In this guide, you’ll get a comprehensive overview of yield farming and learn some safe and effective strategies on how to use it. Whether you’re a DeFi novice or an experienced investor, we will equip you with the knowledge to navigate through yield farming, both on TON and other blockchain networks.
What Is Yield Farming in DeFi?
Yield farming, also known as liquidity mining, is a process where users lend their cryptocurrency assets to a project or supply funds into liquidity pools in exchange for rewards. It’s become a popular strategy in recent years as DeFi protocols compete for users by offering attractive returns on deposited assets.
How Yield Farming Works
At the heart of yield farming are liquidity pools and smart contracts. Here’s a simple example:
Imagine Alice wants to allocate her TON and USDT into a liquidity pool on STON.fi. She deposits both tokens into the pool. In return, she receives LP (Liquidity Provider) tokens representing her share of the pool. These LP tokens can often be staked for additional rewards.
How Are Returns (“Yield”) Generated?
DeFi protocols reward users in various ways:
- Interest on loans
- A share of trading fees from DEXs
- Additional tokens as incentives
For instance, STON.fi distributes a portion of its trading fees among liquidity providers. The amount each provider receives is proportional to their share of the pool.
Annual Percentage Yield (APY) vs Annual Percentage Rate (APR)
While both measure returns, APY accounts for compound interest, while APR doesn’t. For example, an investment with 10% APR would yield 10% over a year, but the same investment at 10% APY would actually yield 10.47% due to compounding.
Top Reasons to Become a Yield Farmer
- Passive income generation. Once you’ve set up your yield farming strategy, you can earn rewards regularly with minimal intervention, creating a stream of passive income.
- Asset diversification. By participating in various yield farming strategies, you can diversify your crypto portfolio beyond simply holding tokens. This can help spread risk and potentially increase overall returns.
- Self-custody of funds. Most DeFi yield farming protocols allow you to maintain control of your funds through smart contracts. This reduces counterparty risk and gives you more control over your assets.
- Contribution to DeFi ecosystem. Yield farming often involves providing liquidity to DeFi protocols, which helps these platforms function more efficiently.
Main Risks Related to Yield Farming
- Impermanent loss. This occurs when the price ratio of tokens in a liquidity pool changes after you deposit them.
- Smart contract vulnerabilities. Bugs or exploits in the code of DeFi protocols can lead to loss of funds.
- Market volatility. Rapid and significant price changes in crypto assets can affect both your principal and potential returns.
- Regulatory risks. The regulatory landscape for DeFi and yield farming is still evolving, and future regulations could impact these activities.
- Protocol-specific risks. Each DeFi protocol may have unique risks based on its design and governance.
Remember, while yield farming can offer attractive returns, it’s crucial to understand and carefully consider these risks before committing your funds. Always do your own research and never invest more than you can afford to lose.
Options to Start Yield Farming
- DEXs: Platforms like STON.fi on TON, or Uniswap on Ethereum, allow users to provide liquidity to trading pairs. Here’s how it works:
- You deposit equal values of two tokens into a liquidity pool.
- In return, you receive LP tokens.
- You earn a share of the trading fees proportional to your share of the pool.
- Some DEXs, e.g. STON.fi, also distribute additional reward tokens to liquidity providers.
✅ Easy to use, often higher yields, maintains token exposure.
⛔ Risk of impermanent loss, requires holding two tokens.
- Lending protocols: Platforms like Aave (not available on TON) or EVAA (available on TON) allow users to lend their crypto assets. Here’s the process:
- You deposit your tokens into the lending pool.
- Borrowers take loans from this pool and pay interest.
- You earn a share of this interest based on your deposit.
- Some protocols also distribute governance tokens as additional rewards.
✅ Generally lower risk, single token deposits.
⛔ Often lower yields compared to DEXs, smart contract risks.
- Yield Aggregators: Services like Beefy (not available on TON) or Yearn Finance (not available on TON) automate the process of finding and switching between the best yields. Here’s how they operate:
- You deposit your tokens into the aggregator’s smart contract.
