Yield farming is one of the best ways to earn passive income in the crypto space, but it is not without risks. Smart contract vulnerabilities, lag pulls, temporary losses. These are risks to consider.
But if the risk is well managed and distributed across multiple protocols, it’s fine.
What is yield farming?
Yield farming is a process in Decentralized Finance (DeFi) that involves lending or staking cryptocurrency assets to generate income or rewards in the form of additional cryptocurrency.
This is typically achieved through various decentralized applications (dApps) or protocols such as automated market makers (AMMs) and liquidity pools.
To better understand yield farming, here’s an analogy:
“Imagine planting crops on your farm for profit. Just as a farmer invests time and resources in growing crops and sells them for profit, a yield farmer invests in cryptocurrency assets and earns a return in the form of additional cryptocurrency. But just as farmers face risks such as inclement weather and pests that can damage or destroy their crops, farmers are exposed to smart contracts that can adversely affect their bottom line. risks such as vulnerabilities and temporary losses.”
Without further ado, here are the 4 best and least risky protocols to try yield farming in 2023.
PETH-ETH pool on convex finance
Convex Finance is an innovative DeFi platform that allows individuals to stake assets and receive incentives in the form of CRV, CVX and transaction fees. Additionally, the platform offers users the prospect of liquidity mining via the Curve LP pool.
pETH is an ETH derivative supported by the JPEG’d protocol. Created when a user borrows against her jpegified NFT. Depositing PETH – ETH pool liquidity to Curve and betting LP tokens to Convex, he can earn 29% of her APY rewards without permanent loss.
However, there are some risks. When a user borrows against his NFTs, pETH is issued, so if the price of his NFTs used as collateral drops significantly, JPEG could become bad debt. Although unlikely, pETH could lose its peg if it did.
VLPs on Vera exchange
Vela Exchange is a decentralized platform that offers sophisticated perpetual trading capabilities, prioritizes community-driven incentives, and boasts a highly scalable infrastructure.
Since Vela launched last month, its huge trading volume has exceeded all expectations. VLPs are Vela Liquidity Provider Tokens and can be minted using USDC. VLP Minter earns rewards based on trading volume and staking APY is now over 120%.
The Vela exchange has already achieved $3 billion in trading volume. When they started, they were just small fish, unimaginable reaching $3 billion in volume.
VLP stakers earn 60% of platform fees and 10% of esVELA lifetime fees. However, be aware that if the Vela trader wins too much, the VLP staker will suffer a loss. But as long as volumes remain high, the VLP looks like a good opportunity for his USDC yield.
The Vela team is shipping products all the time, and their roadmap includes significant trade competition, which could lead to further increases in trade volume.
We are currently in beta phase 3 of our roadmap, which includes two trading competitions, a beta airdrop, and an official launch announcement.
FrxETH ON Stake DAO
Built on top of a decentralized blockchain protocol, Stake DAO is a non-custodial platform that allows individuals to easily expand their cryptocurrency portfolio. It provides users with a convenient means to grow, monitor and manage their assets directly from their wallet.
FrxETH is another big yielding opportunity for ETH at 22% APY. FrxETH is a liquid staking derivative of Frax. Yields are paid primarily in the form of CRV rewards. When you deposit frxETH into the Stake DAO, the protocol will stake it into the Curve Gauge and boost it thanks to the CRV locked in the CRV Liquid Locker. According to DeFiLlama, the 30-day average APY is 15%.
LUSD-MAI pool on velodrome finance
Launched on May 31, 2022, the Velodrome is an Automated Market Maker (AMM) that serves as Optimism’s primary trading and liquidity hub. This represents a departure from the Solidity model previously introduced by Andre Cronje.
If there’s one thing that’s become clear over the past few months, it’s the need for a truly decentralized stablecoin. It doesn’t rely on anything centralized. Both LUSD and MAI fit this category, with LUSD fully supported by ETH.
The strategy currently yields 17.5% with a 7-day average APY of 14%. Not as good as the previous ones, but at least the LUSD and MAI stablecoins should actually be “stable”.
Yield farming is a great source of passive income. Many large investors have locked millions of dollars into large bluc-chip DeFi protocols such as Aave and Compound. These have a much more stable APR because they have an established income stream. Please do your own research on each of these protocols before investing.
Vincent Munene is a freelance writer and great blockchain enthusiast. Blockchain has changed his life in terms of financial freedom. In return, he likes educating people and keeping them up to date on all things blockchain. He is a biochemist by profession and loves to play the piano.