There is a lot to know about the cryptocurrency and DeFi world, and it can sometimes be overwhelming to figure it all out. We are passionate about offering educational materials about DeFi on our blog. Today, we'll talk about how cryptocurrency investors can earn interest from yield farming: what it is, how it works, what the difference is from staking, and what the best platforms for yield farming are.
What Is Yield Farming?
In a nutshell, yield farming is a financial strategy where users deposit their assets on DeFi platforms to earn rewards—usually in interest, tokens, or a share of transaction fees.
Unlike simply holding digital assets with the expectation that their price will increase over time, yield farming allows you to make money on your savings right now by acting as a liquidity provider, staking your tokens for protocol security, and so on.
Yield farming has both advantages and disadvantages.
Benefits and Risks of Yield Farming
Yield farming has an obvious advantage: it allows you to earn money here and now without waiting for the price to rise.
Providing liquidity in some protocols, you receive not only a part of the fees but you can also receive rewards in project tokens. It can be in the form of airdrops when you use the app, and when the protocol issues a token, you get a part for your contribution. It could also be through liquidity mining— when you immediately know you’ll receive another token for providing liquidity. This is a widespread practice in crypto.
Yield mining also carries financial risks like any other investment strategy. The main ones are:
- The volatility of the crypto market which can lead to a loss of value of the tokens used in farming.
- Risks of smart contract exploits when hackers can steal your funds.
- If you use your holdings to leverage your portfolio by borrowing and fail to repay, the position can be liquidated, and you can lose your collateral.
- Regulatory restrictions on the use of DeFi protocols.
Main Types of Yield Farming
Here’s how yield farming works in DeFi:
Providing Liquidity.
Decentralized exchanges (DEXs) like Uniswap, PancakeSwap, or CEXs (through liquidity mining pools) allow their users to deposit crypto to pools (e.g., ETH/USDC). When traders swap tokens in this pool, liquidity providers (LPs) earn a share of the transaction fees. They may also receive additional rewards in the form of governance tokens from the platform, like UNI on Uniswap. This is one of the most common types of yield farming.
Staking.
Yield farmers can also stake tokens they receive from liquidity pools (LP tokens) or other platforms’ single tokens (also called vanilla tokens) in staking contracts to earn more tokens as rewards. For example, after providing liquidity to the QODA/USDC pool on Uniswap, the resulting LP tokens can be staked in the Qoda DAO App and receive rewards.
Lending.
Users can lend their crypto assets to borrowers on lending platforms like Aave (floating rates) or Qonstant (fixed rates). In exchange, lenders sometimes earn interest on the lent tokens and additional platform tokens as incentives.
Yield Farming VS Staking
It’s worth noting that the term staking has several definitions. We’ve already mentioned the staking of vanilla and LP tokens. However, there is also native staking.
Native staking is locking up your tokens within their original blockchain to help maintain operations, such as validating transactions and enhancing network security.
Yield farming and native staking are similar, providing liquidity, but differing in forms and associated risks. Let's look at examples.
Example 1. Native staking
You have ETH tokens and can run your own node to validate transactions and earn fees or deposit tokens in a pool, such as Lido or Rocket. The APR will be 3-4%. Read more about staking on Ethereum.
Example 2. Yield Farming
Holding ETH tokens, you can deposit in Lido, receiving 3-4% APR, then invest stETH in EtherFi, a well-known restaking protocol, receiving another 2-4% on top and the resulting liquid restaking tokens. These, in turn, can be used in other DeFi apps, such as Pendle, and get 3.5% additionally. Thus, the total APR will be much higher compared to example 1. These numbers are approximate.
What’s the point of native staking? By running your node or joining a pool, you use the infrastructure of Ethereum or a trusted partner, significantly reducing security risks. In example 2, you interact with various smart contracts and protocols to earn more, but the risks also increase.
So, yield farming offers higher profit potential but comes with increased risk due to smart contract vulnerabilities and technical challenges that could result in fund loss. In contrast, staking delivers more consistent, lower returns by contributing to blockchain security, offering a safer and more stable option for earning passive income.
Best Yield Farming Crypto Platforms
Since DeFi is a dynamic field, pools have floating rates, and yield is sometimes limited in time, we won't recommend specific apps to make the content relevant, no matter when you read it.
Instead, use the following tools to find the best DeFi farming platforms, pools, and APYs at once:
- Defillama. It is one of the best DeFi data platforms where you can find the actual APR in thousands of protocols.
- DeFi yield aggregators: Beefy, Yearn Finance, Silo Finance, etc. Depending on your network and tokens through Defillama, Dappradar, or other analytics platforms, you can find the best ones for you with a bit of research.
- One of the Qoda Finance Ecosystem partners, Qonstant, allows a unique opportunity to earn fixed APR on your USDC on Arbitrum. Compared to other lending platforms with floating rates, Qonstant offers more predictable returns.
Consider the associated risks we discussed earlier while depositing your assets using any protocols!
Conclusion
Yield farming allows idle tokens to work and earn more than just holding. It comes with risks and benefits you should know before you start farming. Also, different types of yield farming and protocols that provide such services should be considered according to your investment strategy and risk tolerance.
Do you like this article? Join our social media or sign up for the newsletter below to receive monthly updates about new materials and participate in discussions. We’d like to hear your feedback.