Recently, Decentralized Finance (DeFi) proponents have latched onto the farming metaphor and created the meme yield farming.
This term implies that traders quantify yield as the amount of interest that’s grown on the top of underlying crypto holdings such as Dai and USDT when invested in DeFi platforms like Compound.
The DeFi sector was already gathering tremendous pace since the start of 2020 before yield farming exploded onto the scene, but things have now kicked into overdrive in the sector thanks to the beginning of the Compound governance token distribution system on Monday, June 15.
Shortly after the launch of the Compound DeFi, COMP, which is the native token to the popular protocol, surged in value by more than 100% after being listed on Coinbase Pro.
Moreover, DeFi’s so-called yield farmers are also putting their capital to work to earn yield from similar protocols such as Synthetix, Balancer, and Curve and are receiving as much as 100% APR on popular stablecoins in cash-back bonuses and incentives.
Let’s dive deeper into DeFi’s hottest meme right now to understand better what strategies top investors are deploying to earn a profitable harvest.
Successful Strategies for DeFi Yield Farming
DeFi yield farming basically involves earning high returns by utilizing leverage to gain additional exposure to various crypto assets collateralized with USD-backed stablecoins.
The investment blueprint has become more lucrative in recent weeks as protocol teams progressively incentivize liquidity providers (LPs) by distributing their native token.
One of the initial successful strategies for yield farmers was developed to increase liquidity for Synthetix’s synthetic ETH token (sETH) on the Uniswap DEX.
Here, investors contribute liquidity to the sETH/ETH trading pool and then staked their Uniswap sETH LP on Synthetix, earning a harvest of SNX tokens and additional trading fees collected from Uniswap.
The strategy was mimicked for many other tokens across different DEXs and has emerged as a winning strategy for DeFi investors.
And now, when Compound started distributing its governance token COMP last week, Traders suddenly had the chance to tap into the “Compound Fertilizer strategy”.
This plan allows them to earn a share of the 2,880 COMP tokens distributed each day to those supplying and borrowing capital from the protocol.
The launch of Compound has also seen some farmers start to supercharge their earnings by taking out leveraged loans to borrow the tokens, which yield the most COMP, and platforms like InstaDapp are making this strategy possible in one click.
Moving forward, we are likely to see crop rotation take form as LPs shift from USDT into more scarce assets like BAT, WBTC, and ZRX.
More DeFi Yield Farm Tips and Tricks
Considering the average bank saving account interest rate is 0.1%, and DeFi products can yield up to 100% annualized yields, these products are inherently 1,000 times more lucrative to investors.
As the new DeFi space continues to garner attention, some active DeFi farmers have seen it fit to share their farming strategies.
For instance, DeFi investor who goes by the online name of Degen Spartan, shared his strategy that involves taking stablecoins, depositing them into a sUSD Curve pool, and then taking the LP tokens (tokens that represent deposits on Uniswap) and depositing them into the Synthetix Mintr incentives contract.
Similarly, the DeFi investor “SNX Professor” deployed “collateral” to borrow USDT and lend back USDT. Then BAT began giving more COMP, so he closed the positions and switched over to borrow BAT and lent out BAT again.
Even as the latest DeFi boom in yield farming explodes onto the crypto scene, Ethereum Founder Vitalik Buterin has taken to twitter to warn the community over the integral risks of over glorifying DeFi products.