Disclaimer: nothing in this article constitutes professional and/or financial advice. This is a guideline and framework for Defi and yield farming. Do your own research!
Maybe you or someone you know has been bitten by the Defi bug.
Defi, short for decentralized finance, is a blockchain-based form of finance, which does not rely on centralized financial intermediaries and is completely permissionless. Through Defi, users can lend out cryptocurrency, like a traditional bank would, and earn interest as the lender. When I first heard of this from a friend, I admit I was skeptical. Once you get over the learning curve, it’s amazing to see the bright road ahead for Defi.
This article is for people who have a solid crypto baseline and are looking to dabble in Decentralized finance by yield farming or lending out their crypto to earn interest. Below, I share my Defi framework to help you get started and earn interest on your crypto. This is a good starting point as a beginners guide that scratches the surface of the full suite of yield farming.
I’ll also show you a real world example of how you can get started today (and earn 58% APY!)
Let’s jump in.
Framework and Directions for Defi yield farming:
Setup a Metamask wallet
Unlike a Centralized Exchange like Coinbase or Gemini, Metamask is a crypto wallet that allows you to store and send cryptocurrencies in a quick and easy way. I use the Chrome extension and it allows me to login into various web3 websites seamlessly and easily (no username or password needed!)
Pick a chain (protocol) that you want to transact on
For example, Ethereum Mainnet is the most popular protocol and the native token used to transact on the network is ETH. You’ll need to use the native token on that network to pay for gas fees. You’ll likely hear people talk about cross-chain swaps, but for this beginners guide, just focus on one chain.
Find a reliable DEX/Defi project which you choose to provide liquidity to
DEX’s are autonomous programs that are built on a protocol (Ethereum, Avalanche, Solana, etc) that essentially offer a high yield to attract users in to deposit liquidity on their platform.
As a general rule of thumb, the lower the risk, the lower the yield projects offer (yields are calculated on an annualized basis but paid out instantly).The higher the risk, the higher the yield. You can find rates here for top yield farming pools by value locked. Check out this article for an in-depth read on Yield Farming.
When deciding on which liquidity pool to add to (ie deposit your crypto in), do some research on the assets you’re providing liquidity for. Whether you’re supplying assets for a single-sided liquidity pool or a pair, you should feel confident that the underlying assets you’re providing to the pool will be worth more in the future, when you do decide to exit that pool (and hope for a high return!)
While similar, they do differ slightly. Farming is a newer concept and intended for liquidity providers (the individuals putting up the assets) who supply liquidity (a liquid asset which is equivalent to cash, in this case, a cryptocurrency, that’s added to a pool) to a protocol in return for a yield. Staking is generally a term used for ‘locking up’ your asset to show your good faith and interest behind a project. They are very similar and both offer the same end goal (yield), but make sure you always check the fine print behind the protocol you’re depositing these assets into and see if there are any fees or fine print associated with either or.
Rates, calculated in APY (annual percentage yield) and/or APR (annual percentage rate), are very fluid and change rapidly depending on the price of the underlying token(s), liquidity inflows/outflows, etc. This may affect your yield farming strategy if the rates drop, but also consider the costs of switching between farms (gas fees) and your long term goals.
Have a strategy for reinvesting and taking profits
Always check to see how the rewards are paid out. Once you receive your rewards (often calculated in real time), you’ll need to manually harvest those tokens at your own discretion. After you harvest or redeem those rewards, it will be added to your Metamask. You have the option of re-investing those profits back into the protocol or cashing them out (ie. swapping the reward token for a stablecoin and transferring back into a Centralized Exchange or cold wallet). I would recommend a mix of both to ensure you’re cashing in on profits in the event the project dips or yield drops off.
Know how to get out of liquidity pools
It’s important to know how to exit any liquidity pools you enter. Check the docs to figure out how to ‘unstake’ any assets and how to remove it from the pool. I recommend doing a ‘fire drill’ exercise where you remove all of your liquidity as fast as possible to make sure you know how to get your funds out and safe in the event of a major crash or hack.
It’s also important to understand how much liquidity there is in a pool (i.e. total amount of money locked up). If there’s very low liquidity (for example, $50k of total locked value), it’s going to be difficult to exit without affecting the price. If you’re in a pool with $50M of total locked value, liquidity shouldn’t be an issue or affect the price of the asset(s) you’re looking to withdraw and sell for another token.
Join the community
Join Telegram and Discord Channels behind the projects you’re investing in and get a feel for the community. Ask questions about the roadmap and see what other token holders care about (and maybe even meet some internet friends!)
Find some friends to share alpha with and help each other out
This might be the most important part. Find trustworthy friends and allies to share stories and trades with. More often than not, you’re going to mess up somewhere along the lines and need help (or have a friend that messes up and needs help). This has happened to me countless times and it’s good to have a friend you can call and walk through what happens! Oftentimes, you can backtrack your transactions to find where things went wrong, but it’s difficult to do on your own behind a computer screen with no help.
If it seems too good to be true, it probably is! It’s important to Do Your Own Research (DYOR) before providing any liquidity into a project. Ask yourself: why do they need my tokens and how is the yield being generated? Defi is an unregulated industry and anyone can spin up a website and offer incentives to attract people. Look for reputable Defi projects that have a known leadership team behind them and an easy to use platform with a strong community and growing TVL (total value locked). You want to avoid rug pulls at all costs (or try your best to!)
