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.

Outlines

00:00

🤑 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.

05:03

😱 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.

10:05

📈 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.

🤔 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.

Keywords

💡Yield farming

Yield farming refers to strategies that aim to maximize returns on capital by leveraging different DeFi protocols. It involves frequently moving funds between protocols or assets to chase the highest yields. The video gives examples like crop rotation between different lending platforms or liquidity pools.

💡Liquidity mining

Liquidity mining refers to the process where DeFi protocols distribute tokens as rewards to users who help provide liquidity. For example, Synthetix rewarded SNX tokens to Uniswap liquidity providers. This incentivizes yield farmers to use certain protocols.

💡Leverage

In yield farming, leverage means using borrowed funds to increase potential investment returns. Farmers deposit coins as collateral to borrow more coins to further invest. This amplifies yields but also risk.

💡APY

APY or Annual Percentage Yield is a standard metric used to compare returns across different yield farming strategies or DeFi protocols. While savings accounts offer 0.1% APY, yield farming can bring over 100%.

💡Risk

Yield farming involves high risks like smart contract bugs, price volatility, and liquidation risks with leverage. But high risks also enable the high reward potential.

💡Lending & borrowing

A basic yield farming strategy where users supply or borrow assets on protocols like Compound to earn interest. Can be combined with liquidity mining for extra token rewards.

💡Liquidity pools

Users can supply token liquidity to AMMs like Uniswap and earn fees. Some pools incentivize this further by distributing tokens like BAL or UNI to liquidity providers.

💡Staking

Some protocols allow yield farmers to stake the LP tokens they received for supplying liquidity. This lets them earn extra token rewards through staking.

💡Crop rotation

The video compares yield farmers frequently moving funds to chase yields to crop rotation in agriculture. Strategies must evolve as incentive programs change.

💡Adoption

While yield farming attracts capital to DeFi, the video notes it can also complicate things for normal users. For example, volatile borrow rates due to capital shifting.

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