Yield farming has been one of the best ways to earn passive income in the cryptospace, but it isn’t risk-free. Smart contract vulnerabilities, rug pulls, impermanent loss. These are risks you should take into consideration.
But if you manage risk properly, and diversify across multiple protocols, you should be fine.
What is Yield Farming?
Yield farming is a process in decentralized finance (DeFi) that involves lending or staking cryptocurrency assets in order to generate returns or rewards in the form of additional cryptocurrency.
This is typically accomplished through various decentralized applications (dApps) or protocols, such as automated market makers (AMMs) and liquidity pools.
To better understand Yield Farming, here is an analogy:
“Imagine planting crops on a farm to earn a profit. Just as a farmer invests time and resources in growing crops and then sells them for a profit, a yield farmer invests cryptocurrency assets and earns returns in the form of additional cryptocurrency. However, just as a farmer faces risks such as bad weather and pests that could damage or destroy their crops, yield farmers face risks such as smart contract vulnerabilities and impermanent loss that could negatively impact their returns.”
Without further ado, here are four best protocols with the least risk to try out Yield Farming in 2023.
PETH-ETH Pool on ConvexFinance
Convex Finance is a revolutionary DeFi platform that enables individuals to stake their assets and receive incentives in the form of CRV, CVX, and trading fees. Additionally, the platform provides liquidity mining prospects to its users via the Curve LP pools.
pETH is an ETH derivative supported by the JPEG’d protocol. It is minted when a user borrows against an NFT on JPEG’d. If you deposit liquidity in the PETH – ETH pool into Curve and stake your LP tokens on Convex, you’ll earn 29% APY rewards with no impermanent loss.
But there are some risks: As pETH is minted when a user borrows against an NFT, a massive crash in the NFTs prices that are used as collateral would create bad debt for JPEG’d. The chances are low, but if this would happen pETH could lose its peg.
VLP on Vela Exchange
Vela Exchange is a decentralized platform that offers sophisticated perpetuals trading features, prioritizes community-driven incentives, and boasts highly scalable infrastructure.
Since Vela launched last month, its huge trading volume surpassed all expectations. VLP is the Vela liquidity provider token and can be minted using USDC. VLP minters earn rewards based on the trading volume, the staking APY currently being greater than 120%.
Vela exchange is doing $3B in volume already. When they started, they were only small fish and could not have imagined reaching $3B in volume so fast.
VLP stakers earn 60% of the platform fees and 10% of the perpetual fees in esVELA. Keep in mind though that if Vela traders win too much, VLP stakers will incur a loss. But as long as the trading volume remains high, VLP seems to be a good USDC yield opportunity.
Vela team has been constantly shipping products, and the roadmap includes a grand trading competition, that may lead to a further trading volume increase.
They are currently in Beta Phase 3 of their roadmap and it includes two trading competitions, a beta airdrop and an official Launch Announcement
FrxETH on Stake DAO
Built on top of decentralized blockchain protocols, Stake DAO is a non-custodial platform that allows individuals to effortlessly expand their cryptocurrency portfolio. It provides users with a convenient means to increase, monitor, and manage their assets directly from their wallet.
FrxETH is another great yield opportunity for ETH, with a 22% APY. FrxETH is Frax’s liquid staking derivative. The yield is mainly paid in the form of CRV rewards. If you deposit frxETH on Stake DAO, the protocol will stake it in the Curve gauge, and boosts it thanks to the CRV locked in the CRV Liquid Locker. The 30-day Avg APY is 15% according to DeFiLlama.
LUSD-MAI Pool on Velodrome Finance
Velodrome, which launched on May 31st, 2022, is an Automated Market Maker (AMM) that serves as the primary trading and liquidity hub on Optimism. It represents a progression from the Solidity model previously introduced by Andre Cronje.
If the past few months have made something clear, that is that there is need for truly decentralized stablecoins. That aren’t reliant on centralized ones. Both LUSD and MAI fit this category, with LUSD being fully backed by ETH.
The yield for this strategy is currently 17.5%, with a 14% 7d Avg APY. Not as good as the previous ones, but at least the LUSD and MAI stablecoins should actually be “stable”.
Final Thoughts
Yield farming is a great source of passive income. Many large investors have locked millions of dollars into large bluc-chip DeFi protocols such as Aave and Compound. These have much more stable APRs since their income streams have been established. Ensure you do your own further research on each of these protocols before investing.
