Is crypto yield farming profitable?

Yield farming crypto can be profitable, but it depends on how you measure the gains. Most crypto investors measure returns in fiat. Given that crypto is so volatile, you might make a decent return from Yield Farming measured in percentage return that is a loss in fiat terms.

This can simply be because of changes in the wider crypto market or something called impermament loss. If you are providing liquidity to a DEX this means contributing two assets with proportionate value, which could be 1 ETH and 3,000 USDT. 

If the overall liquidity pool is 60,000 and you contribute 3,000, your share is 5%. As the price of ETH changes, the overall size of the pool will remain the same, but the proportion of ETH will increase or decrease. 

If the price has fallen and you want to withdraw your 5% of the pool, it might be worth less than you contributed, realising the Impermanent Loss. Therefore, the net impact of the liquidity provision has to consider fees earned, the impact of impermament loss, and the GAS fees you pay to interact with the different services.

It can help to use a DEFI tracking tool, like Defi Yield, which will pull everything together for you in a dashboard but the reality is that yield farming only becomes profitable at scale. If you experiment with small amounts, GAS fees alone can make it unprofitable, so there has been a big rise in DEFI applications built on rival chains to Ethereum, with lower fees.

Profitability should also consider the opportunity cost of yield farming, which means considering what returns you could have otherwise earned on your funds through an alternative strategy, whether inside or outside of crypto.

Should you try yield farming?

If you are reading this and wondering whether you should try yield farming, your answer should come down to a few key considerations:

• Are you comfortable using a browser wallet like Meta Mask?
• Do you understand how GAS fees work?
• Do you have realistic expectations?
• Are you prepared to lose some or all of your investment?
• Have you considered simpler alternatives like CEFI – services that offer a return on crypto, but use a more familiar centralised, account-based model, without GAS fees or the complications of impermanent loss?

The final consideration, and arguably one of the most important considerations around Yield Farming, is security.