Yield Farming: Is It Still Worth Doing In 2024?
What is Yield Farming? What You Need To Know
Yield farming is a term used in decentralized finance (DeFi) to describe investment strategies which increase returns on crypto capital.
Investors, or farmers, put their cryptoassets to work on DeFi platforms in order to earn a yield, moving tokens around to maximize that yield. They can further expand their profitability by receiving in-house tokens as a reward for providing liquidity, while leverage allows the use of borrowed funds to increase the overall capital available to earn a yield.
Yield farming first became popular several years ago, and while conditions have changed since, it can still offer a useful way of earning passive income on cryptoasset holdings.
Yield Farming Definition
Yield farming, as its name suggests, means putting capital to work in order to earn a yield as a result.
Crypto holders who engage in yield farming are themselves called farmers, and their aim is to maximize the size of the yield, bearing in mind the constantly changing DeFi environment and its high volatility.
To keep investing as lucrative as possible, yield farmers move funds between platforms as yield conditions change — a process known as crop rotation. This can happen frequently, as conditions can force a rethink in strategy in order to avoid losses.
Yield farming differs from staking, which nonetheless offers a yield — in yield farming, capital is used for liquidity and to gain rewards, while staking earns investors the right to participate in a Proof-of-Stake (PoS) blockchain as well as earn money through fees.
How Does Yield Farming Work?
Yield farming in crypto works on the basis of liquidity and interest — in fact a similar setup to traditional finance.
A yield farmer has capital to put to work and offers it, for example, to a DeFi liquidity pool. In return, subject to the terms and conditions of the specific offer, the farmer earns interest on the liquidity provided to the pool. This is expressed in the form of annualized percentage yield (APY), more information about which can be found here.
In addition, platforms can reward yield farmers with their own tokens as an incentive to provide liquidity. This has the potential of increasing the overall profitability of yield farming. Farmers themselves can further choose to invest on leverage, using borrowed funds to increase liquidity and earn a higher yield.
DeFi trends can come and go in an instant, and yield farmers thus use crop rotation — shifting capital to follow profitable trends — in order to keep yields intact and minimize the risk of loss.
Types of Yield Farming
Yield farming can involve multiple strategies and a combination of investment formats, all in the name of maximizing profitability. That said, there are three broad ‘styles’ of yield farming which have become the mainstay of yield farmers.
Liquidity provision refers to supplying a DeFi service — for example a liquidity pool or lending platform — with capital in order to facilitate operations. Yield farmers who do so earn interest on their investment, and this is expressed in APY which can reach double-digit or even triple-digit figures. Some platforms offer in-house tokens to liquidity providers as an additional way of boosting the incentive to provide liquidity through increased returns. All things being equal, yield farmers can withdraw their funds at any time — an important condition when it comes to crop rotation.
Crypto lending and borrowing is another popular way to earn a yield in DeFi. Here, the liquidity provider can borrow funds in order to invest them elsewhere for a higher return, as well as simply lending out existing capital. Here, yield farmers bet on the returns being higher than the initial cost of the loan, taking into account APY and any other associated costs such as fees.
Staking, while notionally a separate activity to yield farming proper, frequently ends up as part of a yield farming strategy. It is not just liquidity pools that require funds to be available — PoS blockchain protocols, such as Ethereum, have also become popular destinations for staking in return for rewards. To learn all about staking in crypto, check out the TabTrader Academy guide.
Calculating Yield Farming Returns
Earning crypto through yield farming and related DeFi activities can be confusing and unpredictable, and the sheer variety of strategies means that how profitable a given farming operation is can change constantly.
Yield farmers need to monitor changing profitability conditions, these being tied to both liquidity and the overall performance of a given project and/or token. Additionally, bad actors launching attacks — such as rugpulls — can impact markets in an instant, and some will not recover. That said, some aspects of yield farming returns are easy enough to predict — if not often precisely.
Lending funds to a platform with a fixed annual percentage return (APR), for example, offers a static interest rate which does not compound, meaning that a set percentage is paid on the initial capital pro rata per year.
APY is more complex, but tools to calculate this also exist, allowing investors to input the required parameters to get an idea of a strategy’s overall profitability.
For more information about how to calculate APR and APY, read the TabTrader Academy article here.
Beyond simple interest, yield farmers receiving additional rewards in an in-house crypto token need to take market volatility into account. A newly-launched token can experience wild fluctuations in value, meaning that a strategy can quickly become unprofitable if a token fails to gain significant demand.
The opposite is also true — lending conditions may be uncompetitive, but the rewards in in-house tokens make up the slack. For this reason, some yield farmers choose this combined approach over a simpler, higher-interest alternative.
Benefits of Yield Farming
Yield farming is popular for a reason — it leverages the opportunities that DeFi provides to deliver highly profitable passive investments.
Given its decentralized nature, DeFi arguably offers lay traders an investment opportunity like no other before it. With no barriers to entry other than the amount of starting capital, yield farming allows anyone to put their funds to work in multiple ways at once to reap what they deem to be the best possible rewards.
