What Is YIELD FARMING? DEFI Explained (Compound, Balancer, Curve, Synthetix, Ren)
Summary
TLDRYield 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
- π² Yield farming aims to maximize returns by switching between protocols
- π¨βπΎ The term 'crop rotation' refers to moving funds between strategies
- π APYs can reach 100%, much higher than traditional finance's 0.1-3%
- β½οΈ Liquidity mining rewards users with tokens for supplying protocols
- π Leverage allows farmers to borrow and increase potential returns
- βοΈ Risks include liquidations, smart contract bugs and price crashes
- π§° Strategies involve lending, liquidity pools, staking and combinations
- π Synthetix rewarded stakers for supplying tokens to Curve's BTC pool
- β± Strategies can become obsolete quickly due to protocol changes
- π 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.
Outlines
π€ What is yield farming and how did it start
Yield farming emerged as a way for cryptocurrency investors to maximize returns by switching between DeFi protocols. It started with Synthetix rewarding liquidity providers with snx tokens. The concept became popular with Compound's liquidity mining rewards.
π± The risks of leverage and liquidations in yield farming
Yield farming carries risks like liquidations from over-collateralized loans, smart contract bugs, and attacks draining liquidity pools. The use of leverage amplifies returns but also risk. Liquidation occurs if collateral ratio drops too low.
π Common yield farming strategies
Yield farming strategies involve lending, borrowing, supplying liquidity pools, or staking LP tokens to generate returns. Steps can be combined and optimized but need adjustment as incentives change. Tools help calculate profitability across different yield farming opportunities.
π€ Yield farming adoption considerations
Though yield farming attracts users and capital to DeFi, complex strategies can frustrate normal users. Continual rotation between profitable setups is required. While far from efficient, yield farming presents opportunities exceeding traditional finance.
Mindmap
Keywords
π‘Yield farming
π‘Liquidity mining
π‘Leverage
π‘APY
π‘Risk
π‘Lending & borrowing
π‘Liquidity pools
π‘Staking
π‘Crop rotation
π‘Adoption
Highlights
Yield farming tries to maximize returns by switching between multiple DeFi protocols
Liquidity mining distributes tokens as incentives for yield farmers on top of existing yields
Yields from farming can be over 100% APY due to liquidity mining, leverage, and risk-taking
Leverage allows farmers to use borrowed funds to increase potential investment returns
Risks like liquidations and smart contract bugs enable high farming reward rates
Common yield farming strategies involve lending, liquidity pools, staking, and borrowing
Farmers can lend stablecoins and earn interest, enhanced by rewards and leverage
Providing liquidity earns fees and rewards, e.g. BAL tokens for supplying to Balancer
LP tokens from pools can be staked for further rewards like on Synthetix
Strategies combine lending, leverage, pools etc to maximize yield farming returns
Profitable farming strategies change quickly as protocols and incentives shift
Yield farming risks are high but so are the opportunities compared to traditional finance
Tools help calculate profitable yield farming strategies amidst complexity
Yield farming adoption brings opportunities but also volatility for normal DeFi users
Readers are asked to comment on favorite yield farming topics for future videos
Transcripts
yield farming is one of the hottest
topics in decentralized finance and
there is a high chance you may have
already heard something about insane
returns that some of the yield farmers
are making through these yield farming
how did it all start
what are some of the examples of yield
farming and also what are the risk
involved you'll be going through all of
this in this video but before we start
if you need to defy you may want to
pause this video and watch my
introduction to decentralized finance
video first okay so what is yield
farming actually all about yield farming
in essence is a way of trying to
maximize a rate of return on capital by
leveraging different defy protocols
yield farmers try to chase the highest
yield by switching between multiple
different strategies the most profitable
strategies usually involve at least a
few defy protocols like compound curve
synthetics yoona swab or balancer if the
strategy doesn't work anymore or if
there is a better strategy available the
yield farmers move their funds around
they may for example move the funds
between different protocols or they may
swap some of their coins to other ones
that are currently generating more yield
in our yield farming world this
procedure is sometimes called crop
rotation to compare it to traditional
finance you can imagine people trying to
find the best saving account with the
highest APY APY stands for a new alized
percentage yield it's a common way of
comparing rates of return on your money
across different products it's also a
common way of expressing the returns of
different yield farming strategies
speaking about APY it
come on to see traditional saving
accounts having around 0.1% APY and
anything above 3% is pretty much unheard
of these days when it comes to yield
farming the returns can be pretty insane
with some of the strategies bringing as
much as 100% APY so how is that possible
and where is a catch there are three
main elements that make such returns
possible liquidity mining leverage and
risk let's cover all of them Before we
jump into some common strategies
liquidity mining is a process of
distributing tokens to the users of a
protocol one of the first defi projects
that introduced liquidity mining was
synthetics that started rewarding users
who helped with adding liquidity to
their s eat eat pool on uni swap with
snx tokens liquidity mining creates
additional incentives for yield farmers
as the token rewards are added on top of
the yield that is already generated by
using a certain protocol depending on
