Guide on Yield Farming of DeFi Tokens

best yield farming and defi coins

Yield farming is another concept from the physical world that can be applied to the crypto industry. We already have miners and mining farms. Why can’t we become farmers as well? The DeFi (decentralized finance) sector is a hot trend in the crypto industry. A range of decentralized exchanges (DEXs) sees a significant traffic increase while the second cryptocurrency in the world, Ethereum (ETH), is currently having all-time high transaction fees. 

What’s going on? Is it the second coming of the crypto rush or just a crypto bubble? What is yield farming? Changelly has investigated the issue and collected the essentials. Here we go. 

How Yield Farming Influences the Market: Bottleneck within Ethereum

This August, Ethereum transaction fees (gas) spiked by over 100%. The increased demand for ETH provoked the growth in both price and market capitalization.

We all remember the time when a popular Ethereum-based decentralized application (dApp), CrypttoKitties, took more than 10% of the Ethereum network traffic. That situation has created a bottleneck within the blockchain so that users faced crazy gas fees and were required to wait for ages for a simple transaction processing. 

However, it is quite different this time. As mentioned above, the DeFi sector hits cryptocurrency trends, and yield farming is the one to blame. Decentralized exchanges (most of which are built upon Ethereum) attract new users, lending platforms and protocols like Compound are in great demand. Still, there is a third component that might affect Ethereum’s sudden growth.

Projects that promise passive income, if users share invitations to three or more people, suspiciously remind scam. On August 11, Ethereum co-founder Vitalik Buterin accused the Asia-based project Forsage of being a scam. For the last month, Forsage users have paid around $455M for gas fees. Forsage representatives claimed that ‘such projects’ moved the crypto industry forward. 

forsage's answer to Ethereum

Several days later, Buterin reminded users there would be other ETH dApps to explore rather than trendy ‘defi things.’  

In the middle of August, an anonymous investor purchased over 40,000 ETH (around $15M) on the Uniswap DEX. All these stimulated the cryptocurrency growth and increase in gas fees. Regular users have to pay crazy commission fees, and they asked Buterin to solve the issue as soon as possible. 

Lending Platforms

Lending platforms play an essential role in the DeFi development. According to defipulse, there are currently $8.89 billion staked funds in the decentralized space. Aave lending protocol attracted too much attention the other month as it could increase the amount of staked funds by 34%. The Aave project currently takes first place in terms of locked funds by obtaining $1.39 billion.

locked funds in aave protocol

Why are cryptocurrency lending platforms in such a demand? Once the crypto industry realized the massive amount of crypto assets locked on exchanges and wallets, it was decided to propose the solution that would make these funds work. Lending platforms suit perfectly to bring this plan into effect. 

Most of the decentralized lending platforms are “automated market makers” (AMM for short). These are robots that always want to buy or sell any cryptocurrency they provide markets for. 

Moreover, let’s face the fact that the global economy suffers a financial crisis. 2020 is full of terrible events, and it brings new ‘surprises’ every month. Oil wars and COVID-19 have affected the economy heavily. The crypto industry might become a great alternative for investors who want to continue earning on cryptocurrency investments. By depositing funds on lending platforms, investors have an opportunity to get passive income while developing the industry at the same time. 

Stablecoins

Being an important part of the DeFi industry, USDT is the second user of gas in the Ethereum network,  according to gasfeestation. The most obvious question that comes to the mind is: why? Why does USDT attract so much attention? At the beginning of summer, the CEO of Three Arrows Capital, Su Zhu, tried to explain this in the interview.

“I think that’s because it (USDT) is doing a service to the whole world in sort of bridging the liquidity across all these exchanges and allowing on-ramp off-ramp, I think being in that position, it automatically attracts the attention of all regulators onto crypto itself.”

USDT is one of the most popular digital assets in the industry. It can be swiftly purchased with a credit card or Apple Pay on the Changelly platform as well as traded against BTC, ETH, and other cryptocurrencies on the full-featured Changelly PRO exchange. Changelly PRO provides flat withdrawal and trading fees. Tether is also available for margin trading on Changelly PRO with up to x10 leverage.

Yield Farming 

Yield farming is a relatively new term to the industry, but you could probably meet it in the gaming sector. Techopedia provides the following definition of gaming farming:

Farming refers to a gaming tactic where a player, or someone hired by a player, performs repetitive actions to gain experience, points, or some form of in-game currency.

Back to the crypto world, yield farming helps users to earn interest on idle assets through different crypto strategies: lending, marketing-making (liquidity aggregation), etc. The thing that makes so many people start yield farming is the fact that anyone can actually grow their initial investment without adding extra funds to it. With the power of leverage and borrowing, crypto traders may enlarge their initial investment twice/triple/etc. 

So, what is the algorithm of yield farming? Let us provide an example. 

Alice decides to earn interest on the popular yield farming. She puts her initial investment into a certain decentralized lending platform, say, Compound.  

compound yield farming dashboard
Compound

Alice sees that if she supplies Basic Attention Token (BAT) to the Compound platform, she can earn almost 14% APY (Annual Percentage Yield). She puts $100 worth of BAT tokens on the Compound platform and starts earning passive income. BAT has a 60% of a collateral factor, which means Alice has $60 for borrowing any listed cryptocurrency.

