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Yield Farmers – Big Rewards And Huge Risks – A Cautious Guide To Yield Farming

blockster.com 10 October 2021 23:43, UTC
Reading time: ~3 m

On paper, huge rewards look spectacular. Deposit some crypto, and in exchange, get a reward after a set period. Yield farming is basically locking up funds using a decentralized application (dApp), which will, in turn, lend that crypto for a return rate.

Of course, there are all kinds of risks involved, as the smart contract might have a breach, the pricing oracle might be tricked, or the operation itself goes bust because of a design flaw. Generally, the higher the risks, the bigger the returns.

Decentralized Finance (DeFi) has grown to a $100 billion mammoth, up from $15 billion by the beginning of 2021. Yield farming became an integrated part of this ecosystem, as almost every application needs depositors to provide liquidity or trade those funds on other platforms.

Staking is the most simple and popular form to generate a yield. For example, most Proof-of-Stake chains offer a reward for users that lock up their coins and delegate a validator. That includes Cardano, Solana, Polkadot, and EOS, to name a few.

However, yield farming consists in seeking returns in every imaginable form. That could include swapping the token for another, making arbitrage trades on DEX exchanges, or even providing liquidity for lending pools.

The most famous DEX exchanges, such as UniSwap and PancakeSwap, use the Automated market maker (AMM) solution instead of traditional order books. The price feed sourced from the external oracle calculates the exchange ratio for the assets held on multiple liquidity pools.

The yield farm will automatically search for the highest return for the investment based on the smart contract specs. There will be riskier pools and some more conservative, usually aiming for lower APY or annual percentage yield.

Keep in mind some liquidity pools, or DEX trading, offer a staking mechanism of their own. For example, Uniswap hands out UNI tokens to its users, so yield farms might benefit from that.

Is there easy money to be made by automated, fully decentralized yield farms? Sure, but there’s always a risk involved. Besides the previously mentioned smart contract and oracle risks, an unexpected price swing and network congestion might cause cascading liquidations that end up severely impacting the yield pool.

All you need is a smart contract-capable wallet, such as MetaMask, and some Ethereum (ETH), Solana (SOL), or Binance Coin (BNB), depending on the network you’re aiming to use. Most yield farms accept stablecoins deposits, such as DAI or USD Coin (USDC), but the network transaction fee must be paid in the native chain’s crypto.

a) Create and fund with some BNB and CAKE a BSC compatible wallet, such as MetaMask or TrustWallet.

b) Convert the native BNB tokens into BEP-20 BNB, either on Binance exchange or directly on Trustwallet.

c) Visit PancakeSwap.Finance and click on ‘Connect’ at the top-right corner, allowing MetaMask or TrustWallet to interact with the decentralized application.

d) Head over to ‘Farms’ on the left side and select the CAKE-BNB pool.

e) Click on ‘enable’ to join the yield farming pool, informing how many CAKE (or BNB) you’re willing to add. Keep in mind PancakeSwap requires an initial 50% and 50% balance deposit for both cryptocurrencies.

f) To wrap it up, click on ‘Supply’ and confirm the transaction on your wallet. All set! In return for the yield farm, you’ll receive CAKE-BNB LP tokens representing your share on that specific pool. Moreover, those tokens can also be staked for increased gains.

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