2021 GUIDE

Maximize Your Gains
In Yield Farming

Yield farming was one of the main driving forces behind Defi blowing up and bursting onto the scene in 2020. From Andre Cronje’s daring decision to have a no pre-mine token protocol that led to countless YFI forks, to a “vampire mining” platform trying to steal not only liquidity from its competitors but even money from its own users, the year certainly had no shortage of new and exciting happenings in the decentralized finance space. What does 2021 have in store for us?

Defi Statistics
$36.4B
Total Value Locked
16.90%
Maker Dominance
4067.7%
TVL Annual Growth
* Last updated: From Defi Pulse on 9 February 2021~
What is Yield Farming?

The Search for A Market Edge

COMP tokens distributed by Compound arguably started this whole trend of luring in liquidity providers with the promise of governance tokens in exchange for parking their crypto.

Yield Farming is a term coined in the defi space, and refers to the concept of maximizing profits and finding edges through borrowing from defi protocols for the purposes of reinvesting with higher leverage, liquidity mining to supercharge gains from liquidity pools, and moving money quickly across pools to take advantage of arbitrage opportunities.

This guide looks to keep the party going, not by trying to predict what new strategies are going to come out for liquidity providers, but where and why to get started with the newer and better protocols to piece together your Defi farming monopoly.

What you need to know

KEY POINTS

Status Update on
Yield Farming

With the space heating up, it's important to keep a level head to avoid getting burnt. Here are some things to note in 2021.

EVM Altchains Proving Profitable

Don’t be afraid to jump onto new networks like Binance Smart Chain or even more obscure ones like the Theta Mainnet.

Hedge Your Risk with New Derivatives

Manage your risk by exploring derivatives offered by new Defi-centered protocols.

Check for Smart Contract Audits

Push for and look for smart contract audits because pushing the envelope in defi innovation comes with the risks of software bugs.

How will new smart contract networks affect Yield Farming?

Crossing Chains for Yields

In the 3rd quarter of 2020, Binance opened up their Smart Chain (BSC) just as the Defi craze went into full swing. With Ethereum gas fees continuing to trend up, developers and speculators alike flocked to this new EVM-compatible (Ethereum Virtual Machine) blockchain that was yet to be saturated. They saw the opportunity to utilize the skills they had learned on the Mainnet on a familiar playground. In fact, most of the new dapps and Defi tokens to come out were practically identical to what Ethereum’s homegrown offered. But the difference in fees from a network filled to the brim with all kinds of food tokens, and an untouched garden ripe for the taking, was all that was needed to give Binance a foothold in the race for yield profits.

But gas fees weren’t the only thing yield farmers were thinking about. With a new network came a reset in the status quo – old strategies could be retried in this new chain, because the competition wasn’t as mature. Some people would be tinkering with their new Binance wallets or trying to find out how to switch to BSC on their Metamasks, while the sharper ones would already be well ahead of everyone and getting to work on providing the much needed liquidity.

As long as gas fees stay high and trend higher, developers will always be incentivized to explore alternate networks to host their smart contracts on, and you’d be missing out on a lot of gains if you stuck to just one chain. Don’t be afraid to be ahead of the curve and explore upcoming chains because the rewards of being first and early in crypto is something everyone’s very familiar with.

Make sure to stay updated with innovations across ALL networks: It's important to stay in the know with progress being made within these chains that weren't previously innovated on the Ethereum mainnet. Polkadot parachain Bifrost leads the way in liquid staking, a practice similar to yield farming that focuses on removing the restrictions of locked staking while keeping the benefits.

Learn More
How are derivatives shaking up the Defi space?

New Financial Products

Opyn is one of the burgeoning options platforms looking to bring derivatives to the defi space. And while mainstream media has recently turned the perception of options as a tool for YOLO plays, traditional finance used these tools to hedge their risks, once upon a time. For example, put options are often bought as insurance against downside risks. Combinations of these financial products, such as iron butterflies, could work either in tandem with or against yield farming’s risk of impermanent loss.

