Yield farming is a collection of strategies used in decentralized finance (DeFi) that create more cryptocurrency from your existing holdings.
This is a return maximization strategy that aims to enhance yield. However, the world of DeFi is extremely complex with hundreds of projects offering various prepositions and the risk of rug pulls & cyberattacks aplenty.
Here we review the top 5 Yield farming protocols so that you, our readers, know who else to avoid.
1. Yield Farming with AAVE
1.1. Introduction to AAVE
AAVE defines itself as a “decentralized non-custodial liquidity market protocol” that allows users to assume the role of depositors &/or borrowers.
The depositors are essentially liquidity providers that allow them to earn a passive income. On the other hand, borrowers are able to collateralize their existing holdings and raise funds.
1.2. What We Like About AAVE?
AAVE is top of the list due to the sheer size of the liquidity locked into its various protocols (USD 11.53 Billion as of the time of writing). This is a major comforting factor and reflects the trust of the community in the protocol and its robust security systems.
Also, AAVE has been designed for a multi-chain world and supports Ethereum, Avalanche, Polygon, Arbitrum, Fantom & Harmony. This ensures fast transaction speeds and low transaction costs which are unavailable on Ethereum-only networks while also facilitating a wider audience in the marketplace.
The protocol provides the full range of lending & borrowing services with the additional feature of staking. Staking is delegating/locking your tokens of a Proof of Stake (PoS) blockchain project to support transaction authentication on that network. More on that later.
1.3. What We Don’t Like About AAVE?
Unfortunately, AAVE requires an active understanding and participation when farming. There is a lack of automated strategies available which are not exactly user-friendly.
2. Yield Farming with Compound
2.1. Introduction to Compound
Compound defines itself as an “algorithmic and autonomous interest rate protocol” connecting lenders and borrowers.
Just like AAVE, depositors provide liquidity through smart contracts to earn interest whereas borrowers pay interest to access these funds making Compound an intermediary.
2.2. What We Like About Compound?
All the things to like about AAVE are to like about Compound.
As of the time of writing, the protocol has USD 5.4 Billion of liquidity locked up with 310,000 participants reflecting trust in the protocol and its security systems.
2.3. What We Don’t Like About Compound?
Unfortunately, like AAVE, there is a lack of automated strategies available. Our only other criticism is that it is solely on the Ethereum network.
This has a very negative impact on its ranking in terms of comparing transaction costs with AAVE.
3. Yield Farming with Curve Finance
3.1. Introduction to Curve Finance
Curve Finance is a liquidity protocol for exchange trading primarily focused on stablecoins.
They are on the Ethereum blockchain with, as of the time of writing, USD 8.34 Billion of value locked into its smart contracts. Liquidity providers are rewarded through LP tokens which may be staked or converted to stablecoins.
3.2. What We Like About Curve?
Unlike AAVE & Compound where the protocol aims to connect depositors and borrowers, Curve aims to utilize the liquidity lock-up on its platform to act as a market maker for exchange trading.
In layman’s terms, decentralized exchanges draw on the liquidity pools of Curve to conclude swaps thus ensuring that the liquidity parked with Curve is always and consistently put to best use.
Resultantly, the interest generated on Curve pools is generally very competitive and rewarding.
3.3. What We Don’t Like About Curve?
The basic criticism is primarily the lack of automated strategies & the transaction costs of Ethereum as with AAVE & Compound.
However, I would like to add that the website and app represent extremely poor visual UX, with the protocol aiming for a vintage 90s feel.
4. Yield Farming with UniSwap
4.1 Introduction to UniSwap
Uniswap is a DEX operating on the Ethereum blockchain. They operate under a no-trust system whereby liquidity providers invest in a pool of two tokens which creates a market for that trading pair.
This allows trading to happen on the said pair (through swaps from one token to another) in a trustless manner with the trading fee being paid out to the Liquidity providers as a return.
4.2 What We Like About Uniswap?
The system is extremely simple and transparent, with best-in-class security. As of the time of writing, USD 5.83 Billion of value is locked into the protocol providing liquidity to hundreds of trading pairs.
4.3. What We Don’t Like About Curve?
Unfortunately, the fact that this is Ethereum-centric exposes it to the risk of high transaction costs. This is a barrier to entry for those with small portfolios.
5. Yield Farming with PancakeSwap
5.1. Introduction to Pancakeswap
Pancakeswap is BNB Chain’s answer to the Ethereum-focused Uniswap.
Using liquidity pools comprising two tokens, a market can be created for any trading pair with liquidity providers earning the trading fee. This is a no-trust DEX similar to Uniswap.
5.2. What We Like About Pancakeswap?
A simple and transparent system with top-notch security and the added benefit of being on a cost-efficient blockchain. These factors make Panckaswap a sure winner.
No wonder that USD 4.63bn of value is locked on the protocol which puts it at par with its Ethereum counterpart – Uniswap.
5.3. What We Don’t Like About Pancakeswap?
The world of DeFi is primarily an Ethereum-heavy one. Other chains are competing to take a share of the pie with an overall movement towards an interoperable and multi-chain future.
However, at present, Ethereum remains the dominant force. In this respect, BNB chain & Panckaswap offer a much smaller universe of tradable assets as the focus is on BNB Chain tokens only.
The total value locked in DeFi, as at the time of writing, is USD 129.75 Billion of which 65% of all total value locked is in Ethereum.
This helps explain that yield farming has essentially been a high transaction cost strategy. With the advent of low transaction cost chains & Ethereum Virtual Machines, there is a drive to make DeFi more accessible.
That being said, a fundamental problem is that DeFi & yield farming are not easily explained or automated enough. Hence, being fully versed with the strategy you want to implement is important.