As with entry, there is likewise little standing in the way of withdrawing funds, subject to any terms laid down in a specific investment strategy, and traders are in control of how long liquidity is deployed.
Yield farming, as a product of DeFi, offers benefits common throughout the space, including reduced fees and accompanying expenses compared to traditional financial asset management. This is again thanks to decentralization — there are no middlemen or agents to pay as part of the investing process.
Exposure to multiple assets without needing to expressly purchase them or swap one’s existing capital is a further plus — yield farming can pay out in any number of currencies, depending on the specific opportunity at hand.
The TabTrader Academy has more information about the benefits of the DeFi in the dedicated guide.
The Risks of Yield Farming
Yield farming is a high-risk, high-reward environment, and is intrinsically tied to the volatility of DeFi.
Investment strategies leverage the constantly-changing DeFi token landscape, and yield farmers need to be aware that trends and conditions can change in an instant.
This unpredictability is what creates risk, even on the most reputable platforms, and this is a characteristic of yield farming that comes with its potentially extremely lucrative returns. Logically, the bigger the risk, the bigger the reward — some offers advertising unusually high APY rates, for example, will generally involve taking on a great deal of risk as a result.
Another issue relates to leverage, as any losses can be significantly compounded if an investor is trading with a large proportion of borrowed funds relative to their initial starting capital. The other major downside to yield farming is a phenomenon common to cryptocurrency as a whole — bad actors.
While the evolution of the DeFi space has meant that reputable platforms now stand out as a less risky environment to trade, scams still exist, and fraudsters have become highly adept at parting investors from their crypto. Rug pulls are a classic example of this — crashing the price of an asset or draining a venue’s liquidity leaves yield farmers exposed to significant losses.
For more information about how to calculate APR and APY, read the TabTrader Academy article here.
Yield Farming Vs. Staking
Staking has been around longer than yield farming as an activity, but in 2024, the two activities are often considered part of the same phenomenon.
There are, however, some differences which characterize staking versus yield farming, among them being how funds are put to work in each case.
Staking, as its name suggests, involves pledging crypto liquidity to Proof-of-Stake (PoS) blockchain networks in return for various rewards and/or influence. The more liquidity, the better the reward, and staking remains a popular method of earning passive income, sometimes with double-digit APY.
Dedicated staking platforms exist, helping investors do just that — and even traditional exchanges now offer staking programs with their own incentives.
Yield farming has different aims, as here, investors are trying to earn a return on their capital without locking it up with a specific entity over a period of time. That said, yield farming places more responsibility on liquidity providers themselves, as rapidly-changing conditions in DeFi can impact profitability quickly.
Staking, it could be said, thus serves as a more “hands off” approach to crypto investing.
Yield farming can work, however, with potential rewards outpacing those commonly found on staking platforms. As can be expected, the higher the reward on offer, the higher the risk that is likely involved in providing liquidity.
How to Start Yield Farming
By far the easiest way to start yield farming for entry-level investors is via an established DeFi platform.
Here, various offers will be on display, along with the various incentives available for supplying liquidity.
It goes without saying that a prospective yield farmer will need to own crypto already, and TabTrader can help. Use the TabTrader terminal to facilitate the best value trades on the biggest exchanges worldwide to accrue starting capital in one or more of thousands of crypto tokens.
Once capital is available, it is simply a matter of determining its use case based on the rewards on offer. Note, however, that yield farming is not a one-size-fits-all affair, and even after selecting a strategy, it will need to be monitored constantly in order to maintain profitability.
Depositing to a DeFi platform involves the use of smart contracts, as decentralized exchanges are entirely automated and do not make use of human third parties to facilitate trades. Many platforms will allow instant access to capital, however, meaning that as a yield farmer, one can withdraw funds supplied at any time should conditions change or a more lucrative opportunity present itself.
Yield Farming Strategy
Yield farming is all about balancing risk and reward, and this gives rise to so-called “strategies” — an alternative term for navigating the fast-paced, constantly changing DeFi environment.
Yield farming is a strategy in itself, as investors seek to earn passive income on cryptoassets which would otherwise lie dormant in a wallet or on an exchange account.
Within the practice, however, lending out funds to liquidity pools with automated market makers (AMMs) as described above is just one way of making crypto tokens work for you. Here, rewards come in the form of a share of trading fees, and lending out stablecoins is a particularly low-risk option for entry-level farmers.
Staking also removes some of the volatility risk involved in more complex yield farming strategies, making this a popular choice, either directly or through options such as Staking-as-a-Service (SaaS) providers.
More risky is involving governance tokens and those related to NFTs, for instance, as token values can change dramatically in an instant, impacting the entire strategy.
There are even various services which manage yield farming returns for predefined strategies on a farmer’s behalf.
