Yield farming as a retail crypto investor
Passive income in the form of yield farming is a great way for retail investors to increase their crypto holdings, especially during sideways and bearish markets like the one we are experiencing at the moment.
This great quote by Warren Buffett fits perfectly:
“If you don’t find a way to make money while you sleep, you will work until you die”.
Back in February 2021, I wrote a piece entitled “The crypto story of a retail investor”, in which I detailed my journey in this nascent space, and in the section “Other earning strategies” I made an overview of some of the ways I passively keep accumulating cryptocurrencies.
In this piece, I’ll cover 2 yield farming methods, one for beginners and one for experts.
What is yield farming?
I won’t spend too much time on this as the web is filled with great explanations, one of which come from the Binance Academy:
“Yield farming, also referred to as liquidity mining, is a way to generate rewards with cryptocurrency holdings. In simple terms, it means locking up cryptocurrencies and getting rewards. In some sense, yield farming can be paralleled with staking. However, there’s a lot of complexity going on in the background. In many cases, it works with users called liquidity providers (LP) that add funds to liquidity pools. […] Yield farmers will typically move their funds around quite a lot between different protocols in search of high yields.
Yield farming for beginners
The easiest way to start yield farming is to choose one of the leading crypto lending platforms. These include BlockFi, Nexo and my personal favourite: Celsius. Here’s a review I wrote last year and, since the interest rates have changed, you can find the updated ones here.
So, how easy is it? Well, it’s enough to download the app, create and verify an account and simply deposit any supported asset to start earning interest, which is paid out every Monday. A great way to start the week I’d say.
It is important to note that this ease of use comes from the fact that it is Celsius that is in control of the custody of your funds and uses them to do yield farming. Hence, trust has to be placed in them. I’ve been using Celsius since November 2019 and they haven’t missed a week. Moreover, they are regulated and have insurance on customer’s funds.
Out of all the lending platforms, Celsius is the most transparent one, especially ever since they introduced something called “Proof of Community”, which is a way for users to confirm via blockchain that Celsius holds the funds and are distributing the rewards. Essentially it’s a live auditing system that aims to become a gold standard in the industry.
Furthermore, every Friday during their regular AMAs on their YouTube channel, the CEO Alex Mashinsky and the Celsius team answer questions from the community and share the latest updates.
To conclude, if you use my referral link for Celsius to sign up, when you transfer at least $400 to your Celsius account and keep them there for 30 days, we will both receive $40 in BTC.
Yield farming for experts
This method is a bit more cumbersome but it does generate quite good returns. I’ve actually stayed away from yield farming in the DeFi space mainly because of the very high gas fees on Ethereum, where unless you provide significant amounts of liquidity, then you might actually be losing more in fees.
However, the recent advent of DeFi on PoS blockchains like Binance Smart Chain (BSC) and 2nd layer solutions like Polygon has allowed even retail investors to tap into these streams of revenue.
Yield farming requires researching different protocols and moving funds where they can be most profitable.
At this point in time, I’ve been mostly farming the token NIOX on smartdex, a decentralized exchange powered by Autonio. There are many ongoing farming campaigns at the moment, some of which offer APYs ranging from 30% to 200%, which is about x10 the APYs offered by Celsius.
How to start?
The first thing required is good knowledge of how the wallet MetaMask works. Since this particular DEX is on the Polygon (former Matic) network, there’s an additional step required.
What I’ve done is bought some Polygon (MATIC) on Binance, moved the ERC20 version of MATIC to MetaMask (Ethereum Mainnet), then used the Polygon Bridge to move them on the Polygon network. After that, I connected my MetaMask (Matic Mainnet) to smartdex and swapped some MATIC for the tokens required to provide liquidity to the DEX.
The next step is creating an LP token. As an example let’s consider the farming campaign SDAO-NIOX, which has a current APY of 120%. What you require in your wallet is the same amount (in terms of value) of SDAO and NIOX, then on smartdex you go to the “Pool” section and click on “Create a pair”.
After creating this pair, you will have an LP token (SDAO-NIOX) in your wallet which is used to add liquidity to the DEX. The last thing to do is to go to the “Farm” section and deposit this LP token to start farming NIOX.
You will immediately see your NIOX increasing. At any time you can claim them and withdraw the LP token to recover the SDAO and NIOX with which you created the pair.
What I usually do is claim NIOX tokens every couple of days and use them to create new LP tokens to keep farming.
If you want to avoid the volatility of these tokens or the risk of impermanent loss, there are also stablecoin pairs like DAI-USDC and USDC-USDT with current APYs of 35%.
It’s worth mentioning that tokens remain in your possession at all times, this is the key difference with Celsius.
To beginners all this probably sounds like I’m speaking a different language, I totally understand you, it was very confusing to me as well and it took me a while to learn how to play around with these protocols. I can only say it’s worth it as the returns can be very high, especially with new DEXs that have ongoing farming campaigns.
As with investments, diversification is key here as well. I use both of these yield farming methods to accumulate cryptocurrencies, adjusting my strategy to the market and researching what DEXs and protocols offer high APYs.
The information above is solely for educational purposes and does not constitute financial advice. The crypto world is still a Wild West and there are many risks. Hacks, poorly written code and rugpulls are rampant. Assess your risk tolerance before making any kind of investment.
I wish you good luck!