How To Choose A Good Yield Farm

What is Yield Farming?

While the specifics can vary, ‘yield farming’ is a term that refers to the activity of lending crypto avails to protocols, platforms, or chain validators with the intent of generating boosted income on the provided uppercase.

Liquidity providers can engage in yield farming with collateral in the grade of native protocol tokens, stablecoins, awarding tokens, trading and lending positions (themselves represented every bit tokens), NFTs, and effectively whatever type of digital asset on a blockchain. The multifariousness of options makes yield farming a big and complex corner of the DeFi universe with multiple sub-sectors in its ain right.

In its most simplified class, yield farming is no more dissimilar than any other financial incentivization mechanism readily nowadays in TradFi (i.east. lending assets for a passive return). The caveat is that the interoperability of DeFi applications gives birth to an unusually wide array of opportunities waiting to be unearthed by investors, and that factors such as smart contract risk and fund custody nowadays dissimilar risk profiles for yield farmers. Nevertheless, for users who are willing to swoop into this exciting field of decentralized finance, at that place’s an abundance of opportunities investors tin can choose from to bring productivity to their idle assets.

Allow’s have a wait at key concepts and principles beginners need to know to get started making passive income with their crypto avails!

Why Yield Farming? The Benefits to Both Sides

Both liquidity providers and platforms offering rewards take their own motivations when it comes to yield farming. Investors enjoy the additional income on their crypto holdings while networks and applications leverage user liquidity for their unique purposes, such equally ensuring network security with the funds or accessing uppercase for lending, trading, and creating network furnishings for their services. Refer to this article by Bound Trading, one of the leading institutional participants in DeFi, in which they extensively explore the incentives allocated to yield farming.

Yield Farming Strategies

Every investment strategy mentioned here essentially operates as a passive income strategy. Notwithstanding, given how speedily things tin can change in the yield farming world, hunting for the most profitable strategies can often experience like a full-time job, or active income generation. Indeed, there are professional yield farmers who pursue circuitous strategies to obtain the highest yields. Thus nosotros can consolidate the arroyo to yield farming under two arbitrary categories: effortful and effortless.

In fairness, the try input is more of a spectrum than ii rigid categories merely let’s apply these two for the sake of simplicity. The effortless approach is settling with on-concatenation opportunities similar to those more often than not present in traditional finance: tiresome-paced yield farming with a relatively stable, steady, and secure income inflow and without the need for a constant search for better yields. Staking at the protocol level for network security, lending and LPing with stablecoins or loftier marketcap cryptocurrencies, following some time-tested strategies, and farming on centralized exchanges constitute these opportunities that don’t crave investors to stomach high risk or try to come up up with elaborate strategies or catch fringe opportunities.

Effortful yield farming, on the other paw, is fast-paced, risk-on, and normally involves a mercenary approach to capital. Information technology requires finesse in managing funds and a certain level of sophistication to navigate both the market place and technology-related risks. Activities built-in through this approach offer lucrative results merely demand a higher endeavour input and hazard tolerance from the investor in render. Yield farming with loftier-gamble avails similar governance tokens and NFTs, searching for pool 2s, and combining numerous services to further financialize assets are some examples of high-endeavor farming.

Those who want to get yield farmers must know the differences between the two approaches and pursue strategies that fit their investment goals and run a risk ambition. Since it’s bear, investors willing to optimize for protection against volatility and minimize application-specific risks can refer to our commodity laying out the all-time stablecoin strategies for surviving the deport.

Below is a bird’s-centre view of the yield farming space, exploring some of the popular strategies investors can follow. Please note that some of these strategies may become obsolete with applications deprecating incentives.

Staking

If investors are property native tokens for bondage with inflationary tokenomics, staking may be crucial for protecting themselves confronting dilution and earning rewards on top. Staking is a relatively more secure style to utilize L1 tokens compared to lending and providing liquidity. One of the leading thought leaders in the manufacture, Arthur Hayes, goes as far equally to phone call the staked Ether a commodity-linked bail. Hither are some of the vanilla staking strategies.

