Yield Farming – How to increase profit per year over 100% from cryptocurrencies

Tram Ho

Introduce

At the time of writing, this phrase is an extremely hot phrase in the crypto currencies community in particular and blockchain in general. Yield farming really emerged when the community saw investors make annual profits (Annual Percentage Yields – APY) in excess of 100% on the Compound platform.

Profits earned through Yield farming come from many factors and also come with many risks

About Decentralized Finance (Defi)

The first point when learning about Yield Farming will need a little bit of learning about defi – a very hot keyword. Defi at the time of this writing is only covering financial products operating on Ethereum. These products are implemented in the form of code (smart contract) and this code is deployed on the Ethereum platform.

Defi’s famous products can be mentioned as products to swap between tokens like Uniswap, or a Vietnamese product called Kyber network.

In addition to the above platforms, there are also other services that have emerged on the recent Defi wave such as:

  • Crypto lending and borrowing platforms such as Compound, Aave (widely used in the UK)
  • The stablecoins correspond to the USD, Euro …

  • No-loss lottery on ETH (no-loss lottery) PoolTogether
  • ….

It can be seen that the current Defi products are not merely swap tokens, but have expanded a lot and will grow more in the near future.

Yield Farming

What is Yield farming ???

Yield farming is a form of profit from using defi applications, the yield is usually brought about by providing liquidity for platforms. These rewards often come from exchange costs on platforms (uniswap, kyber network), interest rates (lending) and also from paid tokens (sometimes this is what makes up the majority of profits).

Methods of making a profit from Farming

In the Defi platform there will be a lot of farming methods, in this section I will introduce methods from simple to complex.

Uniswap

The first and the simplest is to provide liquidity to Automated Market Maker (AMM) platforms – This is a platform that allows users to switch between Cryptocurrencies. Each transaction on Uniswap costs a 0.3% fee, which is transferred to your Liquidity providers – So to be able to profit from this platform, we have to become Liquidity providers .

So what are Liquidity providers ? These are the people who provide the liquidity for large pools. In the case with Uniswap , with an ETH-DAI trading pair, the ETH or Dai providers will be Liquidity providers , who will split the fee when trading pairs between ETH-DAI are made.

This is the simplest and least risky method in Yield Farming , suitable for those who want to keep tokens long term.

Leverage

Farmers have many ways to increase the yield yield. By finding the difference between lending and borrowing in the two platforms, they can both get a bonus token amount and interest in lending. The most basic example with 2 lending & borrowing platforms is Compound and Balancer . Some people have realized that the profits paid when lending on Balancer is higher than the interest paid when borrowing on Compound -> Thanks to this difference, they have just gotten the difference interest and COMP ( tokens are generated when lending or borrowing on Compound )

The use of leverage is expanded on the Compound platform to be able to recoup COMP tokens because lending and borrowing on Compound are rewarded with COMP tokens.

Note: COMP token has increased in value from $ 60 to $ 330 in just 1 week

Using leverage on Compound can be explained simply with the following steps:

  1. Provides USDC lending (lending)
  2. Borrowing USDT from the amount USDC just provided
  3. Swap from USDT to USDC
  4. Continue to lend USDC
  5. Get more loans for USDT from USDC just lending

Just like that, the user can repeat the above steps many times. The amount of COMP tokens collected can be 30 times higher than simply lending in step 1.

However, this method was stopped by Compound (sad).

Stacking Yields

Most of the current Defi platforms offer compensation tokens, so it is a strategy that has been proposed to make profits from staking new tokens farmed on different platforms. This method can be simply explained as it is possible to generate different tokens from a single liquidity supply thanks to the platforms:

  • Curve
  • Balancer
  • Lace
  • Synthetix
  1. First with the Curve platform, this is a place that allows users to exchange BTC types on ETH (sBTC, wBTC, renBTC). By providing liquidity to the platform, users will gain newly born tokens, CRVs and pool fees
  2. Staking Curve LP Tokens: After acquiring CRV tokens, this amount of tokens can continue to staking on the Synthetix platform. Thanks to this staking, we are getting new tokens REN and SNX

  1. Balancer: The last bet is that we can easily get BAL tokens from staking the amount of REN and SNX obtained from the above step.

After a chain above we have obtained a significant amount of tokens while only providing a certain amount of liquidity are BTC on ETH. However, there is a risk that users will have to balance cost and price volatility between the amount of liquidity initially provided (BTC on ETH) and the value of the newly generated tokens.

Farming considerations

Confusion about APY calculation

The annual interest rate (APY) can be confusing for users. Many advertising platforms claim that providing their liquidity can lead to profits in excess of 100% a year. This profit can be calculated by both interest and the value of the newly paid token (With the COMP token platform, the value quickly increases from $ 30 to $ 330, so a 1-year profit exceeding 100% is evident. however) with other tokens, sometimes it can be quite difficult to quantify in a stable manner.

Price volatility

Except for the use of stablecoins to provide liquidity, many people are still using different cryptocurrencies, and their common feature is that they are very volatile. Maybe a platform offers high APY, but the value of staking assets quickly devalues ​​can make farming tactics unprofitable.

Risk

Farming risks can come from technical issues such as:

  • Error on smart contract
  • Error on Oracle
  • Rate of change
  • Blackswan

Smart contract risk

As mentioned, Defi products have the advantage that there is no need for 3rd party intervention, everything is executed by code (Executed on smart contract), so it will potentially error when the smart code. the contract is not carefully audited. These can be mentioned as Daos on ETH or a recent incident that caused the YAM token to drop by 99% because the smart contract’s code forgot a division, making the number of tokens generated much larger than expected.

To prevent this threat, we need to audit the smart contract code before running them on the mainnet, currently there are a number of reputable audit organizations that can include:

  • Trail of Bits
  • Zeppelin
  • Quantstamp
  • Consensys

Error on Oracle

Oracle is the point that connects smart contracts with real world information, so hackers can take advantage of Oracle’s latency on the prices of cryptocurrencies to benefit.

To prevent this problem, people are using Oracle of Chainlink , this is a relatively stable oracle and the token price is aggregated from many different major sources.

Rate of change

Although staking on Defi platforms is very flexible in deposit because the account is not locked at all, with the fierce exchange rate with the coin market (maybe down a few tens of% in 1 2 candles), the withdrawal from Staking platforms will also be a bit difficult in cases where real loads need to be sold quickly

Black swan

These are risks that not only Defi but any economy will face, these are risks that cannot be expected. The corona pandemic, for example, has also had a huge impact on the crypto market.

Conclude

Above are the methods I have come up with to be able to increase the profits from Yield Farming and the risks that each platform brings. Maybe the next article I will guide you to build a basic Defi product.

Source

A Guide to Yield Farming on Ethereum

What is DeFi and why is it the hottest ticket in cryptocurrencies?

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Source : Viblo