New to Yield Farming? Avoid these common mistakes

In the last year, decentralized finance (DeFi) has been catapulted into the spotlight, thanks to the formation of dozens of innovative new platforms and protocols that now provide users with a huge amount of utility for their tokens.

Though the DeFi space encompasses a diverse array of platforms, one type of platform, in particular, has exploded in popularity — yield farms. As their name implies, these are platforms that allow users to generate a yield on their assets through a process known as ‘farming’. This typically entails staking digital assets in a smart contract to earn either a fixed or variable APY — with some platforms offering incredibly lucrative returns.

However, successfully navigating the yield farming landscape as a beginner isn’t always easy. This is due to the huge number of yield farms now in operation — many of which aren’t as attractive as they look, while others offer genuinely excellent value for users.

Here, we take a look at three of the most common mistakes beginners make when yield farming, and show you how to avoid them. 

APY isn’t everything

Understandably, one of the main features users look at when selecting a yield farm is the APY it offers, since this is often misconstrued as absolute potential profit.

However, this generally isn’t the case. Many yield farms often boast impressive APYs — sometimes up to 100%+ per year — this needs to be weighed against the performance of the token that must be staked.

Consider a yield farm that offers 100% APY. If the staked asset loses less than 50% of its value within a year, then this can be considered a net positive investment. If staked asset drops faster than yields are accrued, making it a net negative investment.

Take the ApeSwap BANANA pool as an example. As of writing, the BANANA pool offers around 120% APR — equivalent to ~30% every three months. However, in the last three months, the BANANA token has lost 80% of its value. As you can see, anybody farming BANANA during this period would be in a substantial dollar loss.

With this in mind, it’s important to consider the performance of the staked asset before yield farming. If you acquired the token at a very low price (i.e. nowhere near its peak value), then this is generally less of a concern but still worth noting.

Token support

Leading on from our point on APY, it’s generally best to stake assets that demonstrate a long-term bullish trajectory to ensure an absolute profit is realized.

Unfortunately, not all yield farms give you the choice to stake your preferred asset — since they either only support their own native asset or other assets with poor market performance.

But that is beginning to change with the advent of multi-asset yield farms like YeFi. Unlike many yield farms, YeFi allows users to stake a wide variety of different assets and the yields depend on the computing factor the platform offers for each asset. Bitcoin (BTC), ether (ETH), Tether (USDT) offer a 1x computing factor, compared to 1.5x for Filecoin (FIL), and 2x for YeFi’s native asset — the Yefi (YEFI) coin. 

With Yefi yield farming you can get up to 80% APY, YeFi lets users pick the asset they’re most comfortable with.

In general, stablecoin farms eliminate the need to manually account for volatility, since they are by definition stable. This will help you better project your returns over the farming period.  

Early is almost always better

When it comes to yield farms, earlier participants generally net higher yields than those that join late. This is a consequence of the way that many yield farms operate.

In general, most yield farms will either mint or have already set aside a fixed number of tokens to be distributed between all participants in a yield pool. This is usually divided between participants based on their share of the total value locked in the pool, such that somebody who contributes 10% of the total locked value will receive 10% of the reward pool per reward period.

This means that the yields are usually highest right after the pool is launched, since the total amount of value staked is low, leading to a high APY. As the total locked value (TVL) increases, the rewards decrease proportionally — meaning the early bird really does catch the worm in this case.

Because of this, it’s important to check back regularly to see if the expected APY has changed. This will often decrease considerably if the yield farm becomes extremely popular, but can also increase if it loses popularity or the farm introduces other mechanics to boost the yield. Generally, the later you join, the worse your yields will be.

In any case, checking up on your deposits can help you maximize your yields by allowing you to double-down when yields are high, or pull out your funds if the APY is no longer competitive. 

About Author

John Kiguru is an astute writer with a great love for cryptocurrency and its underlining technology. All day he is exploring new digital innovations to bring his audience the latest developments.

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