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Top DeFi Yield Farmers Share Secrets to a Profitable Harvest
Also, how to protect against yield farming risks, and shorting COMP.
Hello Defiers! It’s still all about COMP and yield farming in DeFi land.
Top DeFi farmers share their tips and tricks for a good harvest.
High returns come with high risk; we describe what some of those risks are and how to protect against them.
UMA building token to short COMP
and more :)
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Top Yield Farmers Share Harvesting Tips
DeFi has been overtaken by “yield farmers” - those putting their capital to work to earn yield from protocols like Compound, Synthetix, Balancer and Curve.
Yield farmers are earning as much as 100% APR on popular stablecoins on a good day in the field. On a bad day, losses can be steep, but the potential for big profits has drawn hundreds of millions into DeFi in the past week.
While depositing capital into a smart contracts to earn a return is nothing new to DeFi, yield farming has become more attractive in the recent weeks as protocol teams are increasingly incentivizing liquidity providers (LPs) by distributing their native token. That means traders can get the hottest tokens on the block in addition to interest on their deposits.
We asked top Yield Farmers about their strategies and key takeaways new traders should keep in mind when heading out to the fields.
Yield Farming Roots
But first, let’s briefly get into how this all began. Before there was Yield Farming, there was Synthetix. As one of the OG yield farming strategies, users could (and still can) participate in one of Synthetix’s dozens of incentives to earn a return on capital supplied to various liquidity pools.
Image source: Synthetix
One of the first strategies was designed to increase liquidity for Synthetix’s synthetic ETH token, or sETH, on the Uniswap DEX. Traders who added liquidity to the sETH/ETH trading pool and then staked their Uniswap sETH LP tokens —these are tokens that represent deposits on Uniswap— on the Synthetix platform, receive Synthetix’s native token SNX, plus trading fees collected from Uniswap.
The strategy was mimicked for many other tokens across different DEXs. The incentive to encourage liquidity for sUSD, Synthetix’s dollar-pegged stablecoin, on the Curve DEX, currently offers the highest weekly SNX rewards at 48,000 SNX (~$70k).
When Compound started distributing its governance token last Monday, all bets were off.
Traders now had the ability to earn a slice of the 2,880 COMP tokens distributed daily (out of 4.23M total COMP, or 43% of total supply, reserved for the protocol’s users) to those supplying and borrowing capital from the protocol. Close to $1B in new assets flooded into the lending protocol from those wanting to take advantage of the incentive.
“I’m still surprised by the rate of growth in assets supplied,” said Matteo Leibowitz, an analyst at The Block. “To me, that suggests more professional participation, and is certainly a change from retail-dominated dynamic we've seen over the course of Open Finance's brief history.”
Some farmers began supercharging their earnings by taking out leveraged loans to borrow the tokens which yield the most COMP (Compound’s token is distributed relatively to the amount of interest accrued by each market), and platforms like InstaDapp made this possible in one click.
This strategy quickly caught the attention of many thanks to over 100% APR when including the profits to be earned from selling COMP, as it soared from less than $20 when it was listed, to over $300 in days.
DeFi investor Arthur Cheong said relatively high liquidity at Compound also helped attract new investors. “The difference is the size of the $COMP reward pool can accommodate much bigger capital allocation, compared with previous yield farming strategies which could accommodate around $15m at most,” he said. “COMP reward pool can accommodate $500m of capital and still offers a very high APR.”
Now, we’re seeing crop rotation take form as LPs are shifting from USDT into more scarce assets like BAT, WBTC and ZRX. Over the weekend, the amount of capital being supplied and borrowed on BAT markets surged by over 20,000% as farmers raced to get a leg up on the daily distribution of 2,880 COMP.
Farming Tips and Tricks
Here’s what some of the most active DeFi investors are doing to farm yield.
DeFi investors who goes by the online name of Degen Spartan:
The strategy to “take stablecoins, throw into sUSD Curve pool, take the LP token, and deposit into the Synthetix Mintr incentives contract,” has yielded him “rather consistent 20%+ APY in SNX” since he started farming DeFi yields in early 2019.
He says the flock to COMP “has left a void in the smaller and more niche strategies, increasing the yield in the space overall.”
Jake Brukhman, founder and managing director of CoinFund:
“I'm seeing opportunities that range from a few points of APY to over 100% or even several hundred percent APY, depending what assets you hold and what risks you're willing to take. Most of the returns come from exuberance or inefficiency of these early protocols.” he said.
“A lot of the lending facilities are currently offering capital at very low rates (sometimes 0%) relative to the APYs one could be earning.”