Basic Attention Token and its collateral factor on Compound

Alice chooses to borrow ETH (we can see it has the lowest interest rate for borrowers). She can borrow $60 worth of ether. Once done, she goes to the decentralized exchange, for example, Uniswap. The next step Alice needs to take is to convert $60 worth of ETH back to BAT. 

ETH to BAT swap on Uniswap
Uniswap

After that, she returns to the Compound platform to add her new BAT tokens to the initial investment. Now she has $160 worth of BAT. Alice keeps on doing it several times to enlarge her initial investment. This is yield farming. 

Obviously, there are some risks. The crypto market is highly volatile, so that a cryptocurrency rate may change dramatically within several hours. If you are going to follow Alice’s strategy, please remember that you will need to pay back the collateral that you’ve provided before. Otherwise, your position will be liquidated in order to pay the debt, and you might lose your funds. 

Learn more about yield farming here.

Top 7 DeFi Coins in 2020

#1. Chainlink (LINK)

In its core, Chainlink is a platform that aims to connect real-world applications with the technology of smart contracts. The project has been on the market for almost three years. Today, Chainlink is considered to be the standard of the decentralized oracle network. According to the Chainlink team, oracle is a data feed that connects blockchains to the off-blockchain data. There is no need to deny that we are moving towards mass adoption. Therefore, LINK is a hot trend among those who are willing to join a decentralized race. 

LINK token plays an essential role not only in the DeFi sector but also in the crypto industry in general. This is one of the few DeFi coins that could gain the top cryptocurrency list by market capitalization. LINK continues to strengthen its market positions and conquering the DeFi sector. 

#2. yearn.finance (YFI)

yearn.finance is a blockchain-based platform that offers a range of DeFi functions, aggregated liquidity, leveraged trading, and automated marketing. It attracts thousands of users, which makes it one of the most popular places for yield farming. 

The native token YFI has burst into the market at the beginning of summer 2020. The token is famous for its unbelievable rapid growth as it managed not only surpassed BTC in the market rate but also gained the value of $30,000. Users can earn YFI by supplying liquidity to the yearn.finance liquidity pool. Additionally, the token is used for the network governing. Please pay close attention to the fact that the platform is in beta. Yearn.finance asks users to use the service at their own risk.  

#3. UMA (UMA)

UMA (Universal Market Access) is another DeFi project based on the Ethereum blockchain. The UMA protocol allows anyone with basic tech knowledge to build their own synthetic assets. Borrowing some concepts from conventional finance (like futures, options, etc.), UMA enables you to design derivatives in a decentralized manner. 

UMA token ranked number three in the list of the best DeFi coins. However, it has all the chances to improve its positions. UMA is in great demand among yield farmers. Smart contracts’ technology alongside the developing DeFi infrastructure are the greatest fertilizer for UMA token’s harvest. 

#4. Aave (LEND) 

Former EthLend DEX, Aave introduced its Aave protocol in January 2020. Since then, the LEND token has started its rapid rise on the list of top DeFi coins. As of September 2020, LEND is the 4th DeFi token in terms of market capitalization.  

Aave is a decentralized and non-custodial platform that is tailored to users who want to earn interest on depositing and borrowing crypto assets while providing liquidity to the market. Aave protocol is open-source, which means anyone can interact with the platform’s UI client. If you have the basic technical knowledge, you may interact with Aave directly via API or smart contracts.  

#5. Dai (DAI) 

DAI token is probably the most well-known among those who are stuck deeply in crypto finance. DAI is a decentralized stablecoin of the MakerDAO platform that allows anyone to earn interest on crypto deposits. As Dai is a stablecoin, its value is pegged to the US dollar, making DAI a relatively unfluctuating asset in the world of highly volatile crypto conditions. 

#6. Compound (COMP)

Another lending protocol, Compound, also allows you to earn passive income by lending your funds to the pool. COMP token is in great demand now as it’s actively used for yield farming. 

There are various strategies to multiply your COMP funds. For example, you can deposit ETH on the Oasis Borrow platform and open a Vault to receive DAI. It is possible to deposit DAI on other platforms, like InstaDapp. After that, there are two ways to start earning interest.  First, you can use the “Maximize COMP Earnings” feature. The second option is to provide your Dain tokens directly to the Compound platform.

#7. SushiSwap

This might look like a joke, but it isn’t. SushiSwap is currently a buzzing word of the DeFi sector. 

SushiSwap is a decentralized cryptocurrency exchange. In its core, this DEX is a fork of another Ethereum-based exchange Uniswap. Just like many other DEXs, SushiSwap introduces its native token of the same name to develop its own infrastructure and provide users with enhanced functionality. However, unlike others, SushiSwap is run by the community that uses SushiSwap tokens for governing the network.

Using the popular automated market making model (AMM), SushiSwap strives to provide users with proper instruments to earn passive income.