Yield Farming Crypto Platforms
In 2024, the number of platforms catering specifically to yield farming is extensive, and the industry has had several years to mature and allow market leaders to emerge.
Even these are numerous, while each is slightly different in its approach and services on offer. In addition to dedicated DeFi platforms, yield farming services are available through traditional cryptocurrency exchanges, these including Coinbase Yield and eToro.
Within the yield farming cohort, popular names include Harvest Finance, SushiSwap and Yearn.Finance in addition to industry pioneers such as UniSwap and Compound.
When choosing a suitable platform to manage yield farming, however, it is important to conduct thorough research on its stability and history. While the best-known players are reliable enough, newcomers should be viewed with scrutiny, especially if using them to trade already high-risk assets.
Best Yield Farming Cryptocurrencies
To say that some cryptocurrencies are ‘better’ than others for yield farming does not quite correspond to how the process actually works.
Yield farming can leverage any sorts of crypto tokens, and the difference in the experience lies in a combination of the platform and strategy used, as well as underlying market conditions.
That said, there are two broad categories of cryptoasset common in yield farming: stablecoins and non-stablecoins.
Using stablecoins for yield farming — regardless of the exact strategy — is a common way to earn passive income on crypto capital without taking on too much risk. As such, the more widespread stablecoins in particular, such as Tether (USDT), USD Coin (USDC) and Dai (DAI), are popular choices for newcomer farmers.
Stablecoins do carry risks, however, and it is important to know an asset’s track record in times of wider crypto market volatility before using it to enter a long-term or high-volume investment strategy. This is why the biggest stablecoins are better options, as they tend to hold up better during black swan events than those with a smaller market cap.
For more information on stablecoins, see the dedicated TabTrader Academy guide, and to get to grips with the differences between the two market leaders, USDT and USDC, check out this article.
Beyond stablecoins, there is still a sea of options to choose from when it comes to yield farming. As the two largest cryptocurrencies by market cap, Bitcoin (BTC) and Ethereum (ETH) naturally feature prominently, while some platforms cater to specific tokens.
Rates of return on liquidity pledged can vary significantly. Major platforms with a proven track record, along with relative newcomers to the scene such as traditional exchanges, tend to offer more modest APY, sometimes only single-digit. This is more a trade-off for enjoying a more ‘hands off’ approach to yield farming, however, rather than a reflection on the individual token or tokens involved.
Summary: Is Yield Farming Worth It in 2024?
Some believe that the heyday of yield farming was at its genesis several years ago, and that the industry has become overly mainstream since.
This is a debatable appraisal, as it is exactly that maturation which has led to reliable platforms with proven track records entering the space, allowing safer, more stable investment strategies across a larger range of cryptocurrencies.
As such, yield farming remains a profitable activity in 2024, and even those seeking a less involved approach can still earn a not insignificant return on capital which would otherwise accrue no interest at all.Nonetheless, risks in yield farming still abound, as everywhere in DeFi, and it is essential to be aware of scams, bad actors and markets’ overall volatility as part of crypto investing.
TabTrader gives users access to thousands of cryptocurrencies on the world’s biggest exchanges, making it easier than ever to develop successful crypto trading strategies. Discover the TabTrader app for iOS, Android and Web.
Yield Farming Pros
Yield farming is still popular in 2024 for a good reason — it can give investors decent returns on dormant capital with minimal effort, or considerable returns if they choose to manage their strategies manually.
Some crypto yield farmers have become highly adept at the latter, meaning that they can navigate strategies based on profit potential — crop rotation — while managing risk and avoiding dubious investments.
As such, a successful yield farming operation provides all the benefits that crypto users have come to associate with DeFi: barrier-free investment, no middlemen, 24/7 availability and more. As DeFi and yield farming continue to mature, the possibilities multiply and safety and security improve with them.
Yield Farming Cons
The risks involved in yield farming, as discussed, are to a large extent those inherent to DeFi as a whole.
Yield farmers must balance these potential pitfalls with the profit potential of a specific strategy — but even this can become difficult during periods of broader crypto market volatility.
Some of the most common problems impacting yield farmers include impermanent loss, when the price of a token changes once supplied to a liquidity pool. Liquidity conditions in general can be manipulated by bad actors, while rugpulls can result in an entire token market crashing, often permanently.
Various phenomena can additionally impact profitability of specific operations, such as fees required for sending transactions on public blockchains such as Ethereum.
FAQ
What is yield farming?
Yield farming is a way of earning returns on crypto capital in various ways, such as providing liquidity to DeFi platforms. The practice of providing liquidity to decentralized exchanges in return for rewards is called liquidity mining.
Is yield farming worth it?
Yield farming comes with many risks, some of which are impossible to mitigate fully. Managed properly, however, yield farming can be a good way to earn passive income on otherwise dormant crypto capital.
How do I start yield farming?
As of 2024, a large number of platforms exist to provide an easier gateway into the yield farming world without the need for managing complex trading strategies — something more suitable for beginners.
