What is it?
DeFi platforms such as Compound and Aave reward their users with governance tokens ($COMP, $LEND). These governance tokens can later be sold on DEXs (Decentralised exchanges). When users deposit tokens as liquidity onto these platforms in order to receive and sell governance tokens, it is called "yield farming". Yield Farming is one of the hottest and most innovative activities in DeFi.
The easiest way to yield farm is to lend tokens such as ETH, BTC or stable coins to DeFi lending platforms. Yield farming help DeFi platforms attract users and funds and therefor create greater liquidity to facilitate trading.
Is Yield Farming Profitable?
If timed correctly, yield farming can be hugely rewarding as governance tokens can appreciate largely in value. Historically, successful governance tokens can appreciate hundreds of percentages in value, in their first few weeks. These tokens are distributed proportionally to the amount of funds sent to the platform by the user, so for small investments gas fees can significantly hinder gains.
How To Mine Liquidity/ Farm Yields
To begin with, a user must deposit stablecoins (USDC, DAI or USDT) onto a money market on a platform such as Aave, Compound or Uniswap, using an Ethereum-connected wallet such as MetaMask. Once the platform is chosen and the assets deposited, a user must swap their stablecoin for the platform's respected token which can then be deposited into the money market and is ready to earn interest.
High risk yield farming products are those that are often untested, unaudited, and sometimes only last for a few days or weeks. As with all DeFi strategies, there is a high smart contract risk, with dangers of bugs and hacks aimed at exploiting smart contracts.
Some examples of these include:
- Yam.finance (YAM) — users were able to stake a range of tokens or supply liquidity to a Uniswap pool to farm the YAM governance token. This only lasted 48 hours after its developers realized the protocol also had a critical bug in it; an error in the rebasing mechanism caused the project to lose over 90% of its dollar value in just a few hours