The minting of oTokens definitely takes a page from the token craze started by Compound, and the ability of these grassroots developments to innovate, such as Opyn v2 having auto-expiry exercising for tokens that expire in the money, will keep Defi on track to capture more eyes and money.

Risk management is important in all forms of investment, as boomer-ish as that may sound for a crypto nut.

Why should you demand for more development in smart contract security audits?

Need for Smart Contract Audits

There was no shortage of rug pulls, hacks and smart contract exploits in 2020. MakerDao was exploited and over $8 million in ETH were liquidated by hackers while paying virtually no costs. With countless users losing their money, MakerDao governance made some changes to prevent future mishaps. But the damage was already done.

Defi innovation and progress in blockchain development allows us to create new financial products and paradigms that were previously impossible in a predominantly Cefi (Centralized Finance) world. But the speed at which developers are pushing these innovations forward brings a host of bad habits – lack of assertion tests in favor of a chance at a headstart at a new yield strategy, half-baked audits from unproven security platforms, etc.

Moving forward, the blockchain industry as a whole should prioritize security as there is much more value in the eye of the general public (Defi's eventual target market) in a secure protocol than a lucrative one.

The State of Smart Contract Auditing

Several proven names in the space such as OpenZeppelin come with heftier pricetags than the lesser known auditors. But with the amount of money flowing into the initial offerings, it’s a speedbump compared to the financial and PR disaster awaiting a flawed smart contract deployed willy-nilly. Be vigilant in looking for audit reports on your latest FOMO play – a couple yield points on the newest burger token just isn’t worth it if everyone gets hacked and liquidated in the end.

That being said, auditors aren’t foolproof and many contracts have been exploited despite going through rigorous, expensive tests. But it sure beats just trusting a random anon dev’s word that everything is safe.

Any more things to keep in mind?

Tools & Alternatives

At the end of the day, the blockchain space will change and move fast. Hot trends such as yield farming may fall by the wayside tomorrow, so it's good to be in the know about alternate strategies and references people are looking at to maximize their profits on the blockchain.

  • DAOs or Decentralized Autonomous Organizations are a different way of automating or supercharging your profit strategies, through decentralized governance made possible by economic incentivizes. Exnetwork is one example of a social finance DAO that hosts incubator seed rounds, which otherwise would not have been available to the public due to investment restrictions.
  • There are a ton of places to obtain information on pools for maximizing your APY and 7-day yields, and one of them is Defi Yield. This app has a minimal, no-frills interface which is a sight for sore eyes with all the bloated single-page apps slow to load in this lightning-fast market (I’m looking at you, DEXTools). It’s snappy column sorting allows you to check up on the best yielding pairs across blockchains in real-time. Over time, as more projects come out on networks besides the Ethereum Mainnet, reference sites like these that integrate the different chains into one ranking will come out on top in terms of usability and UX.
New Protocols

Watchlist for Defi Farming

To end our guide, we've gathered some recently released and upcoming protocols that look to shake up the space. (As if we didn't already have enough of those!) Keep an eye on these or give them a try if you want to be ahead of the curve.

PancakeSwap

BSC broke onto the scene with their own slew of automated market makers combined with yield farming, and PancakeSwap is at the forefront of that in early 2021.

Cometh

NFT games aren't new, but NFTs that leverage yield farming strategies (like those on Cometh) can shake up this old scheme.

BotOcean

Algorithmic trading systems have been a tried-and-tested formula since HFTs, but new Defi-centric ones that innovate will survive and thrive. Look for BotOcean to explore yield farming strategies in 2021.

Alpha Homora

If it ain't broke, don't fix it and v2 of Alpha Homora looks to provide much more of the same - leveraged yield farming and leveraged liquidity providing in a few clicks.

Spartan Protocol

Made an interesting bootstrap decision to burn tokens in order to mint their synthetic asset-focused tokens. Looking to recreate the magic of SNX.

Thetaswap

One of the first smart contract protocols on the Theta mainnet is predictably a market maker/liquidity pool.

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