One of the most prominent reasons people invest in cryptocurrencies is that it is a hedge. It has been proven with some clarity that the asset class operates independently of traditional markets. A lot of established investors and firms have invested in the market just to diversify their portfolio, the most recent being MicroStrategy, which invested $250 million in Bitcoin and other assets. But even within the cryptocurrency asset class, there are several ways in which one can diversify their income. In some ways, it may even be better than other assets classes, as it can be tokenized in digital form. There are challenges too, most notably, a high barrier of entry for the non-tech-savvy. We’ll get to the ‘how’ in a bit. Let’s turn our attention back to the ‘why’. Cryptocurrencies provide many ways in which to diversify your portfolio but one of the best ways is with passive income options, of which there are several. The most talked about option is easily Decentralized Finance (DeFi), which will be the subject of our discussion today. It’s important to know how the service works in order to make the most out of it. Unfortunately, there are many out there seeking to capitalize on the mania and make quick a buck — but that’ll never happen. The purpose of this piece is to help you position yourself for passive income maximization with DeFi and possibly even make a decent profit. The time frame you are looking at is months, not days, so don’t get hasty. The best value comes from long-term investments.
The Value Network team is here to make everything easy for you.
What is DeFi and Yield Farming?
The chances are, you have heard of DeFi. Given the buzz, it’s been hitting the headlines and is even being talked about in mainstream finance. So there is a good probability that you know about this rapidly developing niche in the cryptocurrency space.
Even if the practical aspect of investing is a little technical, the concept itself is fairly simple.
DeFi is simply various financial services (like lending and borrowing) that are completely decentralized. There is no middleman involved in the process of lending or trading, meaning that there is no centralized entity to take a cut or slow down the process. Everything happens between the two concerned parties, which results in greater security and faster transactions.
How is this done, you might ask. Mostly through smart contracts and other technologies that take care of dispute resolutions to ensure disagreements are settled fairly. Governance by all of the asset holders also means that the terms of the services can be adjusted, according to their liking and not by some centralized party charging rates to benefit themselves. But perhaps the most salient feature of DeFi is that anyone can easily participate. You don’t need to go through a lengthy process just to be eligible and you don’t need to have extensive documentation either. Since this is a new space with evolving technology, the tricky part is making your first investments, which can be challenging. This is true for all cryptocurrency activities but doubly so for such a recent thing as DeFi. The issue can boil down to user-friendliness. Most DeFi protocols and platforms are not user-friendly at the moment, leaving participation accessible only to those who possess some technical knowledge. But that’s why we’re writing this — so you can begin your foray into DeFi following this a step by step guide without having to worry about making a mistake. But before that, we’ll have to learn a little about yield farming.
What is Yield Farming in detail?
If you’re going to invest in something, you’re going to want to choose something to invest in. And any investor in the market will tell you that yield farming is where it’s at. Strange name, you might think, but cryptocurrencies are no strangers to terms like this (“mining” for example). And the phrase is pretty self-explanatory. Investors simply use their existing assets/collateral on certain platforms, providing liquidity and generating revenue for their contribution. This may all sound confusing, but let’s break it down (we’ll go through specific examples shortly as well). In a nutshell, yield farming is simply letting idle assets generate revenue by making them useful to others. The hot topic right now is liquidity pools, which is where you contribute to an asset’s liquidity by providing it to a liquidity pool on a platform like Uniswap. But the real trick is knowing how to find the synergies between the various DeFi services, i.e. forming a yield farming strategy. As another example, you can borrow a stake on a platform and use that to contribute to a liquidity pool and earn fees. These are the yield farming strategies that some individuals are very adept at forming. Compound this with governance tokens that platforms release and you have a pretty nifty way of earning tokens, which could potentially reach a high value in the medium to long term. That’s why investors have been rushing towards DeFi. But we can discuss strategies later. Let’s now look at the protocols, platforms and tokens that you’ll be coming across.
Protocols, Platforms, and the Top Performers
Now we get to the most exciting part of learning about yield farming — what are the best performing protocols and how much can we realistically make?
Some of the most notable choices for yield farming protocols and platforms are the following:
– Ampleforth (AMPL)
– Compound (COMP)
– YFI (YFI)
– Balancer (BAL)
– Curve (CRV)
If you’ve paid any attention to financial news, then you know these are the ones that have made the highest gains for investors. YFI even temporarily held a 1000% APY for its investors, though such unrealistic gains are no longer the norm. Gains have varied but it’s not uncommon to hear gains in the double digits.
We’ve mentioned different types of protocols because rates may vary and it does take some constant supervision of the market to know where the best rates lie. The aforementioned projects are only some of the choices you have for yield farming, but they are among the better ones because they have avoided catastrophic incidents so far.
Going over the particulars of each protocol is out of the scope of this guide but we’ll use some of them to run you through your first DeFi investment. From there, you should be able to manage on your own and use the plentiful resources of the internet to refine your strategies.
Step by Step Process to Begin Yield Farming
Let’s take Balancer as our choice for our first yield farming venture. It is the second biggest liquidity pool behind Uniswap. You will be rewarded with BAL governance tokens for providing liquidity for various assets. The revenue generation process works like this: you will be providing liquidity to a pool of your choice. When someone makes a trade through that pool, you get a portion of the fees in addition to receiving BAL over time.
First, take a look at Balancer’s liquidity pools and connect your wallet to the application through the option on the top right (MetaMask is quite user-friendly).
Next, click on a pool of your choice — MKR-WETH for example.
Click on “add liquidity” and you will be asked to deposit the asset. You can click on “single asset” to use only one asset. You will have to confirm the deposit of the asset.
That’s it! You will now begin earning fees for providing liquidity on a weekly basis!
And your yield farming has also begun! You will earn BAL governance tokens periodically for providing liquidity. The more liquidity you provide, the more you will earn.
This is an easy way to get started with yield farming. There are definitely more complex and profitable strategies but don’t run the risk of loss when you’re just beginning with yield farming.
Tools to Use
Of course, you’re going to need a set of tools in order to do all this efficiently. It’s simply not possible to go over every tool out there, so let’s just stick to one or two of the most helpful tools
One of the most popular exchanges in the DeFi space and for yield farming, is Uniswap. ConsenSys recently released a report that showed that Uniswap had the most number of DeFi users and indeed, it is very popular with the community.
Trackers will help you keep track of various data, including different rates of liquidity pools on different platforms. There’s a wealth of such tools, so we’re just going to list some of the more important ones for when you first start yield farming.
MyDeFi is a simple and straightforward tracker that helps you find the best lending rates and most profitable liquidity pools. It also helps you calculate the rewards you can earn from the Synthetix network. It may not have the most information, but it’s a good place for beginners.
DeFiPortfolioTrackeris a more robust tracking and reporting tool that monitors holdings, trades, APR performance and more. It’s definitely more effective for those seeking to maximize their gains from yield farming.
3. Analytics Tools
DeFiPulse is the crypto community’s most popular way to check the amount of funds that have been locked into various protocols. Currently, the figure stands at $6.8 billion, up over $3 billion in just three months. DeFiPulse gives you information on each DeFi entity, how much value is locked in and what their growth is over a period of time.
DefiMarketCap is somewhat similar to DeFiPulse, except that it is focused on a broader range of tokens and their market cap. It’s a good way to keep track of tokens.
Dune Analytics is the most information-dense of the analytics tools mentioned here but it’s also the most insightful. It may not be something you peruse at first but if you’re interested in the DeFi space, it’s worth checking out. It provides information such as the growth of DeFi users over time, the amount of tokenized Bitcoin on Ethereum and gas prices.