns
• ❗️ Risks include liquidations, smart contract bugs and price crashes
• 🧰 Strategies involve lending, liquidity pools, staking and combinations
• 🚜 Synthetix rewarded stakers for supplying tokens to Curve's BTC pool
• ⏱ Strategies can become obsolete quickly due to protocol changes
• 👍 Yield farming adoption could attract more users to DeFi protocols

Q & A

What is yield farming?

Yield farming is a way of trying to maximize the rate of return on capital by leveraging different DeFi protocols. Yield farmers try to chase the highest yields by switching between multiple strategies across protocols.

How are insane returns possible in yield farming?

Insane returns are made possible through liquidity mining incentives, leverage via borrowing, and farmers' willingness to take on high risks.

What is liquidity mining and how does it relate to yield farming?

Liquidity mining refers to rewarding users with tokens for providing liquidity. It creates additional incentives for yield farmers on top of the base yield strategies.

How does leverage play a role in yield farming returns?

Farmers use leverage by borrowing funds with their crypto collateral to further increase their capital deployed. This magnifies returns but also risk.

What are some of the risks involved with yield farming?

Major risks include liquidation risk if collateral drops too much, smart contract bugs, changes to protocols, systemic failures of crypto assets, and targeted attacks to drain liquidity pools.

What are some common yield farming strategies?

Common strategies involve lending & borrowing, supplying liquidity pools, staking LP tokens, and combining these to maximize yield from incentives and leverage.

Why do yield farming returns change so rapidly?

Changes to protocol incentives and dynamics can quickly make formerly profitable strategies unprofitable. Farmers must continually rotate to the best opportunities.

How can yield farming benefit normal DeFi users?

It can increase adoption and attract users to protocols. But it can also negatively impact normal users through effects like rapidly changing, opaque borrow rates.

What tools exist to help analyze yield farming opportunities?

There are emerging tools to calculate profitability of different yield farming strategies and track the rapid changes across protocols.

What risks may not be fully apparent in these early days of yield farming?

As a very new market, there may be many unknown risks. The practices and safeguards surrounding leverage and risk management are still developing.