Yield farming, also known as liquidity mining, has allowed traders to gain crypto tokens by providing liquidity to DeFi products. It’s an alternative way to grow your portfolio alongside more conventional crypto trading. There’s a lot to consider when yield farming, and as with any crypto product, it’s always wise to do your own research before jumping in. In this article, we’ll outline what is yield farming and share an overview of some of the top yield farming platforms available to you today.
What's yield farming?
Decentralized Finance (DeFi) enables seamless and secure peer-to-peer transactions to happen on the blockchain. This includes services such as trading, swapping, loans, and more. For all of these services to function, liquidity is needed.
For example, when a user is swapping Ethereum for USDT on a centralized crypto exchange, an order book is used. If the price is met, the exchange enables the transaction between multiple users. However, most DeFi applications don't use an order book. Instead, they use liquidity pools. Users can lock up cryptocurrencies such as Ethereum and USDT on DeFi protocols, which can be used by others to perform swaps. The fee that’s given for providing liquidity is called yield farming. Liquidity pools are essential for the smooth running of DeFi protocols, as they enable seamless trading without the need for a counterparty.
Top yield farming platforms
Let's look at some of the leading yield farming platforms in 2024 that offer lower risk yield, a generous number of trading pairs, and simple usability.
Aave
Aave is an open-source decentralized crypto loan platform where users can lend and borrow assets. As a yield farming platform, users can generate interest by depositing into Aave’s liquidity pool. In return, users receive interest based on the demand for borrowing the asset deposited.
Type of project: Decentralized loans.
Chains supported: 13 different chains are supported, including Ethereum, Avalanche, Polygon, BNB, and Optimism.
Pros:
Offers lower-risk lending and borrowing of assets on the blockchain.
Has a long and proven track record in the DeFi space.
Conceived and delivered new products to the space, such as flash loans, where users can take loans without collateral.
The community can decide on the protocol's future using its governance token, AAVE.
Cons:
Flash loans have been exploited in the past.
Not always easy to use for beginners.
If you’re taking a loan, you need to over-collateralize. For example, if you want to take a loan of $1,000, you need to have collateral of $1,500. Also, you’re at risk of being liquidated if the collateral drops in value.
Uniswap
Uniswap is a well-established decentralized exchange known for pioneering the automated market model (AMM). Users can create a liquidity pool for any trading pair, and traders can instantly swap tokens without the need for an order book or counter trades. Users receive LP tokens for providing liquidity, which can be staked for rewards. Over the years, Uniswap has gone through several iterations and expanded to multiple chains with the help of its thriving community.
Type of project: Decentralized exchange.
Chains supported: Ethereum, Polygon, Optimism, Base, and more. Both Uniswap V2 and V3 are available across six different blockchains.
Pros:
Fully decentralized exchange without an order book.
Users can create liquidity pools for any trading pair.
A strong community and development team behind it.
With Uniswap V3, users can create customized liquidity pools for better capital efficiency.
Cons:
Chance of impermanent loss for liquidity miners.
Gas fees can get expensive at times while using Uniswap on Ethereum.
OKX
As one of the world’s largest and leading cryptocurrency exchanges, we simple and secure yield farming to our users. To date we’ve integrated various yield farming protocols into our platform, including SushiSwap, and also provide our on-chain earn product. Once you’re registered and signed in, you can start using on-chain earn with the funds in your OKX Web3 Wallet.
Type of project: Crypto exchange with access to on-chain yield farming protocols.
Chains supported: A total of 32 different blockchains are supported with their native currency, including Ethereum, IOST, and DOT. Meanwhile, OKX has integrated six major pairs from SushiSwap.
Pros:
Very easy to get started, without having to experiment with the different yield farming platforms.
Access to verified yield farming pairs.
No gas fees or other transaction fees. You can get started with the funds already in your OKX Web3 Wallet.
Cons:
A limited number of cryptocurrencies and trading pairs are available compared to other platforms.
Curve Finance
Curve Finance is another popular decentralized exchange. However, one limitation is that the trading pairs offered are similar asset types, limiting diversification. For example, different types of stablecoins like USDT and USDC are available, alongside wrapped coins like ETH and WETH. You can use the same type of asset to yield farm on Curve with relatively low volatility between them.
Type of project: Decentralized exchange focusing on trading pairs of similar asset classes.
Chains supported: Ethereum, Polygon, Avalanche, and more.
Pros:
Specializes in stablecoins and wrapped assets.
Ideal for people looking to yield farm the same type of asset. A total of 11 different blockchains are supported.
Cons:
Curve has been hacked in the past due to code vulnerabilities.
Limited pairs and blockchains supported.
Complex to use for beginners.
Yearn Finance
Yearn Finance doesn't have an exchange or offer loans on its own. Instead, it acts as a DeFi aggregator for yield farming. The platform provides a suite of tools and products for users to yield farm across multiple DeFi protocols and chains. Yearn exists to optimize and enhance yield farming on other platforms.
Type of project: Enhance yield farming on other DeFi applications.
Chains supported: A total of five chains are available: Ethereum, Arbitrum, Optimism, Polygon, and Fantom.
Pros:
Helps users to optimize their yield farming efforts and maximize gains.
