Introduction
Yield farming has become one of the most popular and profitable investment strategies when it comes to the world of decentralized finance. Here, users can mainly earn passive income through providing liquidity to various platforms within the landscape. However, as its popularity increases, numerous methods are surfacing as well, making it difficult to know where to start and which approach to take to find success. But for the same reasons, rest assured that there's a strategy that will surely fit you whether you're a conservative or a high-risk investor.
Thus, in this article, we will be outlining the most recommended strategies in DeFi yield farming along with highlighting the key benefits of each method. Through this guide, we aim to help you understand how yield farming works and make well-informed decisions as you navigate the world of decentralized finance.
Exploring Yield Farming Strategies to Success
Without further ado, here's a break down of the highly recommended and proven strategies that have led investors to success in the DeFi yield farming venture:
Stablecoin Liquidity Provision
This is the most common and least risky strategy in DeFi yield farming that's most ideal for conservative investors who are seeking for low volatility and stable returns. This involves providing liquidity to DeFi platforms using stablecoins and in return users can earn passive income in the form of interests and rewards. This strategy comes with key benefits as well such as the following:
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Low volatility - Stablecoins are known to be the least to non volatile type of cryptocurrency, mainly because of their value being dependent on fiat currencies or commodities.
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High demand - These crypto holdings have always been preferred and in constant use for different financial services such as lending, trading, and other transactions within DeFi. This ensures its steady demand for liquidity.
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Incentive rewards - Aside from the typical rewards, DeFi protocols usually offer more, increasing the overall yield which encourages more liquidity providers.
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Flexibility - Depending on the market conditions, users can easily switch between different stablecoins and liquidity pools, offering flexibility to participants.
Blue-chip Token Farming
If you're a moderate risk-taker, this method is perfect for your tolerance. This strategy involves investing in well-established cryptocurrencies. Tokens that are usually preferred here are the less volatile options and have a proven track record of consistency in terms of performance for long term. To see if this method fits you well, here are the benefits its advantages with:
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Proven track record - Cryptocurrencies involved in this strategy are with proven track record and are from reputable projects along with a history of stability. This includes crypto holdings such as Bitcoin, Ethereum, and Binance Coins. This reduces the risk that is usually faced with investing with unknown assets.
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Higher liquidity - Tokens used for this strategy comes with high trading volumes as well and for that reason, this allows participants to easily enter and exit from the pools.
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Staking rewards - Blue-chip tokens also provide opportunities in earning passive income through their several staking options.
Leveraged Yield Farming
Moving forward to more advanced strategies, leverage yield farming appeals to farmers who are comfortable with engaging in higher risk investments. One reason is that it's more profitable. In this method, investors will increase their investment assets through taking out loans by using their crypto holdings as collaterals. Then, the borrowed funds will be used as an additional investment in yield farming, whereas, the bigger the capital, the higher returns. Despite this there are still risks to consider. Furthermore, here's an overview of both of its benefits and drawbacks.
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High returns - By borrowing more funds for additional yield farming capital, this can increase possible returns.
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Diversification - Since there are numerous yield farming opportunities, participants are not only limited to engage with one. Instead, they can opt to diversify their assets by borrowing funds and allocate them to different platforms, reducing the risk of financial loss when one venture fails.
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Exposed to volatility - The most common risk experienced in leveraged yield farming is its vulnerability to volatility. While borrowing funds can result in higher returns it also means increasing the risk of collateral liquidation, most especially if the market moves downwards.
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Interest costs - Borrowing funds always comes with interest, while it may not be as significant as interests in traditional loans, it can still pose a risk of reducing overall profits most especially when not handled properly.
Cross-Chain Yield Farming
This method pertains to investors being able to move assets between different blockchain networks. While this offers more opportunities to gain higher yields, the process can be complex as well, making it one of the most advanced strategies. This will require in-depth understanding about different aspects of blockchain, decentralized finance, and yield farming. Furthermore, this strategy is suited for investors who are up for the risk in return for taking advantage of the unique benefits it has to offer. Let's take a closer look - including the risks:
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Access to more opportunities - Since the main purpose of this strategy is to enable participants to access different yield farming opportunities across various blockchains, this leads to higher returns as well.
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Diversification - For the same reason, it allows users to spread their investments across different platforms which also reduces possible risks.
Yield Aggregators and Auto-Compounding
Lastly, this method is popular for users who both want convenience and income. Yield aggregators are platforms that automates yield farming strategies, mainly with auto-compounding, on the users behalf and reinvests earned yields automatically as well. Thus, it's a method where the tools will work for you while you earn passive income. Then again, while it offers promising advantages, it is still associated with risks that should be carefully considered.
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Automation and convenience - One key advantage of using yield aggregators is it helps users to save their time as all processes will be automated. This creates a hassle-free strategy allowing investors to maximize their yields without personally monitoring the market.
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Platform risk and fees - However, since it's automated, users will only have to trust the platforms which aren't perfect all the time. Aside from that, convenience comes with a price in the form of transaction fees which can impact overall returns.
Conclusion
DeFi yield farming is definitely one of the most profitable investments in the landscape, most especially that there are numerous strategies that you can choose from depending on your preference and risk tolerance. Furthermore, each method should be carefully thought of for successful execution to achieve expected outcomes such as earning passive income. And while each strategy has numerous benefits it also carries risks as well that should be considered before engaging with one.