Read the docs/whitepaper behind every project you’re investing in (or at a minimum, scan them quickly). This will give you an idea of the project and their products, roadmap, etc.
Beware of scammers
After joining a Telegram or Discord Group be very cautious about posting anything about your personal holdings in a public setting. Never disclose how many tokens you hold. If you’re having technical issues, post in a public place and keep the details vague. Post this: ‘Hey, I’m having issues withdrawing into USDC’ Not this: ‘Hey, I tried to withdraw $700 in USDC and can’t find it’). Confirm that anyone who DM’s you and says they are offering to help is truly an ‘admin’ or a verified person. And lastly: never EVER give away your Metamask Seed phrase! No support team will ever ask you for this and it’s a dead giveaway that a hacker is trying to scam you.
Set a goal and stick to it!
Often overlooked, but this is the most important part of yield farming. Come in with a plan and execute on it. Don’t second guess yourself and don’t just ‘let it ride’ unless you’re OK with watching your portfolio go through peaks and troughs. Crypto markets are 10x more volatile than traditional equities markets so it’s important to set benchmarks for your returns and not let your emotions dictate your moves.
Now, let’s bring it all together and use a real example! Here’s how you can farm xJOE for a 58% APY on the Avalanche Network
Getting Started: to start, you’re going to need to set up your Metamask Wallet. You will use this to login to various Defi/web3 websites
‘Pin’ your Metamask extension to Chrome so you can easily click it. You’re going to be checking this quite a bit!
Save your seed phrase and make sure it’s in multiple areas (physical and digital). You cannot recover this and you’re screwed if you lose it!
Most Defi projects are only compatible off a desktop browser, so you cannot make any trades off your phone. Metamask has a mobile app but I prefer the Chrome Extension. If a project is crashing and you want to cash out in a hurry, you’ll need to have access to the laptop which you have your Metamask installed on (or have your seed phrase handy to be able to login off a new computer)
Adding Avalanche Network to your Metamask: the default network for Metamask is Ethereum Mainnet. However, we’ll be staking and farming within the Avalanche ecosystem (lower gas and quicker transactions than Ethereum), so you’ll need to manually add this as a new network.
Once you have the Avalanche Network setup in Metamask, you’re ready to send assets into Metamask.
Note:if you’re using Coinbase, you can purchase AVAX and transfer directly into your Metamask Wallet, just make sure you switch over to the Avalanche Network on your Metamask!
If you cannot buy AVAX (native token of Avalanche Network that is needed to pay for gas fees), you will need to send an ERC-20 compatible token to your Ethereum Mainnet Wallet (I used ETH). Go ahead and transfer your ETH or other token (from Coinbase, Gemini, cold wallet, etc.) into your Metamask account
Make sure the asset you are sending into Metmask is listed under ‘Assets’ in Metamask so it shows up
Make sure you have enough ETH to cover gas fees (very high at the moment)
Once you can see the ETH in your Metamask account, you’ll need to bridge this over to the Avalanche Network, since it is a different protocol. The bridge essentially wraps your tokens and converts them into comptable format on the other network. A simple analogy is like transferring your cell phone plan from one network to another, but imagine if you kept your same number.
At the time of writing, if you bridge over $75 onto the Avalanche Network, you will be eligible for an airdrop to help cover your gas fees.
Make sure you have added in the new asset within Avalanche Network. For instance, if you bridged over ETH, it will now be under ‘wETH.e’, not ‘ETH’, since you left the Ethereum Network.
Once this is bridged over, you’re ready to begin your Defi journey in the Avalanche Network!
Buying $JOE Token: head on over to TraderJoe, the largest DEX (Decentralized Exchange) on the Avalanche Network. Login with your Metamask and then you can begin trading. You can trade your ‘wETH.e’ that you transferred over and now swap this into JOE (but, remember to make sure you have some AVAX to cover the gas fees!)
Staking & Farming: once you swap for JOE, you can now stake and farm this (yes, you can do both but you need to stake your JOE into xJOE first) to get double rewards. You’re essentially providing liquidity in two pools and getting double the rewards. Here is how you do it:
And Voila! You’re now providing liquidity and earning yield on your assets. Your rewards are displayed in real time on the platform under the ‘Farm’ page. You will need to harvest and claim your rewards (JOE), which will get added to your Metamask wallet. You can then cash them out into USDC.e (or other stablecoins) for profits or reinvest back into the xJOE farm.
I tend to harvest (claim) my rewards every few days. Once I do so, I redeem my JOE, and then re-stake it into xJOE and put it back into the farm (repeating the steps listed above). I usually cash out a small portion of xJOE into USDC.e for profits at the end of the month
Check to see if they charge a fee for withdrawing your assets out of the staking/farming pools (they usually don’t but some charge a withdrawal fee).
To summarize, you’re making 28% from staking your JOE into xJOE, and then another 30% for farming your xJOE, which comes to a grand total of 58% APY
There is no other technology that has allowed individuals and institutions to trade and lend assets out in a permissionless environment than Defi has. At the time this is written, there is over $104 Billion dollars of value locked in Defi and this is just the beginning of a new wave of permissionless protocols that will unlock trillions of dollars of value for lenders and borrowers across the globe. All you need is access to wifi, a wallet and crypto coins.
P.S. - the Snowball.network team has great Defi University materials if you want to dig deeper into the fundamentals of Defi, yield farming, governance, NFT’s and more
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