Yield Farming in DeFi

Module 3.2: Yield Farming in DeFi

Aqua Protocol (Stablecoin on TON)


This article explains the principles and key concepts of yield farming in DeFi (Decentralized Finance), providing examples of successful farming strategies. It covers fundamental aspects of this process, such as liquidity pools, liquidity providers, APY (Annual Percentage Yield), and examines various farming strategies, including liquid farming, staking, and combined farming. The article also highlights risk management.

History of Yield Farming’s Emergence

Yield Farming began to gain popularity in 2020, becoming one of the leading trends in the Decentralized Finance (DeFi) sector. However, its roots go back to earlier experiments with decentralized lending protocols and exchanges, such as MakerDAO, Compound, and Uniswap. A significant increase in interest in yield farming was triggered by the launch of the COMP management token from the Compound platform on the Ethereum blockchain in June 2020. This moment marked a turning point when DeFi users actively began to seek strategies to maximize their rewards by moving assets between various DeFi protocols. Yield farming emerged as a method to increase profits for cryptocurrency holders, offering an alternative to traditional earning methods such as mining and staking. It became popular among investors due to the opportunity to receive high-interest rates on their investments compared to classic financial instruments.

Definition of Yield Farming

Yield Farming is the process of earning cryptocurrency rewards for providing liquidity to DeFi protocols. Participants in the ecosystem, known as liquidity providers (LPs), invest their assets in liquidity pools used for financing loans or ensuring exchange on decentralized exchanges. In exchange for their contribution, they receive interest payments or new tokens generated by the platform’s smart contracts. An important aspect of yield farming is that it allows participants to exploit various economic incentives offered by DeFi projects to increase their income using complex strategies of moving assets between protocols to obtain the highest possible yield. This mechanism attracted many investors to the DeFi sector, contributing to the growth and development of decentralized finance as an important direction in the crypto industry. With its help, DeFi protocols attracted significant amounts of liquidity, which contributed to their further development and innovations in the field of blockchain-based financial services. Thus, yield farming not only provides an opportunity for crypto investors to earn on their assets but also plays a key role in the development and strengthening of the decentralized finance ecosystem.

How It Works and Key Concepts

Yield farming in DeFi is the process of earning rewards for making your assets available to various DeFi protocols. A distinctive feature of farming from other types of earnings, such as simply storing cryptocurrency, is the ACTIVE participation of the user in the economic activity of DeFi platforms, such as providing liquidity, borrowing, and lending. Key concepts of yield farming include:

  • Liquidity Pools: Cryptocurrency assets locked in a smart contract that provide liquidity for exchanges or other financial operations on DeFi platforms.
  • Liquidity Providers (LP): Users who invest their assets in liquidity pools and receive LP tokens in return, confirming their contribution and the right to a share of the pool’s commissions.
  • APY (Annual Percentage Yield): The annual interest rate reflecting the real interest yield, considering the effect of compounding. It can change depending on the amount of locked funds. Yield farming can be distinguished from other types of investment by ACTIVE asset management and SEARCHING for the best conditions for MAXIMIZING yield, which often involves moving assets between different protocols and platforms.

Main Platforms for Yield Farming and Yield Farming Strategies

Yield farming strategies range from simple provision of liquidity on popular decentralized exchanges, such as Uniswap or SushiSwap, to more complex strategies involving borrowing, staking, and using derivatives. Some popular strategies include:

  • Liquid Farming: Providing tokens in a liquid pool to facilitate their trade on DEX.
  • Staking: Freezing tokens in a protocol to receive new tokens as a reward.
  • Combined Farming: Using borrowed funds to increase positions in liquid pools and maximize rewards. Choosing a yield farming strategy depends on your risk appetite, available assets, and investment goals. It’s important to consider the risks associated with each strategy, such as impermanent losses and smart contract risks, and to diversify your investments by spreading assets across different strategies and platforms.

Examples of Successful Farming Strategies

A strategy we will now consider is a bright example of yield farming on the Curve platform, demonstrating the benefit of combined use of DeFi tools. Users start by borrowing CurveUSD stablecoins, using staked Ethereum (stEth) as collateral. This step allows participants to retain the staking potential of Ethereum while continuing to receive interest on it. Next, CurveUSD stablecoins are invested in Uniswap pools to provide liquidity. This action opens a second source of income — trading commissions from operations within Uniswap. Thus, participants simultaneously receive income from two different activities: interest for staking Ethereum and commissions from trading on Uniswap. Farming in this context involves active management and moving assets between protocols to maximize yield. This combination is beneficial as it allows generating income from multiple sources, effectively using each invested or borrowed asset.

The key benefit of this strategy is that the lending protocol (in this case, Curve) and the liquidity pool on Uniswap may offer additional rewards in the form of their tokens for contributing to their ecosystems. This means that in addition to standard income, such as interest and commissions, participants can also receive rewards in the form of tokens, which can further increase the overall yield of the investment. Thus, yield farming through such a multi-level strategy offers a unique opportunity to significantly increase potential income by optimizing and expanding the use of each invested asset.

A similar combination will soon be possible on the TON blockchain. Using the Aqua Protocol to borrow AquaUSD and the DeDust or StonFi pool to provide liquidity in the AquaUSD/jUSDT or AquaUSD/TON pair. It will also be possible to provide liquidity in a pool with AquaUSD on the Storm Trade futures exchange.

Risk Management in Yield Farming: What You Need to Know In the world of yield farming, rates can change as quickly as the wind. When liquidity in the pool increases, do not be surprised if returns start to decrease — more participants mean a smaller pie for everyone. And yes, those tokens you’ve farmed might soar in price or fall like a stone, all depending on the market and demand.

How to stay informed:

  • Diversity is your friend: Don’t put all your eggs in one basket. Use different strategies and pools to reduce risks.
  • Keep track of trends: Regularly check rates and token prices. Being informed means being armed.
  • Use protection: Consider hedging or insurance to safeguard your investments.

Risk management is not just a necessary part of the work; it’s an art. Be prepared for changes and use them to your advantage. And most importantly, remember that in yield farming, as in life, all learning is through action and observation. Let every step you take be thoughtful, and may luck always be on your side!

Starting Yield Farming on TON: Features and Opportunities TON

(The Open Network), a blockchain with high performance and scalability, offers unique opportunities for yield farming. The pilot phase of farming started in March 2024, and from April, the reward amount will increase to $115M.

How to get TON tokens? It’s quite simple: participate in liquidity pools and contribute to the growth of trading volumes on the platform. TON generously rewards users for strengthening the ecosystem through various incentive programs.

Let’s look at farming strategies on TON. The first method is staking TON. It’s simple and accessible: stake your TON tokens and receive regular rewards. For instance, on Bemo Finance, you can earn XP tokens, which will soon be converted into the project’s tokens.

Another method is participating in liquidity pools on TON DEX. Invest in liquidity pools on decentralized exchanges like Ston.Fi, Dedust, Storm Trade, increasing trading volumes and TVL, and receive rewards in the form of trading commissions and bonus tokens from Ton Foundation.

TON offers attractive opportunities for yield farming, especially interesting for those looking for new platforms with growth potential. Use the available tools and resources to efficiently manage your investments and maximize returns, keeping in mind the associated risks.

This course was prepared by Julia Palamarchuk (co-founder of Aqua Protocol — the first CDP stablecoin on the TON blockchain, over-collateralized by liquid staking tokens).

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Aqua Protocol (Stablecoin on TON)

AquaUSD is the first TON-native decentralised over-collaterized interest-bearing stablecoin backed by liquid-staked assets