Yield Farming Strategies in DeFi Right Now – What You Need to Know

Yield farming sounds fun as a phrase, but in reality it just means to make your crypto work for you. Instead of sitting in your wallet and doing nothing, you “plant” your crypto into different DeFi projects and get more crypto. It is similar to depositing your money in a savings account that pays you on top of it — but now you have tons of choices and a slight more risk.

If you’re unsure where to begin, or what strategies make sense right now — here are some simple, straightforward examples of some of the best yield farming strategies that people are using today in the DeFi space.

What Is Yield Farming? The Quick Version

Yield farming is the act of using your crypto by locking it up in DeFi protocols for them to use and you get paid back in interest or rewards. Sometimes, the rewards can be new tokens, sometimes interest, or trading fees.

The aim is to grow your crypto passively over time — no buying and selling!

Popular Yield Farming Strategies to Consider Today:

1. Supplying Liquidity on a Decentralized Exchange (DEX)
One of the most common ways is to put your crypto in liquidity pools on protocols like Uniswap or PancakeSwap. Typically you deposit two tokens — say ETH and a stablecoin — into a pool which traders use to swap tokens.

Just keep in mind: when the price of tokens moves around, you risk “impermanent loss” — which means you would have been better off simply holding your tokens instead of supplying liquidity. However, if you’re patient, the fees and any extra rewards from the DEX often make providing liquidity worthwhile.

2. Staking Tokens for Rewards
Some projects let you stake their tokens, essentially locking those tokens in place as an incentive for you to help run the network (in return you will get extra tokens as a reward).

Staking is much less complex than liquidity pool farming and typically requires you to convert only one token to stake. The yield may be lower than some of the complex yield farming strategies, but it is also less risk and easier to understand.

3. Lending Your Crypto
If you’d rather not work and swap tokens, some lending platforms (Aave and Compound) allow you to lend crypto to other users, who will pay you interest — just like a bank pays you interest on your savings (usually better rates even).

Lending is a solid way to earn, particularly if you are doing it with your stablecoins; it is lower risk than some of the other farming options.

4. Yield Aggregators
Yield aggregators (Yearn.finance comes to mind) act as robo-advisors for DeFi. You deposit your crypto and the yield aggregator will take care of everything else. The yield aggregator’s smart contracts are working behind the scenes to find the best yields, and automatically reinvesting your yields.

This is a great option if you want to get away from using multiple platform farms on your own and trying to keep track of your rewards.

5. Stablecoin Farming
Stablecoins (cryptos pegged to the dollar) are widely popular in DeFi because they offer a way to earn as money-market fund rates will typically result in very steady returns without the day-to-day volatility that comes with crypto. Stablecoins can be lent out, or you can add them to a stablecoin pool on a platform like Curve Finance.

While you may not earn yield by lending stablecoins that is going to make you happy in crypto, it’s a safer way to earn with less risk.

Just Some Things To Remember Before Jumping In

• You will incur impermanent loss and you need to understand this before you throw your tokens into some liquidity pools.

• Security is an issue and you need to be using platforms that have been audited and have good reputations.

• Don’t go in too heavy, start with less to test your strategies properly, and get used to the yield farming experience.

• Be mindful of your fees. Ethereum gas fees can be quite expensive, so think about using layer-2 networks like Polygon or Arbitrum to minimize your fees associated with yield farming.

To Conclude

While yield farming may feel overwhelming, yield farming is essentially picking the right places to plant your crypto and watching it grow. If you keep your eyes peeled and use your brain wisely, yield farming can be an excellent way to build your holdings.

Start with the simpler stuff like staking or lending and once you’re up to speed, try your hand at more complicated things like providing liquidity and yield aggregators.

And always — and I mean always! — only invest what you can lose.