What is “Yield Farming”?
Yield farming, also known as liquidity mining, is a way to generate rewards with your cryptocurrency. This is done by locking up your funds in a liquidity pool of a particular service. You will receive tokens that the platform provides as a reward.
Let’s say that Mark has some WETH (Wrapped Ethereum) and Matic (Polygon). He wishes to provide liquidity on Sushiswap through WETH & Matic. (If you want to learn more about SushiSwap check out the following article.)
Mark provides the liquidity in a 50/50 split. He in turn is rewarded with a token that represents his ownership/share of the pool that he is providing liquidity to. In essence, whoever owns the token can claim the fees from providing the liquidity.
So Mark then decides that he wants to use this new LP (liquidity provider) token to earn some Fish on the Polycat yield farm. Mark deposits his LP tokens so that Polycat can gain the fees from the LP token and in exchange, Polycat gives Mark some Fish, which is their native token to their farm. Mark then uses Quickswap to swap that Fish for more Matic, etc.
This essentially is yield farming. However, this can be rather risky and I always recommended that you DYOR (Do your own research).
Liquidity Pool – collections of funds locked in a smart contract. In exchange for locking up your crypto, you earn trading fees proportional to your share in the total liquidity. Examples are SushiSwap, QuickSwap, UniSwap, etc
There is a difference between APY and APR, it is imperative that you understand the differences.
APY = Annual Percentage Yield
APR = Annual Percentage Rate
APY takes into account the compounded interest whereas APR does not.
First before you delve into yield farming. It is important to note the following two educational resources to help ensure you do not get rug pulled. Rug pulling is when a developer of a cryptocurrency abandons the project and runs away with investor’s fees, etc
RugDoc started as a google sheets document by a disgruntled yield farmer. They were tired of getting played by the yield pools and malicious developers. Therefore, she started to learn about the code behind the pools and try to spot any issues in the code. The project has since exploded and there is now a VERY active Telegram group as well as a website where one is able to get all the info they could possibly need.
In order to be a successful yield farmer and avoid getting your funds stolen, it is imperative that you bookmark this page and refer to it. The website/project currently covers Binance Smart chain (BSC) and Polygon. However, they are adding further support for Ethereum and Harmony farms soon.
As one can see from the picture above, the farms are also listed from least risk to High risk and Not eligible. Let’s break down the risk rating system.
- Least Risk
- Projects that are least likely to hard or soft rug are given this tag.
- Low Risk
- Projects that are established, have a track record of success or have revealed themselves directly to the RugDoc. Extremely unlikely that a hard or soft rug will occur.
- Some Risk
- This is the default rating for projects that have not revealed their team but their code is unlikely to hard/soft rug. Still risky as the developers can just dump their coins on you for a quick profit.
- Medium Risk
- Similar to above but the code is complex enough that it would require further deeper research.
- High Risk
- Project contains code that is very likely to lead to losses as it stands. Usually, you should not join any High Risk projects.
- Not Eligible
- Projects that are far too complex for the RugDoc team and would require a senior security analyst to go over it properly which is pricey.
As you can see from the picture above, if you click on the farm, you are able to view additional information about the farm and what RugDoc has to say about it as well as access the website itself. The Masterchef allows one to view the token contract address, you can view the code that runs the pool and such. You will also be able to see where the funds are kept, amount of addresses that hold the token and other related information.
I would also highly recommend that any potential yield farmers also join their Telegram group.
The next tool we will be looking at is VFAT tools
VFAT tools is merely a website to see all the various farms that are happening. This site covers a wider array of farms across multiple chains such as BSC, FANTOM, POLYGON, etc. However this site does not provide any info regarding the legitimacy or any issues that may be prevalent in the code.
Usually, the massive gains possible have diminished a tad once the farm gets listed on this website. However, it also provides links to farms that are not on the RugDoc website, as RugDoc only does BSC, Polygon, Ethereum and Fantom farms currently.
This tool is a lot less useful than RugDoc but it still has its uses, being able to see multiple pools on multiple chains is a great feature. If you only used VFAT then you would possibly have to look at the code & Masterchef yourself. So I would recommend getting familiar with the coding language used and searching the internet for more information on what code to look out for.
One is also able to look into the details of the pools by clicking on the “Various” tab. From here, one is able to do an emergency withdrawal, etc if there are issues with the farm that you are on and you need to get out ASAP!
Being rug pulled feels horrible. If it is a soft rug pull then maybe you have just lost your deposit fees but if it is a hard rug pull then you can even lose all your deposited crypto. This is the wild west, there are no rules and there is no-one to help you if you get played like a deck of cards.
Just look at the recent news around the TITAN & IRON tokens. This was a farm on the Polygon chain that Marc Cuban himself was in. However, the stablecoin (Iron) they had created was pegged to the value of their farming token called Titan and when Titan token’s price took a massive hit then the value of Iron also took a massive hit.
If you are not constantly managing your funds, you could possibly lose everything like in this scenario. Even such a massive backed farm can be susceptible to the dangers of DeFi. Our recommendation is that you constantly dollar cost average (DCA) out of the farm. In a practical example, I would everyday harvest some of the rewarded tokens and convert that into either MATIC or Bitcoin (BTC), etc this way I turn an unsafe asset into a much safer and well known asset. Never stay in a farm for too long, our recommendation is to change between farms every few days. That way you can help to mitigate any risk associated with staying on a particular farm, etc.
Being rug pulled ain’t great, it’s a hollow feeling for sure. Using tools such as these above can help one mitigate the risks involved in this Wild West system we find ourselves in. There is no-one to help you but yourself and of course, us at Crypto University. If you want to learn more about DeFi, how you can better protect yourself and how to avoid being fooled, check out some of the courses we offer!
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Written by Alexander Hilton © Crypto University 2021