June 17, 2021 · 7 min read
Mark Cuban shares his yield farming strategies | Yield farming 101
This week in DeFi, Mark Cuban, billionaire investor and owner of Dallas Mavericks, posted “The Brilliance of Yield Farming, Liquidity Providing and Valuing Crypto Projects.” In this post, he shares his experience and investments in DeFi and how he is earning impressive returns. For example, he reports over a 200% APY by providing liquidity on Quickswap! His primary strategy is something known as yield farming.
This week at Novum Insights, we take a deep dive into yield farming. We explain what yield farming is, map out yield protocols including yield aggregators, asset management tools and vaults.
What is yield farming?
Yield farming, often used synonymously with liquidity mining, allows users to be recompensed in return for “locking” their tokens in a DeFi platform. This can entail staking cryptocurrencies, providing liquidity to a pool in a decentralized exchange, staking the LP tokens, or providing liquidity to lending protocols. Users are incentivized to lock in their tokens or to provide liquidity and this behaviour is rewarded with attractive APYs.
The secret sauce of DeFi yield farming is the concept of “composability”. Composability means that different protocols can interact with one another in a permissionless way. DeFi applications are often called “money-legos” due to their stackable and composable nature.
Let us demonstrate how to stack up returns in DeFi.
Take QuickSwap for which Mark Cuban is an LP, for example.
You can provide liquidity to a pool and earn a 0.25% transaction fee.
Take the LP tokens from your liquidity provision to QuickSwaps’ Rewards program, stake the LP tokens and “farm” the governance token QUICK (QUICK farming is expected to last for the next four years).
You then take your QUICK to Dragon’s Lair where you can stake QUICK and receive dQUICK, whose value will increase as swap fees are generated, so by the time you withdraw your QUICK from Dragon’s Lair, your QUICK will be worth more than your initial investment. Currently the ratio of dQUICK:QUICK is 1.19:1.
You could alternatively take your QUICK outside of QuickSwap and bring it to Aavegotchi. You can participate in the GHST-QUICK pool, stake the LP token to earn FRENS that let you buy raffle tickets on Aavegotchi to earn in-game wearables.
Now take your idle DAI to a lending protocol like Compound and stake them, get cDAI in return that earns interest and earn COMP as a reward. cDAI and COMP can then be supplied to Uniswap to earn more fees!
The precise gains are impossible to discern, and the intricate web of designing yield farms may confuse new DeFi users. Moreover, each step to maximize returns on your crypto holdings requires an interaction with a smart contract, which means it costs network fees.
To simplify this multi-layered yield farming process, various yield products have emerged. For example, yield aggregators find the best lending rates across different lending protocols, users can create strategies and subscribe to existing yield farming strategies. Vaults pool users’ deposited assets and automatically allocate to optimize returns. Rather than jumping from one lending protocol to another, vaults deploy complex and often riskier strategies. This could include investing the returns from one project to fund another.
Below we map out yield protocols that offer various farming strategies.
Source: Novum Insights up to 15th Jun 2021
Yearn Finance has $4.7 billion in TVL. Yearn Earn is a yield aggregator that hunts for the best yields across lending protocols including Compound, dYdX and Aave. Yearn Vaults have strategies for more than 40 tokens. The most popular Yearn Vault is Dai with more than $700 million TVL. The current APY of Dai in Yearn Vaults and Yearn Earn is 7.86% and 5.42% respectively.
Wault Finance is an AMM DEX running on Binance Smart Chain. Other than facilitating atomic swaps, Wault Fiance also provides yield farming, staking rewards and vaults like SushiSwap and PancakeSwap do. There are currently three assets accepted in Vaults - CAKE, BUSD, and EPS 3Pool made up of USDC/USDT/BUSD. The reported APY for each vault are 119.68%, 13.56% and 6.12% respectively.
Alpaca Finance is a yield farming protocol that allows up to 6x leverage. The TVL stands at $1.4 billion. Alpaca Finance uses Pancakeswap and Waultswap for yield farming and currently offers 34 active pools. The pool that allows the largest leverage is the USDT-BUSD pool on Pancakeswap.
Alpha Finance aims to create an ecosystem for various DeFi products. Alpha Finance’s Homora is a leveraged yield farming protocol with $1.18 billion in TVL. Alpha Homora allows up to 9x leverage and uses Uniswap and Sushiswap as farms. There are currently two broad strategies - yield farming and liquidity providing. The yield farming strategy looks for farming new tokens in addition to earning trading fees from liquidity providing. The best yielding pool in Alpha Homora is the ETH/CRV yield farming pool on Uniswap with 150.24% APY.
Autofarm runs on Binance Smart Chain, Polygon and HECO. More than 90% of the TVL is locked in BSC. Autofarm uses MDEX, WaultSwap, PancakeSwap, Belt, BZX and more as farms.
Vesper currently supports 6 pools - ETH, WBTC, DAI, VSP (native token), LINK, and USDC. They all have conservative risk levels as these “Growth Pools” only interact with established DeFi lenders such as Aave, Compound or Maker. The most popular pool is ETH with $246.5 million in TVL and the highest-returning pool is VSP with 66.93% APY.
Harvest Finance has $287 million in TVL and runs on Ethereum and BSC. Harvest aggregates yield opportunities across 19 protocols including Compound, Curve, Ellipsis, Idle, Sushiswap, Pancakeswap, Belt Finance and Lido Finance.
Idle has two broad strategies - best-yield and risk-adjusted. Best yield strategy moves assets when the interest rate changes on different lending protocols. Risk adjusted strategy takes account of the total assets within a pool and levels of supply and demand on top of the changing interest rate.
TokenSets is a crypto asset management protocol that lets users create portfolios called Sets and follow existing strategies built by other users. There are currently 11 featured Sets. The most popular Set is DeFi Pulse Index with $149 million in TVL and more than 13000 holders of the portfolio.
APY Finance currently supports three assets - DAI, USDC and USDT and aggregates yield opportunities across DeFi protocols such as Curve, Compound, dY/dX, Uniswap, Sushiswap, 1inch and more. There is currently $42 million locked in APY Finance.
The current market capitalization of yield farming tokens stands at $29.6 billion. There are numerous 100-200% APYs offered in the markets and in some cases, the stated returns go as high as 40M%! This has made it very attractive for investors. A well designed yield farming strategy allows users to diversify their portfolios, mitigate risks, and diminish the volatility of an asset.
However, this is an unregulated market and there are risks. Risks include liquidation risk, technical risk, price risk and more. The price of the token you put as a collateral to take out a loan could drop below the price of the loan. Smart contracts could be attacked or miscalculate returns. An attacker could lend funds on a DeFi platform and borrow back, creating artificial demands and manipulating the token prices. Yield farmers could also make meaningless transactions on DeFi protocols just to interact with the protocol in order to earn token rewards (apart from fees and interests) in hope of price appreciation. A common safety tip for looking out for these types of landmines, is ensuring the project has been audited correctly.
And as Mark Cuban said, every single DeFi project is, at its core, “just another business”. So, valuing a DeFi project comes down to the revenues, like valuing any other traditional businesses. It comes down to current revenues, growth rates, and the strength of the community. Yes, the eye-opening, jaw-dropping 200%, 300% APYs create FOMO around the block but it is important that you understand the business and have faith in the project’s future before you jump into yield-farming.