Top DeFi Projects Suitable for Crypto Farmers

Handy Tips / 19.06.2021

The advent of DeFi projects for farming pales compared to the aptitudes of traditional finance like lending and borrowing Into oblivion. However, the underlying capabilities of farmers to earn rewards in the form of interests for locking up their funds allows these DeFi projects to reach new highs in the future. 

A market with over $7.2 billion in Total Value Locked of liquidity pools in yield farming projects explains why many want to join the craze. Yield farming involves farmers lending their money to others through computer programs called smart contracts. These farmers then get rewarded fees for their services.

Since yield farming encompasses a lot, finding the best DeFi project for farmers will require some basic knowledge on yield farming. True enough, you will need to beware of the risks that accompany DeFi projects to yield more from “farming.”

What is Yield Farming?

Yield farming is an opportunity for cryptocurrency holders to block all or part of their cryptos, which rewards them after a while. In layman’s terms, as a crypto holder, you can take advantage of yield farming, where your crypto holdings can earn you either a fixed or a variable interest after investing cryptocurrency in a DeFi project.

Parallel to traditional finance, where banks issued loans using fiat money and received interest from the amount lent out, DeFi protocols lend out cryptocurrencies through the Ethereum network. Yield farming duplicates the entire interest-earning ability by banks; instead of letting your cryptocurrencies sit in an exchange or a wallet, you can loan out your crypto through smart contracts to get a return.

Over the years, many crypto holders have joined the bandwagon since yield farming operates using ERC-20 tokens on Ethereum. It has revolutionized some, if not all, of the processes involving lending and borrowing by traditional banks by running all yield farming transactions in the Ethereum ecosystem and issuing rewards in the form of ERC-20 tokens. 

It is possible to deposit these reward tokens to other liquidity pools with high yields to multiply your rewards. Like staking, yield farming is when liquidity providers lock up their cryptocurrency funds in liquidity pools and earn rewards later.

How Does Yield Farming Work?

Interests in the phenomenal yield farming ecosystem kicked off with Compound after it launched the COMP token – a governance token that gave token holders governance rights. Although Compound did not invent the ecosystem, the type of token distribution gained adoption, and other DeFi projects brought to life the colossal possibilities to attract liquidity to their ecosystem. 

A DeFi project issues liquidity incentives that allow liquidity providers “farmers” to provide liquidity to the DeFi projects and earn token rewards. If looking for a suitable DeFi project to farm, you should consider the Total Value Locked in the protocol. It’s a significant metric that tends to portray the health of a DeFi project and the whole yield farming ecosystem. 

The advent of many DeFi projects makes it impossible to pick one in particular: however, that’s where TVL comes into play. In particular, Defi Pulse can aid you in tracking the leading platforms with the highest Ethereum or other cryptos because it indicates more yield farming activities. That way, you are well informed as you traverse through the yield farming craze.

First, you deposit funds into a liquidity pool where you can lend and borrow tokens. The fees incurred in the DeFi project go to the liquidity provider as a reward which represents the staked contribution to the liquidity pool. Another way to generate funds for a liquidity pool is to distribute a new token to buy others tokens in small amounts.

Farmers generally deposit funds in the form of stablecoins like; DAI, USDI, USDC, etc. After that, they receive tokens from the DeFi project, representing the deposited coins in the protocol. For example, a farmer that uses Compound can deposit DAI to get cDAI, and an ETH deposit will get a cETH reward.

The Best DeFi Protocols for Farmers

Finding the appropriate yield farming platform will require broad research on the different projects since each project might have rules and risks that differ from the other. These DeFi projects are among the vast number of projects but are the mammoth players in the craze of yield farming.

Compound.finance

Compound.finance is one of the big players in the yield farming frenzy, with over $12 billion of assets earning interests over 12 markets where farmers get to lend and borrow funds. Compound.finance utilizes Ethereum, and once you supply your crypto holdings to its liquidity pool, you will earn rewards that will continue compounding. The DeFi protocol offers exceptional current interest rates that might increase if you liquidate more to the pool or if the markets move in your favor.

Aave

Aave, an open-source and non-custodial protocol, allows farmers to earn rewards as interests on deposits and borrowing assets. Aave consolidates its place on this list because it has made farmer’s interaction with the protocol much more accessible and better by opening up new scalability frontiers. Farmers leverage their holding cryptos on Aave by depositing, which start to earn and compound interest. It solidifies as a significant DeFi project with added functionalities like flash loans.

Uniswap

Uniswap is a decentralized exchange (DEX) where farmers become liquidity providers and pool their funds on the DeFi project. The farmers receive token rewards for their contributions. Farmers can utilize Uniswap because it charges a mere 0.30% trading fee on the platform. Furthermore, farmers take advantage of the Uniswap v.2 upgrades, which farmers can turn off or on through a community vote. 

It takes o.05% from every 0.30% trading fee for financing future Uniswap developments. If turned on, farmers could receive 0.25% of trading fees.

Conclusion 

Recent months have put DeFi projects in the spotlight, and that’s why everyone now wants a piece of the pie. Farmers should also stay alert since yield farming is a high-risk adventure. Before indulging in yield farming, stay aware of possible risks like; price risks on loans where the collateral price falls below a specific price. 

The DeFi platform might liquidate your funds before any chance to return the loan. Other risks such as gas fees and liquidation risk might also limit your potential to harness farming on a DeFi project.

avatar
Wayne is a Blockchain enthusiast and expert in crypto trading. Currently, he covers trendy issues on digital currencies.