Yield Farming - the new DeFi King
Disclaimer - This is neither financial advice nor am I promoting any financial service.
Updated
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Updated November 2026. This was first published on 20 August 2020. The idea is the same. Any number below is what the original piece said then. It is not a new count.
Key takeaways
- Disclaimer - This is neither financial advice nor am I promoting any financial service.
- Investment in DeFi is your responsibility and I will not be held responsible.
- Passive Income is a catchy term that has sprung up lately.
Disclaimer - This is neither financial advice nor am I promoting any financial service. Investment in DeFi is your responsibility and I will not be held responsible.
Passive Income is a catchy term that has sprung up lately. Even though there are a lot of scams, the legitimate ones are a god-send. Who wouldn’t want to make money by investing their existing cryptocurrency and get high returns.
What is yield farming? #
A farmer sows the seeds, waits for it to grow and harvests it (I know there’s a lot more steps involved but I don’t want to bore you all). It the process of investing idle crypto assets and using it to earn profits.
The returns are mostly in the form of interest or rewards. Lending and borrowing** is the most widespread method for yield farming. The borrower puts in a crypto asset as collateral and borrows equivalent COMP token. This can be lent to other borrowers who might in turn lend it out to someone else. These people who borrow and lend on Compound earn rewards in the form of COMP tokens. 2880 COMP tokens are released to users per day. At the time of writing, the value of COMP is 184$ which translates to almost 530,000$ per day in rewards!
The second most used method for yield farming is liquidity pools. It’s basically a giant pool of money (I just made that up but it sounds fancy doesn’t it?). A great example for liquidity pool is Uniswap. Due to scalability issues of Ethereum, it is not possible to follow the order book method. To tackle this problem, Uniswap came up with a beautiful solution. Uniswap consists of multiple pools, one of the best ones being DAI-ETH pool. Liquidity providers deposit an equal amount of two tokens to create a market and in return they earn fees whenever a trade is facilitated in the pool.
Would you believe it if I told you that yield farming gives 100% APY (Annual Percentage Yield)? Banks have never offered such high interest rates and will probably never will. I agree that there are risks involved but it’s not as bad as you think it is. There’s a large community to help you out in the process, so, don’t jump into this and throw all your life savings in it without knowing the risks.
The 100% APY isn’t very realistic but it is possible. The farmers switch between multiple strategies and protocols to gain high yields. They borrow and lend coins between multiple protocols like Compound, Balancer, Synthetix and more. These coins are in rotation and they earn the users incentives which explains the super-high returns.
The huge returns also come with huge risks #
I’m also going to disappoint you here but here it is, yield farming is profitable only when you can shell out a considerably large amount of crypto (at least over 1000$). This is because of the competition out there and high gas prices (determines the transaction fees). If you’re just getting started, invest a few dollars and see how it works and learn but this approach will definitely result in loss.
How risky is this? #
Like I already mentioned, this is riskier when compared to the traditional financial system. There’s no deposit insurance, chargebacks or anything of that sort. The two major risks are smart contract bugs and liquidation.
Smart Contract Bugs #
The yield farming system is built upon smart contracts which are pre-written lines of code which facilitate the lending and borrowing or other functionalities of the system. If a hacker or any tech guy notices a bug/flaw and exploits it, it is possible to steal hundreds of thousands of dollars from that pool.(Oh I mentioned pool? We’ll get there in a minute) This does not make the traditional financial system superior, the benefits overweigh the risk but it will be wise to learn about what you’re stepping into rather than to cry over spilt milk.
Liquidation Issue #
Most of these DeFi platforms operate with stablecoins which are cryptocurrencies whose values are pegged to the US Dollar. If the platform decides the reduce the coin value to half of what it actually was, the returns are heavily impacted and the loans related to other crypto assets will crash.
All these risks are to be considered when stepping into yield farming. The risk are definitely higher than the traditional financial system but it is up to you to decide if the risk is worth it. Some have risked their money to earn enormous amounts of profit while some have lost all of their invested money entirely. This is the game, this is why such great rewards are being offered and it is up to the user to risk it.
These huge gains are not going to last forever. Such high yields are only until its infancy. Once more money flows in, the insanely high yield dies and along with it so does the risks. We live in a revolutionary era where blockchain is attempting to become the next big thing like how the internet did back then.
Almost all of the DeFi platforms are run on top of the Ethereum network. Ironically, the market cap of all ETH based tokens surpassed the market cap of ETH. This shows how rapidly and large the DeFi market is growing.
The future of Yield Farming #
Yield farming is driving mainstream DeFi adoption rapidly and the passive income has made a lot of heads turn. People are more aware of the crypto world now. Even though yield farming is a profitable idea, it is not going to be sustainable in the long run as DeFi becomes more widespread. If you’re planning to dip your feet into the pool, now is the time but let me remind you that this is not financial advice nor am I promoting all of this. It sure does have a lot of risk but if you think the risk is worth then go ahead and do what you think is right. More yield farming projects are likely to flood the crypto world in the next few years.
Questions and answers #
It’s basically a giant pool of money (I just made that up but it sounds fancy doesn’t it? #
A great example for liquidity pool is Uniswap. Due to scalability issues of Ethereum, it is not possible to follow the order book method.
Would you believe it if I told you that yield farming gives 100% APY (Annual Percentage Yield)? #
Banks have never offered such high interest rates and will probably never will. I agree that there are risks involved but it’s not as bad as you think it is.