People are attracted to DEFI because they want to grow their funds and naturally want to know the best yield farming cryptocurrencies and available strategies. These are the wrong questions to ask.
You need to start by thinking about how much risk you are prepared to take, how much research you are willing to do and how much time you can dedicate to actively managing the different yield farming activities.
You can find returns from under 1% up to several thousand %. As yields increase, so do the associated risks and the volatility of the underlying asset you need to hold to earn that yield.
Coinmarketcap provides Yield Farming Rankings which, when sorted for the highest returns, regularly has APY of over 1,000,000%. Such high APY will obviously attract attention, but you have to also look at the TVL – Total Value Locked – and the direct connection level to Impermanent Loss.
Impermanent Loss is a DEFI euphemism for the change in the value of a coin that hasn’t been realised. As already mentioned, yields are based on supply and demand. Still, you also have to factor in the prices of the coins you are depositing, the value of the coin the return is paid in, and the protocol’s trustworthiness.
Anchor is a very good example of the risk/reward trade-off. Built on the Terra blockchain it offers up to 20% APY on deposits in UST, a native Terra Stablecoin, but you’ll need first to acquire UST (either from a centralised exchange or DEX) then send it to a UST supported wallet before connecting with the Anchor App.
With over 11bn UST deposited, users are clearly prepared to jump through those hoops to earn 20% APY, but how many stop to consider how that return on a Stablecoin is sustainable? Terra has been actively buying huge amounts of Bitcoin to provide collateral to UST, which many see as a tacit admission that its current model was unsustainable.
Chasing the highest yield is fraught with risk and stress, and often it is only the earliest and most sophisticated investors that can take advantage.
The most sensible approach is to start by finding the best available interest for the coins you hold from a provider with significant TVL that has been operational for a while. That list would include names like Curve, Uniswap, Compound and Aave. But you have to look beyond the available APY to understand whether Yield Farming is profitable.
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