• Staking native protocol tokens on PoS blockchains to participate in concatenation security and getting rewards for block validation. Investors who cannot afford to stake at the protocol level can stake ether on centralized exchanges or on SaaS (staking-equally-a-service) applications similar Lido, RocketPool, or Ankr; stake SOL on Lido or Marinade; stake the native tokens for Cosmos Ecosystem bondage like Secret Network, Osmosis, and Cosmos Hub on Kepplr Wallet app (examples can be expanded to every PoS chain) and can offset earning rewards on their deposit.
• Liquid representations of the staked positions such as stETH from Lido allows investors to utilise their locked assets in DeFi while contributing to the block validation. A well-adopted strategy for investors can be accomplished through wrapping the stETH to wstETH, matching the amount with Wrapped Ether (WETH), and depositing it to Balancer’s wstETH-ETH pool equally liquidity, increasing their total earnings.
• At that place is also a variation of staking non related to a technical security feature though ane can argue that it contributes to the stability of applications and thus has a office in maintaining network furnishings and the security of services. Staking application tokens like ILV of Illuvium, CRV of Curve Finance, and BAL of Balancer Finance by locking funds for both financial and awarding-specific benefits belongs to this type of staking. If an investor holds a stakeable ERC20 token and doesn’t use it on any other DeFi service, this might be a good way to earn on their assets.

To learn more virtually ETH staking specifically, check out Nansen’due south guide!

Lending

Investors can lend stablecoins, majors (i.eastward. ETH and BTC), and alt native tokens (due east.1000. SOL and AVAX) on decentralized coin markets like Aave and Compound, or alternatively, use platforms like Maple Finance and Goldfinch to lend to vetted businesses. In that location are many lending markets optimizing for dissimilar ranges of assets and offering countless on-chain opportunities. Still, the more an investor strays further from battle-tested applications the more they demand to pay attending to risks.

Apart from choosing less popular platforms, some other risk-on strategy with decentralized money markets is lending volatile application tokens (e.g. MANA and BAT) If an investor plans to hold a token with the anticipation of an increase in price, it might be better to have these assets work for them rather than keeping them in their wallet doing nothing and probably getting diluted with token emissions or unlocks.

Providing Liquidity

Investors tin can lend their assets to decentralized exchanges, increment the majuscule efficiency of the platforms, and get a portion of the trading revenues generated on their avails. Although liquidity provision is a vast country with a hazard spectrum ranging from one of the safest heavens in DeFi (stablecoin pools) to the near degen opportunities on the market place, it also hosts strategies with the near fiscal upside potential. Here are some of the examples readers can choose from:

• Providing liquidity to AMMs such as Uniswap and Sushiswap on EVM-compatible bondage and L2 platforms; to Orca, Serum, and Raydium on Solana, TraderJOE on Barrage, or on application-specific DEX chains like Osmosis and Thorchain. According to Nansen’s DeFi Paradise, Uniswap remains to host the nearly preferred pools past the smart coin on Ethereum.
  Alternatively, providing liquidity to CLOB DEXs like dYdX and Injective Chain or yield farming on selection services like Hegic, Opyn, and Dopex.

• Depositing stablecoins and other major avails like ETH, stETH, BTC, and WBTC to stableswaps like Curve Finance as liquidity and getting compensated with trading rewards is another popular strategy. The ecosystem built around Bend Finance also introduced additional steps to this strategy. Users can accept their LP tokens representing their lending position, lock them in CRV gauges or stake them to applications like Convex Finance or yveCRV vault on Yearn Finance, and increase their rewards.
  A similar formula can exist followed on Avalanche via Platypus Finance & TraderJOE and Vector Finance or on Solana via Saber Finance and Sunny.

• Looking for incentivized pool 2s with lucrative (and sometimes ludicrous) yields. This is a highly competitive and predatory zone which is often referred to as the PvP function of crypto as in some cases it directly emulates a Ponzi scheme where the application’s sole purpose is to reward the offset participants with subsequent get out liquidity.
  New applications attract capital with three, 4, and occasionally ten or more digit APYs rewarded in their application token. Some pool 2s are sustainable while some are like hay fires, glowing spectacularly for a brief time until incentives dry out out. That’due south why they require extensive risk assay, active monitoring, and extreme agility from the investor to be considered a pursuable farming strategy.
  To know more nigh the returns on these pools and the ways to look for pool 2s, here is an example demonstrating how 0xYakitori harnessed the power of Nansen to follow the smart money and found a Puddle 2 with mouthwatering returns.