DeFi investor who goes by the online name of SNX Professor:
He uses “collateral to borrow USDT and lend back USDT. Then BAT became the one that gives more COMP so he closed the positions and switched over to borrow BAT and lend out BAT again.” The Professor recommends to “monitor daily, switch only if it makes sense -> yield farming takes time since you have sunk costs like gas fees/slippage fees etc.”
Lasse Clausen, founding partner at 1kx:
“Contributing liquidity to Curve is simple but exciting since it pretty much is the same as our main strategy of getting exposure to the tokens of protocols in the early stages and at lower valuations, giving more potential upside than something that is already valued at hundred million plus,” he said.
“Yield farming is a great new experiment trying to achieve,” network effects.
Risks With Yield Farming
To anyone who’s been yield farming, gas costs are something you simply can’t ignore. While smart contract covers on Nexus Mutual are a good starting point, those using leverage should be wary of ways they can get squeezed out - especially when farming with a volatile asset like BAT. Lastly, the potential for irreversibly vulnerabilities - like the $2M worth of ETH stuck in bZx - is something very few saw coming.
The key takeaway here is that no yield is guaranteed, and generally the larger the yield, the larger the risk.
“I would be surprised if yield farming will yield more than 20% APY over extended periods of time.” warned Clausen.
What’s the Point
Jesse Walden, founder of venture fund Variant and former a16z investor, said that while yield farming can incentivize use in the short term, a successful protocol still depends on builders and users staying in the platforms in the long term.
“Yield hacking in DeFi is a short-term incentive to drive user growth, but the bigger game is the long-term wealth creation that comes from building (and owning!) a piece of the products and services that billions of people will use everyday.”
How to Protect Against $COMP Mining Risks
A few days ago, I shared a really powerful DeFi tutorial on how to create a leverage position using stablecoins, thanks to a tool utilizing flash loans on Instadapp called Maximize $COMP mining. You can watch the video that's gotten over 5500+ views clicking here.
While I'm ecstatic to see so many interested in yield farming (aka liquidity mining) to earn COMP, I'm also keen to help ensure the average DeFi newbie doesn't get liquidated using leverage in this experiment. After answering lots of questions this weekend, I thought to create a follow-up video on all the risks I've been considering when farming yield on Compound (by earning $COMP).
In the video, I talk through the following more in detail:
Smart contract bug risk
A liquidity crunch
Admin key or governance compromise
A stablecoin dollar-peg fails or oracle attack
Ignorance to borrowing interest ballooning debt owed and causing liquidation
Liquidation of collateral or use of volatile assets in a leverage position
Then, I cover 3 ways to deleverage my own stablecoin position:
Deposit more collateral
Pay back debt with more USDT
Use the Save/Unwind recipe on Instadapp to withdraw collateralized DAI, swap to USDT, and pay back to my USDT debt
Try the Instadapp tools referenced in this video at: https://dsa.instadapp.io/compound
You can see the Market Distribution Table for Compound which shows how many $COMP tokens are being distributed daily to the lenders and borrowers of 9 different markets: https://compound.finance/governance/comp
You can consider smart contract cover (DeFi insurance) and even get a quote for digital assets on different DeFi apps like Compound at Nexus Mutual: https://app.nexusmutual.io/#/SmartContractCover
Here's the original tweet referencing most of the risks I called out in this video:
DeFi Dad is a DeFi super-user curating apps, wallets, and tools built on #Ethereum. You can find his DeFi tutorials every week in The Defiant and everyday on his YouTube channel, if you subscribe here: https://www.youtube.com/channel/UCatItl6C7wJp9txFMbXbSTg/?disable_polymer=true
You can support his mission to educate all his DeFi disciples through his Gitcoin Grant here: https://gitcoin.co/grants/500/defi-dad-product-tutorials?tab=description
Soon You’ll Be Able to Short COMP on UMA
If you think the COMP rally has gone to far, soon you’ll be able to short it on DeFi. UMA is building a COMP synthetic token, which would allow people to profit if the price of COMP declines, the synthetic asset platform said in a tweet.
“This option already exists on a centralized custodial trading platform. This experiment will help reveal the value added by having a permissionless means to short.”
Fintech giant PayPal plans to roll out direct sales of cryptocurrency to its 325 million users, CoinDesk reported citing three people familiar with the matter. Currently, PayPal can be used as an alternative means for withdrawing funds from exchanges such as Coinbase, but this would be a first in terms of offering direct sales of crypto.
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About the editor: I’m Camila Russo, a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). I was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. I’ve extensively covered crypto and finance, and now I’m diving into DeFi, the intersection of the two.