How Lucrative Are Yield Farms Really?

Editor Pick

Yield farming has become a buzzword in recent months, with the majority of popular decentralized finance (DeFi) projects now offering some sort of yield farming functionality.

But while many of these platforms boast impressive returns for investors, actually turning a profit from yield farms isn’t always as simple as it first appears — as there are more factors to consider than many investors initially realize.

Here, we take a look at the complex interplay of factors behind successfully turning a profit with yield farms, to help you make a more informed choice.

What are Yield Farms?

Yield farms are a type of DeFi product that allow users to generate revenue using their idle cryptocurrency holding or liquidity provider (LP) tokens.

They come in two main types: the first is cross-platform yield farms, in which users stake tokens from one platform to earn tokens on another — e.g. stake ether and earn the tokens of a newly launched project. The second is same-platform yield farms, in which projects provide a yield to users that stake their native token.

The process is somewhat similar to staking, in that assets used for farming may be locked up for a fixed period of time. Platforms will often provide additional incentives for long-term staking, such as an improved APR, and may employ a burn mechanism to disincentivize unstaking early.

https://twitter.com/iearnfinance/status/1381793464216653830

A large proportion of newer projects now offer some form of liquidity mining program, this helps to bootstrap their liquidity on decentralized exchange platforms like Uniswap and PancakeSwap, while reducing the circulating supply to improve tokenomics.

In most cases, yield farms will enforce a minimum lockup period, usually in the order of 7 to 14 days, but can be several months or even years in some cases.

Are They Profitable?

Like many investments, yield farms can vary considerably in their profitability. Some may be incredibly lucrative, offering returns that are difficult to beat elsewhere, while others can be net negative. Choosing a farm that is consistently profitable, and more profitable than competing platforms is one of the main challenges liquidity miners face.

While it is generally possible to find yield farms that offer in excess of 40% APR, it’s important to note that this rate can vary over time based on a number of factors, such as if the payout cryptocurrency changes in value or if the pot gets diluted. Most yield farms tend to offer high rewards initially but quickly fall to below 5% APR once they grow in popularity.

However, some yield farms offer a fixed, guaranteed rate of return, such as Prophecy’s farming platform, which offers a flat 25% APR.

Image: Prophecy

It’s important to note that while Prophecy pays 25% APR on the value of the staked LP tokens, users also earn a yield in the form of trading fees through Uniswap, which count as an additional source of revenue.

For this reason, many liquidity miners prefer staking their Uniswap/PancakeSwap LP tokens rather than simply staking their native tokens in order to maximize their yields.

Finding a Good Yield Farm

As we previously touched on, Yield Farms vary in their profitability. Finding the most stable or most profitable yield farm is a skill that requires patience, research, and often a great deal of trial and error.

With that said, there are a number of tips that can be used to spot a gem from the duds.

First, it’s important to look at the longevity of the farm. How long has it been operating, has the code been audited, is it well-reputed? If so, it may be a good idea to settle for a lower return if the platform is proven and long-standing. After all, moving funds between platforms can be an expensive task, while yield farms that offer extremely high APRs usually don’t do so for very long.

Second, investors need to consider whether the price action of the underlying cryptocurrency will affect their returns. For example, if a project is offering 100% APR through its yield farm, but the asset staked for these returns is likely to fall by more than 50% over a year period, then investors will actually be net negative over this time frame.

In any case, users should consider the long-term potential of their staked assets, and avoid staking ones that are overvalued — particularly if the yield farm in question enforces a long minimum staking period.

Yield farming is still a relatively new investment model. While there are profits to be made, it will take a discerning eye and some due diligence to spot the real gems.

How Lucrative Are Yield Farms Really?

Editor Pick

What are Yield Farms?

Are They Profitable?

Finding a Good Yield Farm

Our Partners

Get Crypto Newsletter