Designed to automatically move funds across multiple protocols, to generate the highest possible gains.
Easy to use as the user doesn't have to experiment with multiple applications.
Cons:
Yearn Finance has suffered multiple hacks in the past.
Yearn Finance does not have an insurance fund to compensate users in case of future hacks.
The native token has a limited supply of 30,000. This governance token and its low supply could create a barrier for new users to participate.
SushiSwap
SushiSwap is a decentralized crypto exchange similar to Uniswap. In fact, it started as a fork of Uniswap with a focus on the community and launched with the SUSHI token as a governance token. Only later did Uniswap launch its own own governance token. SushiSwap also differentiates itself from Uniswap by sharing a part of the trading fee yield with users who stake the SUSHI token. SushiSwap is mostly the same as a yield farming platform for most major cryptocurrencies. However, you may notice differences in the AMM for lower-volume cryptocurrencies, as one exchange might have more trading volume than the other.
Type of project: Decentralized exchange.
Chains supported: A total of seven chains are supported including Ethereum, Polygon, Optimism, and Base.
Pros:
Has maintained a strong focus on community since launch.
Shares yield from the trading fee with users who stake SUSHI token.
SushiSwap offers other DeFi products, such as lending, borrowing, and a launchpad for new projects.
Cons:
SushiSwap is a fork of Uniswap V2, and doesn't have many unique features.
Expensive to use on Ethereum.
Chance of impermanent loss for liquidity miners.
Compound
Compound is a decentralized crypto lending platform where you can lock and lend your cryptocurrencies to make gains. Similarly, you can also take out loans on the locked asset. It has a variable rate of interest based on the current market conditions.
Type of project: Decentralized lending.
Chains supported: Three chains are supported — Ethereum, Arbitrum, Polygon, and Base. Also, Compound only supports a limited number of cryptocurrencies across these chains.
Pros:
Has high liquidity as it's optimized for a limited number of cryptocurrencies.
Easy to set up and get started as a yield farming platform.
Cons:
Limited number of cryptocurrencies and chains supported.
APY is lower compared to some of its competitors.
Not user-friendly for beginners.
How to choose a yield farming platform
Now we’ve walked through some of the top yield farming platforms, what factors should you consider when choosing which is right for you?
Understand the project deeply
Before you even consider locking up your tokens, you must understand the project and more importantly, where the yield comes from. As a user, understanding how the yield is generated will help you to better research the risk, rewards, and long-term feasibility of the project.
Evaluate assets and pairs
Next, consider the assets supported by yield farming platforms — both the locked-up assets and rewards — to help you mitigate the potential for impermanent loss.
A yield farming platform could promise high rewards. However, the token you’re interested in might have a large supply or high inflation rate, which can impact its future price. For example, when you withdraw the yield, you may have made a gain in the number of tokens you hold, but their total value may be significantly lower than what you bought them for. This is called impermanent loss. Look for platforms that support a wide variety of cryptocurrencies, giving you the flexibility to choose coins according to your risk appetite.
Blockchains supported
Not all platforms are available on all chains. It’s key to also consider the chain while choosing a yield farming platform, as the network fees on chains like Ethereum could eat into potential gains. Some platforms are also interoperable, providing opportunities for yield farming across different blockchains.
Analyze yield farming gains
Gains on yield farming platforms are dynamic and depend on market conditions. These gains are calculated as the annual percentage yield (APY). When there’s more liquidity, the APY is lower. Alternatively, when there’s less liquidity, a higher APY is offered to incentivise users to lock in funds. This means the potential gains to be made could change depending on the cryptocurrency chosen, the platform, and current market conditions. Similarly, higher APY could be offered for riskier and more volatile coins. You need to consider the APY you’re comfortable with for the coin of your choice.
Evaluate security
Yield farming platforms operate on blockchains through smart contracts. In the past, poorly coded smart contracts have been exploited to drain user funds. Look for platforms that have strong security and a proven track record. Audited smart contracts with open-source code are an added bonus.
Review liquidity and volume
Look into the liquidity of the assets locked up and the daily volume to understand the real usage of the platform. A good platform has a significant amount of assets locked up, indicating trust in the platform. Meanwhile, the daily volume indicates the popularity of the platform.
Additional tools
Some platforms offer additional yield optimization tools that can potentially generate better gains. One such feature is auto-compound, where the user can choose to automatically re-invest their gains. Other features offered by some yield farming platforms include advanced portfolio management and risk management tools.
Analyze the developers and community
Yield farming platforms are constantly evolving. An active development team backed by a strong community indicates a committed and, in theory, more trustworthy platform.
Ease of use
Yield farming isn't easy for beginners. It's very different from any other financial product and comes with a relatively steep learning curve. It's therefore up to yield farming platforms to make it easier for users to navigate the product with an intuitive user interface and a transparent structure. A complicated user experience could be a major barrier to your success.
The final word
Yield farming is a unique opportunity in the DeFi ecosystem that allows anyone to participate in the market on an open platform. Understanding yield farming and choosing the right platform for your preferences is imperative but not straightforward. It’s essential to complete thorough research before committing your own funds — starting with our essential guide here.
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