Automated Strategies

Certain DeFi services provide automated fund management to investors with predetermined strategies executed through smart contracts. Here are some of the examples:

• Using yield generation services similar Yearn Finance on Ethereum and Yield Yak on Avalanche to accept an automated strategy to execute more than complex farming strategies on behalf of them.
• Using automated choice strategy platforms similar Ribbon Finance, Katana, and Friktion.
• Referring to automated liquidity management platforms similar Arrakis Finance and Gamma Finance for providing liquidity to next-generation AMMs (due east.g. Uniswap V3) and having the position managed by these platforms.

NFTs

Although it is a rather nascent industry, NFT-Fi offers investors several tools to get some passive returns on their assets.

• Staking the NFT for fungible tokens is one of the common earning strategies. Several projects (by and large games) design their tokenomics to utilise both NFTs and fungible tokens. Nyanheroes, a game on Solana, has been running a staking programme through which the holders of the collection take been mining the rights to future fungible tokens through staking their NFTs. Another instance is that the NFT lending platform JPEG’d offers its fungible token through staking JPEG cards.
• One other more generalized opportunity for the NFT holders is to eolith their assets to NFT lending platforms similar NFTX to boost the liquidity for vaults and gain in return.

Apart from these examples, the next level of yield farming is the constant search for niche opportunities, discovering wild puddle 2s, and extracting as much value from the composability of DeFi. Meaningfully farming with these activities is usually more suited for knowledgeable investors with relatively small capital letter sizes since both the risks entailed by the activities and the size of the funds narrow down the target segment who can bring together.

Like to the Curve and stETH strategies mentioned in a higher place, users can create elaborate yield farming combinations and boost their earnings. The following one from @lemiscate is a good instance for these strategies.

Or here is another instance from @FabienC_dev combining services to increase yields: Lido to stake ether and APwine, a platform to speculate on yields, to provide stETH as liquidity.

Possibilities are express to investors’ risk appetite. Put involvement-bearing tokens to do leveraged yield farming on platforms similar Alchemix and Apricot Finance, bridge your BTC through WBTC and combine Badger, Curve, and Convex for maximum results, or innovate an additional step to the Curve-Convex yield farming strategy with ButterflyDAO. Or opt in for a relatively safer option and seek profitability through complexity on stablecoins.

Yield Farming Risks

Almost of the risks mentioned in our complete guide to DeFi article hold for yield farming activities, with the near accent should exist put on the smart contract risk, the risks coming from exposure to highly volatile assets, rugpulls and scams, and the take chances of impermanent loss.

Using majors instead of stablecoins introduces the risk of volatility. Meanwhile, using app tokens or the tokens for alt L1s amplify the risk of volatility as they are relatively less liquid and have concentrated buying. Yield farming on less popular platforms with questionable auditing practices comes both with the risk of scams and exploits. On superlative of that, the more entrenched is an investor in a yield farming strategy, the more careful they need to be to outsmart the threats as the application-specific risks are cumulated past combining different DeFi services.

How tin can Nansen Help You Maximize Yield Farming Income?

Nansen sheds light on how the maestros of the craft orchestrate their yield farming strategies and therefore is an effective tool for building and tracking strategies. But heading to the Smart Money section and filtering it for “Smarter LP” allows users to meet the contracts most profitable liquidity providers recently interacted with, which reveals the about popular pools and the newest opportunities they discovered.

Users unleash Nansen to its fullest to level upwards their yield farming game. Here Nel explains how using Nansen’s Hot Contracts feature allows finding patterns in smart coin activity, inbound positions earlier the market, and exiting merely before the bell tolls for the pool. Likewise, here Nel once again, specifically talking most avoiding risks in liquidity pools.

Alternatively, Nansen’s DeFi paradise allows users to rank the liquidity pools past the number of smart coin holders to see the virtually preferred pools by the assisting wallets or rank past the smart money buying to see the fresh opportunities discovered past these wallets.

Determination

Similar investing, trading, or any activity that can be placed on a scale of chance tolerance, yield farming is too can exist simple or complicated depending on investors’ approach. Subscribe to Nansen’due south newsletter to learn more nearly the latest opportunities and continue yourself up-to-appointment with farming strategies.