Yield farming was likely the greatest driver of the decentralized finance (DeFi) explosion in 2020. Risk-tolerant investors saw the potential of yield farming and jumped at the chance to earn “free” interest with their cryptocurrencies. It isn’t exactly free, however, and the gains come with significant risk, depending on the project. While many farms are only profitable for a few weeks, we've compiled a list of the best yield farms for longer term fee-earning.
The strategy uses the innovative technology of smart contracts, which in essence are automatically executing coded contracts that run on blockchains like Ethereum. Yield farming has grown as an investment strategy along with the technology that enables it. It can be risky, and scams are still part of the ecosystem, but the best platforms already have proven their worth.
Best Yield Farms:
- Liquidity Providing on Uniswap
- Earn interest on Aave
- Yield farming on PancakeSwap
- Liquidity Providing on Curve Finance
- Yearn Finance
What is Yield Farming?
Yield farming is the popular strategy DeFi users take advantage of to put their cryptocurrencies to work to earn high interest. According to DeFiPulse, a DeFi analytics and ranking platform, DeFi protocols have over $50 billion worth of cryptocurrency locked in these programs. There are multiple types of yield farming projects offering different financial services, mostly to earn astonishingly high interest. Large banks might earn you 0.01% to 0.25% a year, but these sub-percent yields can’t compete with the 20% to 200% earnings some DeFi platforms tout. Often, the higher the interest, the riskier the staking pool is. Watch out for scams and unproven platforms that may lose you your money.
Yield Farming on Ethereum vs. Binance Smart Chain
DeFi first erupted onto the cryptocurrency scene on the Ethereum network, but since then it has spread to other blockchains including Binance Smart Chain (BSC). BSC was launched by Binance Exchange in April 2019 to rival Ethereum. The Ethereum network has been struggling with high transaction fees caused by an increase in users and in computation needed to run the staggering number of complex DeFi transactions. BSC is more centralized, which helps speed up transaction processing and dramatically lowers transaction fees compared to its rival. The Ethereum network charges these fees in Ether (ETH), and BSC charges them in Binance Coin (BNB).
The highest value DeFi platforms are on Ethereum (Aave, Curve, Uniswap, etc.), but BSC has enough large projects including PancakeSwap and Venus Protocol to compete with the Ethereum network. Ethereum-based platforms can only use Ether and other tokens built on Ethereum on its network, most of which are called ERC-20 tokens. BSC’s native token is BNB, and its platforms can use other tokens on the network (most called BEP-20 tokens). BSC is still cheaper to send transactions, but at the time of writing, Ethereum gas fees have dropped since DeFi became so popular. Now you can find some of the best yield farms on both chains.
Best Yield Farms
1. Liquidity Providing on Uniswap: ~20% to 50% APR
Uniswap is the second-largest decentralized exchange (DEX) behind Curve Finance by total value locked with more than $5.5 billion in the platform. The platform offers swaps with Ethereum and thousands of ERC-20 tokens and staking in liquidity pools to provide the swaps. Liquidity providers earn a percentage of trading fees for every swap, and with a large enough principle deposited, they earn significant interest. Interest rates on Uniswap and all other DEXes vary by the pool and market fluctuations.
Investors should be careful depositing assets in pools with volatile cryptos because drastic price changes could incur dramatic impermanent loss. Also, like on all DeFi platforms, smart contracts could fail, resulting in major losses. There are currently 2 main versions of the platform, Uniswap V2 and V3. Check out our article for an in-depth explanation of each.
2. Earn interest on Aave: ~0.01% to 15% APR
Aave is the reigning DeFi king in terms of total value locked with a staggering value of over $10 billion, according to DeFiPulse.com. Aave is a decentralized platform on Ethereum (and the Polygon sidechain) that offers low-interest cryptocurrency borrowing and lending. Because investors have deposited so much crypto into Aave to earn interest, its borrow APRs are some of the best on the market. Variable borrowing of stablecoins (like DAI, USDC and USDT) range from 3% APR to 7% at the time of writing.
The unlikely possibility of smart contract failure is the main risk of depositing into Aave. Borrowers must consider the threat of liquidation when the ratio of the value of assets borrowed versus the value of the loan’s collateral rises above a threshold (called the maximum loan-to-value ratio) that varies between tokens. Anyone can buy up your collateral, and you could only recover up to 50% of the loan’s value.
3. Yield farming on PancakeSwap: ~8% to 250% APR
PancakeSwap, like Uniswap, is a decentralized exchange (DEX). It functions similarly to Uniswap but is on the Binance Smart Chain (BSC) network instead of Ethereum and has a few more features focused on gamification. It holds the highest total value locked of all BSC DeFi projects by a mile at about $7 billion. PancakeSwap offers BSC token swaps, interest-earning staking pools, a gambling game where users predict the future price of BNB and even non-fungible token (NFT) art.
PancakeSwap has all the risks of Uniswap, including impermanent loss resulting from large price shifts and smart contract failure. Many of the tokens in pools on PancakeSwap have small market capitalizations and therefore have an increased risk of impermanent loss. Uniswap users suffer the same risks, but there are more and larger Ethereum-based tokens available to stake on the platform.
Impermanent loss is the difference in value you would have had by simply holding your 2 assets instead of staking them for interest. Since liquidity pools rebalance your assets to maintain a 50/50 stake in both, if 1 asset appreciates and the other doesn't, you'll sell off some of the more valuable asset to purchase the less valuable asset.
