How money can make money in crypto
Yield farming is the act of deploying digital capital on DeFi platforms to earn a reliable return. Specifically stablecoins allow us to collect that reward without worrying too much about price fluctuations across the market, so essentially you can use your money to make money in crypto.
The best yield farms stack multiple layers of %-based returns atop your deposited assets, leading to a chain of compounding so glorious it forces traditional bankers to question their careers. And when market conditions are right, protocols will pay you to borrow money.
First, I want to discuss the benefits of yield farming. Setting up your money to make money is an obvious benefit, but there's nuance to that broad statement dictating what farms to use and how a DeFi strategy fits a portfolio strategy. I want to cover two specific events from reputable devs that you can capitalize on right now: Avalanche Rush and the Apollo Community Farming Event.
Markets can be wildly volatile in both directions, so buying the dip and selling the hype is one viable way to generate significant returns.
Many altcoins recovered more than 10% in a single day once Bitcoin recovered from the September dip. And the dip is bought with dollars - not other assets that are still fighting gravity.
Because stablecoin farms are uncorrelated with most assets, using them grows a cushion for your liquidity in both bull and bear cycles. Parking some capital here and earning steady returns also improves the risk-reward profile of any portfolio
while dampening the tangible stress of watching it all happen.
Farming at 10% APY for a few months can return 100%, even 1000%, if you hold the reward tokens and it rallies. Historically, we see an extraordinary performance from many yield farms' governance tokens, rewarding early adopters and attracting massive liquidity.
But there's something more for those who want higher returns: providing to liquidity pools like AVAX-USDC, AVAX-wETH, or USDC-DAI, then deploying on platforms like TraderJoe or YieldYak. The JOE-AVAX pool, for example, basically pays rewards to incentive exit liquidity for JOE farmers.
What providing to liquidity pools does is give a position extra exposure.
If you're starting out with stablecoins, you'll need to swap half the stablecoins for the crypto on the other half of the pool. This way, you can earn rewards on your holdings, and your position in USD will rise in value with AVAX.
When providing liquidity, the risk always mentioned is impermanent loss.
A common misconception is that all liquidity providers risk impermanent loss – this is not true. In reality, impermanent loss only impacts those who supply volatile assets (ETH in an ETH-USDC pool).
There is no impermanent loss in a bull market for those who start a position with stablecoins and move 50% into ETH to participate. In this scenario, if ETH rallies, you actually earn more because the value of the Ethereum in the pool has increased, even though you'd have less ETH. Providing liquidity into these types of pools can be rewarding during bull markets, as you earn income for providing liquidity and your underlying assets increase in value. Later in this article, we will go over a tool that makes depositing into these pools simply efficient.
Avalanche is an EVM (Ethereum virtual machine) blockchain offering
low fees and fast transactions. EVM capability means that it’s easy for
well-known Ethereum apps to deploy their programs, much like Polygon
which had its own incentives program last year.
In late 2021 the Avalanche Rush incentives program was launched offering $180m worth of AVAX to liquidity providers on Avalanche. Anticipation pushed the token’s price from $22 when at announcement time to today's price in the mid 50s. The $180m is now worth over $850m.
Participants include Aave+Benqi (money markets), Yield Yak (a DeFi aggregator), and Trader Joe+Curve (Dexs), with more to come. I'm most excited for Aave and Curve. These Ethereum blue-chips offer secure, battle-tested smart contracts.
In the future it is anticipated that there could be the migration of tens of billions of dollars to Avalanche to claim their share of the liquidity incentives on Aave and Curve.
There's a lot of money on the table, so it's worth considering bridging from Ethereum or from any other blockchain if you're not already getting better APYs elsewhere.
Leveraged Yield Farming on Aave
With the launch of Aave, you can now earn AVAX rewards for both depositing and borrowing funds on the platform. Considered among the safest DeFi platforms alongside Maker and Compound, Aave has locked over $15 billion across 3 chains. While there are more complex strategies that incorporate multiple platforms like TraderJoe, Benqi, and Curve, simple techniques can yield similar gains with less hassle.
Deposit and Borrow
Aave pays you to borrow their money. Take USDC, for example. You pay 3.25% to borrow, but you get paid 4.40% in AVAX - a net profit of 1.15%.
This allows you to recursively deposit and borrow, leveraging up your earnings with no liquidation risk. You can also compound your AVAX earnings at 18% per year by depositing them back into Aave. There’s a very simple leveraged yield farming strategy here to earn serious AVAX.
Apollo is a DAO building a community around their well-rounded platform
with tools like yield aggregators, auto-compounders, and games on the Terra blockchain. They make money with a fee on rewards earned on the platform. The revenue goes to a Warchest owned by APOLLO token holders, which is used to incentivize long-term use of the platform and participation in the DAO to decide what'll be done with Warchest. Over time, Apollo's cut from the rewards will go to providing APOLLO staking rewards.
There was no IDO or other private sale. Until October 31 of last year, the APOLLO
token was farmable by depositing UST into any of their vaults. These vaults moved funds onto Mirror and Anchor's blue-chip platforms for their favourable APYs while auto-compounding your rewards. This bumps the already high APY (~76% on Anchor) into an insane 113%.
10% of the protocol's revenue goes to buying back APOLLO at a fixed price of 25 cents. Tokens are released to users every month for twelve months, and the remaining funds are re-deposited into the vaults, generating even more yield.
Apollo vaults are also a meaningful improvement to UX, as you can simply deposit and withdraw UST without having to manually split, deposit, and stake your funds. It's a rewarding place for farmers of all budgets, especially during limited-time events.
Remember to be careful when you deposit your capital into any liquidity pool or yield farm! There is always a chance of losing your funds – before you deposit check RugDoc to asses a farm’s risk level.