- The aggregator automatically moves your funds between different protocols to maximize yield.
- Earnings are usually auto-compounded to increase returns.
✅ Automated yield optimization, reduces active management.
⛔ Additional layer of smart contract risk, may have higher fees.
Popular Yield Farming Techniques
- Liquidity mining. Providing liquidity to trading pairs on DEXs in exchange for a share of trading fees and sometimes additional token rewards.
⚙️ How it works: You deposit equal values of two tokens into a liquidity pool and receive LP tokens in return. These LP tokens represent your share of the pool and can often be staked for additional rewards.
💰 Suitable for: All fund sizes, from small to large investors.
🟡 Risk level: Medium. Main risks include impermanent loss and smart contract vulnerabilities.
✅ Available on STON.fi: Yes. STON.fi offers various liquidity pools with competitive APYs.
- Staking. Locking up tokens to support network operations, often on Proof-of-Stake blockchains.
⚙️ How it works: You lock your tokens in a staking contract, which are then used to validate transactions on the network. In return, you receive staking rewards.
💰 Suitable for: All fund sizes, particularly good for long-term holders.
🟡 Risk level: Low to Medium. Main risks include potential slashing for validator misbehavior and opportunity cost during lock-up periods.
⛔ Available on STON.fi: Not yet, but you may stake STON and get a community token GEMSTON.
- Governance token staking. Staking a protocol’s governance token to earn rewards and participate in protocol governance.
⚙️ How it works: You lock up governance tokens in a designated contract. In return, you earn staking rewards, gain voting rights on protocol proposals and participate in future airdrops for active users.
💰 Suitable for: All fund sizes, particularly appealing for users interested in participating in protocol governance.
🟡 Risk level: Medium. Risks include potential volatility of governance tokens and smart contract risks.
✅ Available on STON.fi: Yes, with DAO voting participation as a reward.
- Leveraged yield farming. Borrowing funds to increase yield farming positions, amplifying both potential returns and risks.
⚙️ How it works: You deposit collateral into a lending protocol, borrow against it, and use the borrowed funds to yield farm. The goal is for farming returns to exceed borrowing costs.
💰 Suitable for: Larger funds and experienced users who understand the risks involved.
🔴 Risk level: High. Risks include liquidation if collateral value drops, amplified impermanent loss, and complex smart contract interactions.
⛔ Available on STON.fi: No. It’s not available on STON.fi.
- Yield farming with stablecoins. Using stablecoins in yield farming strategies to reduce volatility risk while still earning returns.
⚙️ How it works: You provide liquidity to stablecoin pairs (e.g., USDT-USDC) or lend stablecoins on lending platforms. This strategy aims to minimize impermanent loss and price volatility risks.
💰 Suitable for: Conservative investors or those looking to earn yield on cash equivalents.
🟢 Risk level: Low, relative to other yield farming strategies. Main risks include stablecoin depegging events and smart contract vulnerabilities.
✅ Available on STON.fi: Yes, STON.fi offers some stablecoin liquidity pools.
How to Start Yield Farming on STON.fi DEX
- Set up a TON-compatible wallet (e.g., Tonkeeper)
- Connect your wallet to STON.fi
- Acquire TON and the tokens you want to provide liquidity for
- Navigate to the “Pool” section
- Select the pair you want to provide liquidity for.
- Enter the amount you want to deposit
- Confirm the transaction in your wallet
- You’ll receive LP tokens representing your share. Note that in pairs marked with a violet “Farm” message you may lock LP tokens and get additional rewards
Click here for more detailed instruction: How to provide liquidity on STON.fi
Wrapping Up
Yield farming can be an exciting way to earn passive income in the DeFi space. As you explore this strategy, remember these best practices:
- DYOR (Do Your Own Research): Always investigate protocols before depositing funds
- Diversify: Don’t put all your assets in one pool or protocol
- Stay Informed: Keep up with DeFi news and protocol updates
- Start Small: Begin with amounts you can afford to lose while you learn the ropes
With careful strategy and proper risk management, yield farming can be a rewarding addition to your crypto portfolio. Happy farming!
