What is Yield Farming?
In our opinion, one of the most intriguing parts of DeFi (Distributed Finance) is Yield Farming. Yield Farming allows you to put your crypto assets in a pool with others so that there is liquidity for exchanging one token for another.
Essentially, you can think of it like a bank. You put your money in a bank and the bank then takes your money, or liquidity, and lends it out to other people, earning some interest in the process. In this situation, you are the bank and the service you are providing is the ability to swap one token for another.
Think of the tokens as currency, like exchanging USD for the Euro. If you’re in Europe, you’ll need Euros to buy things. If you came from the US, you likely don’t have Euros so you’ll need to exchange your USD for them. Crypto works the same way. Each app transacts in its own token, and more often than not, you’ll need its token if you want to do things on the app.
If you put money in one of these farms, you are providing liquidity so that these swaps can happen without a third-party intermediary like a bank, or exchange.
Types of Yield Farming
There are two types of yield farming, Single Asset, and LP (Liquidity Provider) Tokens. The easiest one to get started with is Single Asset. With Single Asset, you can take one token, like CAKE, and deposit it into a farm to start earning a yield (interest) in the asset you are farming. There’s not much more to it than that.
LPs require a little more work but they allow you to earn interest on two tokens. You have to take the two tokens, usually at a 50-50 split, and add them to a pool. The 50-50 split is based on the value in USD. For example, at the time of this writing 1 CAKE is worth $35.67 and 1 BNB is worth $641.44. If I wanted to LP CAKE and BNB together, I would need 17.98 CAKE and 1 BNB to keep the 50-50 split. The number of CAKE and BNB don’t matter as much as maintaining the ratios (17.98 CAKE = 1 BNB). This means that I could just as easily add 1 CAKE and 0.0556 BNB to a Liquidity Pool.
One thing to note, with LPs is “Impermanent Loss.” Basically, you always have to maintain the 50-50 split between the tokens. If one token goes down, you’ll end up losing some of the other token to maintain the 50-50 ratio. If that same token that lost value goes back up, you’ll “gain” the other token back to maintain the 50-50 split. I say “gain” because you don’t actually lose the token until you pull it out of the LP, hence the term “impermanent.”
Once you put the two tokens in an LP you’ll get an LP Token in return. This token lets everyone know how much money you put in the pool. Once you have that token, you can deposit in a farm and begin earning yield on it.
What is a Yield Optimizer?
Yield Optimizers help you optimize the yield you can get by doing things like auto compounding (taking your yield earned and automatically putting it back in the LP or Single Asset so you earn yield on your yield), aggregate different farms in one place, and boost your earnings (give you bonuses) for using their app to farm. Typically, they will take a small fee for providing the service when you deposit and withdraw your funds.
There are quite a few Yield Optimizers on the Binance Smart Chain. Some Yield Optimzers we use are Beefy, Auto Farm, Pancake Bunny, bEarn, belt.fi, and Swampy. Each one has different bonuses and perks they offer so you’ll need to dig in to figure out which one is best for your goals. As an example, we use Pancake Bunny for farming CAKE because Bunny was created to optimize yields for CAKE.
More often than not, you’ll get a better return going through a Yield Optimizer than you will by going directly through the farm.
If you’re interested in learning how to farm Single Assets or LPs check out the following pages:
How to Farm Single Assets
How to Farm Liquidity Pools