How to Yield Farm Like a Pro

Since Compound launched its liquidity mining program in June, billions of dollars in tokens have been distributed to liquidity providers across various DeFi protocols. The community has coined this activity as “yield farming” to analogize this process of users putting their capital to work in a protocol in return for tokens, to farmers working the fields in return for crops.

Simply put, yield farming offers investors a novel method for acquiring tokens. Unlike ICOs, where investors exchange capital in return for new tokens, yield farming allows investors to acquire tokens by simply supplying a protocol with capital. That capital is then put towards a productive use such as being lent to other users in the protocol (in the case of Compound) or supplying liquidity to traders (in the case of Balancer).

Yield farmers are free to withdraw their capital whenever they choose. They only pay an opportunity cost for having their capital locked into the protocol. In this regard, investors are able to acquire new tokens effectively for free. (more on the risks later).

A Yield Farming Case Study

Farming comes in all shapes and sizes, but one of the most simple examples of how farming works is Swerve - a newly launched Curve fork. Like Curve, Swerve is an automated market maker (AMM) optimized for swaps between assets price-stable with one another like stablecoins.

However the key differences are that:

1. Swerve has a more “fair” distribution, distributing all SWRV tokens to its liquidity providers rather than also distributing tokens to a founding team, advisors, and venture capitalists