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Yield farming: Is it too late to start in 2022?



Yield farming is a crypto-specific activity that came with the invention of DeFi, or decentralized finance.

DeFi is a new area in crypto and the popular yield-generating platforms are still in their infancy. 

In crypto yield farming, you need provide your token to a liquidity pool that powers a decentralized exchange, a marketplace or a blockchain-based app. Your token can be used in a number of activities, as simple as lending and trading but possibly also much more complex. In exchange for locking up your token into the pool, you earn a small fee (the yield). 

Why did yield farming pay such high yields in the past? 

In the past yield farming used to pay much higher yields. It was very profitable, but drove a lot of imitators who dumped a large number of tokens into the pools and eventually raised the fees so high that it made less sense for new yield farmers to try it out, creating a downwards spiral.

In 2022, yields are much lower. There are several reasons for this, but the main reason is that yield farming has become much more competitive in recent years, resulting in a massive amount of supply entering the market through new blockchain startups and exchanges. This has brought down prices significantly. What's more, investors have realized yield farming and DEX trading isn't without risks. One common issue is a thing called "impermanent loss" which can wipe out all of your stacked small gains in a single sweep. 

Impermanent loss is  a loss in a decentralized exchange that is not reversible. It takes place when a market gets very volatile. When the price of one asset changes rapidly, the automated DEX staking pool system needs to ensure that the DeFi liquidity pools still have 50/50 ratio of the pair of the asset. This puts the yield farmers at risk because their provided liquidity might be lost in order to keep the mathematical formula valid.   

Risks like this damage the yield farming industry. Good news is that DeFi developers are actively trying to find workarounds for impermanent loss to allow yield farmers to decrease their risks.


Sooo...Is yield farming dead? 

Yield farming is definitely not dead, since new technologies are being created all the time that provide excellent opportunities for yield farmers. However it has become harder to enter the market given how competitive it has become. If you still want to try your hand at yield farming in 2022, consider joining an already existing decentralized exchange but choose a pool of a newly launched DeFi market. Chances are that market will not be so crowded and you will get a better chance at catching high yields. 

What to think about if you still want to start yield farming? 

As yields continue dropping, it becomes harder for new entrants to get in and earn money. The best way to get started is to join an already existing decentralized exchange.

The latest trend in yield farming is to have a dual pool where the coins are locked in both an exchange and lending pool. There are several DEXs that can be used for this purpose, including eth2dai, b0x lp, dydx beta, Blockinance , EO.Trade's dex platform...

Are there better alternatives to yield farming?  

Network staking (or cold staking) is  a separate concept from yield farming, but is becoming increasingly popular. It's a way to passively stake your coins, just like in yield farming. The major difference however is that you're staking tokens for free instead of receiving an annual return. Network staking can be done through security tokens (e.g.. Sentinel Protocol) or other platforms like kyber network.

Cold staking carries much lower risks that yield farming, and you can do it from a crypto wallet too. From the user point of view, it looks like earning interest on whatever coins you hold in your cold storage.  It's a very convenient way to passively earn crypto, especially if you're looking for a way to get into the cryptosphere but don't have a lot of money or time at hand.

You cannot stake every altcoin and indeed only some crypto wallets will let you cold stake out of them, but you can always lock your coins into a cold staking pool contract as well. It pays a little less but you don't need such a high amount of coins to start staking as you do when you do it individually from your wallet. 

If you want to try yield farming but your main priority is not volatility risk, then network staking would be a good alternative. 

Conclusion

Yield farming is not dead yet, but it has become more difficult to enter the market for new farmers. The best way to get started is to use an already existing decentralized exchange where you can stack your coins

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