4. Liquidity Providing on Curve Finance: ~2.5% to 25% APR'
Curve Finance is the largest DEX with a total value locked of $7.9 billion at the time of writing. The platform also uses the locked funds better than any other DeFi platform with its unique market-making algorithm. This benefits users performing swaps as well as liquidity providers.
Curve has a long list of stablecoin pools pegged to fiat currency (mostly USD) with decent APRs. Curve maintains strong APRs between about 1.9% (for liquid tokens) and 32%. Stablecoin pools are especially safe as long as the tokens don’t lose their peg. Because their prices won’t change dramatically compared to each other, impermanent loss can be completely avoided. Like all DEXes, using Curve comes with the same risks — impermanent loss (though it's less likely in many Curve pools) and smart contract failure.
5. Yearn Finance: ~0.3% to 35% APY
Yearn Finance (YFI) offers a unique yield farming and aggregation tool with an active development team working on new strategies to earn users higher yields all the time. Also, Yearn is tightly integrated with Curve Finance. The platform has more than 30 Yearn-integrated Curve pools where investors can deposit 1 of 5 different cryptocurrencies (ETH, WBTC, DAI, USDT or USDC) into a smart contract that deposits into the corresponding pool on Curve to earn interest. The smart contract reinvests earnings in the pool, compounding gains. Yearn has similar risks as the other yield-farming platforms like impermanent loss and smart-contract failure.
How to Yield Farm
The best yield farms on the market are all pretty easy to use with one minor exception — Uniswap V3. Before you can start earning yield on your cryptos you need to get a software wallet like MetaMask (or a hardware wallet supported by the platform you want to use). The most common way to purchase some cryptocurrency is to sign up for an account on an exchange like Binance, Coinbase, Webull or Gemini. You also will need to purchase either Ethereum or BNB, depending on which network you plan to use to pay transaction fees.
Once you have some crypto in your exchange account, send it over to your wallet and go to your yield-farming website of choice. Click "Connect Wallet", and enter your wallet password, find the pool you want to deposit in and follow the instructions the platform provides. Now you should keep a watchful eye out for major price fluctuations in case it incurs impermanent loss.
Pro Tip: Use a High-Speed, Anonymous VPN
A VPN lets you securely access the internet in an untraceable way. If you’re a cryptocurrency trader, you may want to remain anonymous or mask your IP address to another location. For trading in particular, ExpressVPN is the best option on the market. Not only can it automatically connect before you access the internet, it also offers lightning-fast speeds — something that’s needed to trade in the volatile cryptocurrency markets.
Where to Store Your Cryptocurrency
The merits of each type of cryptocurrency wallet are still debated among users. The main concerns of most investors are security and ease of use. Some investors leave their cryptos on the trading platform they purchased them on, sacrificing some control over their funds. Exchanges with inadequate security measures (unlike Coinbase and Gemini) have lost users millions of dollars in cryptocurrencies over the years to hacks. To avoid this possibility, you may want to transfer your cryptos to a wallet you personally control.
Software (hot) wallets, including Coinbase Wallet, provide a trade-off between ease of use and security. Most software wallets are easy to use with DeFi and give users complete control over their funds, unlike crypto exchanges. Some DeFi platforms support a few hardware wallets, but a majority support a variety of software wallets.
Hardware wallets (or cold storage wallets) are often touted as the safest option for storing cryptocurrencies because they are mostly invulnerable to cyberattacks. None of the information needed to access the contents of the wallet is stored on the internet. While hardware wallets are the safest place to keep cryptos, they are usually slower and a bit more cumbersome to use. If your main goal is to hold cryptocurrency and you don’t plan on trading it or depositing it into DeFi projects, hardware wallets are probably the best storage solution for you.
Best Hardware Wallet: Ellipal Titan
The Ellipal Titan is an advanced and incredibly secure hardware wallet with a polished and hardened design. The device supports more than 7,000 cryptocurrencies on 40 different blockchains (including all ERC-20 and BEP-20 tokens) and employs a multitude of security features to protect users’ crypto holdings.
The Ellipal Titan can never be connected to the internet and only uses open data (public and verifiable) QR codes to complete transactions. Its hard metal cover and screen are sealed so that cracking open the wallet automatically deletes your private keys, keeping your portfolio safe from physical attacks. The combination of these security features makes the wallet nearly impossible to penetrate either online or offline.
Best Software Wallet: Coinbase Wallet
Coinbase Wallet is a standalone project launched by the popular Coinbase crypto exchange. It is easy to use and one of the best software wallets on the market. The wallet’s greatest advantage over its competitors is its security. Simply, Coinbase Wallet provides security features such as 2-factor authentication to prevent login attacks and encrypted storage of private keys in the user’s device.
Coinbase Wallet’s main disadvantage is its relatively short list of supported cryptocurrencies. It still supports most of the largest cryptocurrencies, including Bitcoin, Ethereum, Ripple, Dogecoin, Stellar Lumens and all ERC-20 tokens. If you are looking for a software wallet to use with the DeFi ecosystem on Ethereum or store supported cryptos on other blockchains, Coinbase Wallet is a fantastic choice.
Yield Farming Versus Holding Crypto
Yield farming is so popular because cryptocurrency investors want exposure to their favorite investments while earning interest at the same time. In safe yield farms and liquidity pools, this can be a great strategy. However, the gains from these opportunities and the principle investment aren’t completely safe in yield-farming platforms. Smart contract failures, scams and impermanent losses have cost investors hundreds of millions of dollars worth of crypto investments. Beware of ludicrously high-interest estimates, and always vet DeFi platforms before investing.
Frequently Asked Questions
Yield farming can be very profitable with a high stake, however, as with any investment it also comes with a significant risk.
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