the protocol this incentives may be so
strong that farmers may actually be
willing to lose on their initial capital
just to get more rewards in the
distributed tokens which makes their
overall strategy highly profitable a
good example of this was the liquidity
mining of competence introduced by
compound that was initially giving
higher rewards to the users who were
borrowing assets with the highest APY
this incentivized farmers to start
borrowing this asset as the value of
minted comput oaken's was compensating
them for the high bar rates they had to
pay complicated mining got super popular
and was pretty much a catalyst for a
wider spread of yield farming bizarre
liquidity mining leverage is another
element that makes ultra high returns
possible leverage is a strategy of using
borrowed money to increase the potential
return of an investment in our yield
farming world farmers can deposit their
coins as collateral to one of the
lending protocols and borrow other coins
now they can use the borrowed coins as
further collateral and borrow even more
coins by repeating the whole procedure
farmers can leverage their initial
capital a few times over and start
generating even greater returns on their
initial capital the last missing element
of double or triple digit AP wise is the
high risk that farmers are willing to
take the first one is related to the
previous thing that we just discussed
leverage all the loans that farmers are
taking are over collateralized and
supplied collateral is susceptible for
liquidation if the collateralization
ratio drops below a certain threshold
besides the liquidation risk we have our
standard smart contract risks like bugs
platform changes admin keys and systemic
risks for example either sharply losing
its value on top of that we have a few
new attack vectors specific to defy for
example attacks that aim at draining
certain liquidity pools all of these
risks put together are yet another
reason why yield farming returns are so
lucrative
it's a high-risk high-reward gain yield
farming strategies are sets of steps
that aim at generating a high yield on
the capital these steps usually involve
at least one of the following elements
lending borrowing supplying capital to
liquidity pools or staking LP token
before we look at them one by one if you
already made it this far
hit the like button and don't forget to
subscribe to my channel for more DIY
content lending and borrowing a fairly
simple way of getting a py on your
capital farmers can for example supply
stable coins such as dye or USD C on one
of the lending platforms and start
getting a return on their capital
liquidity mining and leverage can
supercharge that for example farmers can
get rewarded with extra comput oaken's
for lending and borrowing on compound
they can also borrow funds with their
collateral to buy even more coins these
comes of course with a risk of potential
liquidations supplying capital to
liquidity pools yield farmers can supply
coins to one of the liquidity pools in
protocols like Yunus WAP balancer or
curve and get rewarded with these that
are charged for swapping different
tokens again liquidity mining can
supercharge this so for example by
supplying coins to certain liquidity
pools farmers are rewarded with extra
tokens balancer is a good example of a
protocol that rewards liquidity pooled
suppliers with extra pearl tokens
increasing their APY staking LP tokens
some protocols incentivize users even
further by allowing them to stake the
liquidity provider or LP tokens that
represent their participation in a
liquidity pool as an example synthetics
ran and curve got into a partnership
where users can provide W BTC SBDC and
ran BTC to the curve BTC liquidity pool
and receive curve LP tokens as a reward
these tokens can be staked on Cynthia
Minter where farmers can be further
rewarded in CRV bow as an ex and rent
tokens yeah I know this is getting quite
complicated and we'll create another
video to explain how liquidity pools
actually work some of these strategies
can also be combined so yield farmers
can maximize the returns even further
it's worth keeping in mind that yield
farming strategies can become obsolete
very quickly by for example protocol or
incentive changes and something that may
be super profitable right now may not be
profitable at all the next day so it's
important to keep an eye on the running
strategies and rotate crops if necessary
I hope that now you know a little bit
more about yield farming it's worth
remembering that yield farming is a
completely new thing and far from being
a fully efficient market so there is
plenty of opportunities that can bring a
substantially better return on our
capital than what we can find in
traditional finance or even centralized
crypto finance these comes of course
with certain risks some of them we may
not even be aware of yet although yield
farming has a good potential for
increasing user adoption and attracting
more people to use defied protocols it
can also make life harder for normal
users who may not be interested in yield
farming for example users may see burrow
rates on compound changing dramatically
and they may not be aware of all the
intricacies of different comp token
distribution strategies as yield farming
can get quite complicated there are some
tools that facilitate calculating how
profitable different strategies are I'll
put some links in the description box
below so what are some of your favorite
yields farming
and what kind of topic would you like to
hear about next comment down below if
you liked this video don't forget to
smash the like button and subscribe to
my channel thanks for watching
Browse More Related Video
Leveraged Yield Farming (60% on Stablecoins!?)
The MakerDAO-Aave Debacle: Risks and Rewards of Collateralizing DAI | Analyst Round Table
How to HEDGE your Liquidity Pools positions!? (Like Overnight Finance)
YEARN FINANCE And YFI Token Explained | DeFi, Ethereum
Aave Tutorial (How to Borrow & Lend Crypto)
Lending And Borrowing In DEFI Explained - Aave, Compound
5.0 / 5 (0 votes)