Yield Farming Breakdown

Yield Farming Breakdown

Birth of Sushiswap and yield farming 

With the popularity of UNISWAP in 2020, Sushiswap came into existence to solve a problem of impermanent loss. Without going into too much detail about that, yield farming is basically a way to make money from exchanges offering incentives for adding liquidity into the platform. Why? The platform makes money by having trades (which requires liquidity) and the liquidity providers make money by providing liquidity which creates a win-win scenario.

I think perhaps my favorite thing about DeFi is yield farming. Why yield farming? 

Because there is an obsessive need to maximize gains with crypto. When you day trade crypto, you run the risk of missing out huge gains with the price spikes and also you run the risk of huge dips which can mess up your day trading. And then you got AMM where you add pairings but then you run the risk of impermanent loss. But yield farming on the other hand, gives you the opportunity of making tons of money by getting tokens by yield farming. Just two highlight two platforms real quick, let’s talk about the numbers. 


If you had done pairings last year AUG/SEP 2020 on Sushiswap, even without using SUSHI, you would have earned upwards of 4200% APR.


If you had entered Pancakeswap back last SEPT/OCT 2020, factoring in price increase and rewards levels, you would be sitting at a minimum of 6600% APR. 


Of course, these examples are really focusing on early months APR with the price difference and the APR would have dropped significantly over time. That and these are only estimates, I think these numbers are fairly conservative in nature so it is likely that the APR would be even higher. 


Why are the APRs so high? Even 100% APR seems too good to be true.

Well if we look at Sushiswap, which is like the original yield farmer, we can break down the business model a little bit. SUSHI tokens are minted for free as far as the platform’s concern with at first basically just governance value. The SUSHI tokens are rewards for its users for adding liquidity and to give incentives for the impermanent loss. 


Why does the exchange give away tokens? 

It is all about gaining liquidity. When there is more liquidity, then it gives more opportunities for users to buy/sell their tokens which expands the DeFi marketplace. This is essential as the crypto world moves farther and farther away from centralized exchanges. Of course, on ramps and off ramps for your fiat are a little less smooth with DeFi still. 


Why are these tokens worth anything?

At first, these tokens were really just a governance token with some meme value. As these platforms have grown and have collected more fees, they are implementing a dividend style reward for HODLing the tokens. Taking UNISWAP for example, at the time of writing they did $1,161,288,930 USD worth of volume in the last 24 hours. At .3% in fees, UNISWAP has collected $3,483,866 USD worth of fees (which are currently given to the liquidity providers). So for a platform like Sushiswap or any other yield farming dex, they are giving out governance tokens as an incentive to help with impermanent loss and if they can make it then the tokens themselves have more value than just governance when they start paying out rewards. Several platforms on BSC have taken to doing buybacks and burns which basically is a huge dividend to every HODLer. UNISWAP, SUSHISWAP and some others are trying to redirect some of these fees to the HODLers that stake which causes the native token price to surge in value. With collecting roughly 1.2B in fees a year, Uniswap is becoming a massive exchange in the crypto markets which simply offers some incentives for these other yield farming exchanges to try to compete against. 


Risks of yield farming

Picking out a good yield farm like SUSHI or PANCAKESWAP has its dividends. However, there were definitely a lot of projects that were scammed on both ETH and BSC over the last year. Projects that have rugged pulled or soft rugged. Projects that have stolen tokens from its users with migrating away liquidity pools. Projects that were exploited from bad code, which probably was from the original developers. There has definitely been a lot of loss of money with bad developers.


Closing thoughts

Here are some things to watch for when choosing a yield farming platform.

  • High developer engagement
  • Social media activity
  • TVL growing pools
  • Audits help, but you can still get scammed
  • Tokenomics that actually make sense 
  • If it is a fork, that there are something else added and not just a copy/paste 
  • Getting in “early” helps, but what is early? Are you considering the time of entry point vs the start? The market cap of the native token? Are you just yield farming for this year or are you planning on yield farming for years to come with this platform? 


I have used a lot of yield farming platforms since the fall of 2020 but here are some worthy mentions that I like:


  • Sushiswap obviously however I don’t keep a lot of money there anymore.
  • 1inch however I really don’t like the timed liquidity pools and how expensive it is to move it out. A rich man’s game
  • Curve


  • Pancakeswap
  • Mochi has proven to be a great yield farming platform. Very under hyped 
  • Despite the negative price action on EGG, I think GooseDeFi still has my check boxes marked. High TVL and social media engagement. I think the developers get a bit emotionally tied when they get a hard time which is a bad thing and they do say stuff like “those who sell out will regret it” which makes me think they are trying to create FOMO… but overall I do like their engagement levels.

Harmony ONE

  • VIPER EXCHANGE. As mentioned in my previous post, I think DEXes are going to be huge on Harmony ONE in the coming months. I would guess in May. VIPER has 19M TVL right now and at the time of writing 82% of the ETH on HARMONY ONE is locked in VIPER. Interesting enough, when VIPER first launched the ETH<>ONE pairing, there was only 40-45 ETH wrapped onto Harmony ONE. Now there is 571 ETH that has entered into blockchain. As more DEXes launch on Harmony, we will see a LOT more liquidity flow into it (I am looking at you MOCHI Swap!). But, being the first and solidifying its position, I think Viper has huge potential of competing against the big DEXes on the other blockchains. If you take total supply (including what’s locked), Viper is x10 smaller than Pancakeswap or x100 smaller if you consider only circulating supply. But unlike Pancakeswap, has a limited supply and that locked supply will only release slowly onto the market starting in December of this year. 

Final notes: I will be gone for the big bulk of APR without my computer and cellphone. I will have a couple posts that my wife will publish while I am gone, however, I won’t be following the market for the next few weeks. I am kind of collaborating with a project. I am working with a couple of developers to help design a different tokenomics model for a DEX. Since I am gone for the month, they’re hoping to launch it in May when I am back. I’ll keep you posted on the project but if they manage to pull it off successfully I think it will be a huge opportunity. I mean everyone wants to be an early adopter so that’s cool whatever but more importantly I think it’s a unique idea which has some appealing tokenomics. Anyways, if you want to keep up with updates please subscribe and/or join our discord channel.

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