Liquidity farming is a popular aspect of DeFi and it’s a logical way to incentivize liquidity providers. As most of us already know, liquidity providers play a major role in Decentralised exchanges by providing liquidity to enable the ease of swap between a defined coin pair on the DEX. By providing liquidity you receive a share of the swap fees generated on the DEX and by participating in farms, the liquidity pair tokens (LPs) are locked in a farm smart contract to receive additional incentives as farm rewards.
By providing liquidity and to create LP tokens may expose the tokens to the risk of impermanent loss depending on the type of tokens which makes up the pair. Impermanent loss occurs when there is a price change for both tokens that makes up the liquidity pair. However, for a liquidity pair that is made up of only stable coins for example, uUSD/USDT, there is no risk of impermanent loss since a change in prices for both tokens is almost impossible. Impermanent loss may also be minimal for top tokens, since these tokens have sufficient liquidity and do not experience severe price impacts from swaps. In my opinion, one way of staying profitable with low risks is by providing liquidity for stable pairs.
Now let’s look at some examples of DEX/ dApp where one can benefit from liquidity farming.
There are several dApp in the crypto space but I will focus on major dApps across popular blockchains.
* **Ethereum blockchain – Liquidity Farming on Sushiswap**
On the ethereum blockchain, Sushiswap hosts a number of liquidity farms such as, Block/WETH, UMA/WETH, GOG/WETH, X/WETH and many others. Stables LP options do not currently exist on sushiswap, therefore you may be exposed to the risk of impermanent loss, however the risks may be lessened by rewards and swap fees benefits.
* **Tezos Blockchain – Liquidity Farming on youves**
On tezos, youves DeFi protocol has the highest TVL
The youves farms rewards are designed to incentivize long term liquidity provision. The following liquidity farms exist on youves.
uUSD/USDT, uUSD/USDC.e, uUSD/uBTC, uUSD/kUSD, uUSD/YOU, uUSD/tez, YOU/tez, uUSD/Quipu
There exist a number of stable LPs on youves such as; uUSD/USDT, uUSD/uSDC.e, uUSD/kUSD and providing liquidity for these pairs protects your funds from impermanent loss.
* **BSC – Liquidity farming on Pancakeswap**
On the binance smart chain network, Pancakswap tops the charts for highest TVL.
The following farms exist on Pancakeswap; Cake/BNB, Cake/BUSD, Cake/USDT, BUSD/BNB and a few other LP farms. Currently there are no stable LP farms on pancakeswap. However, it is a little safer if liquidity is provided for a top token with a stablecoin.
What strategies do you currently use and what is your take on this strategy. Please drop your opinion in the comment section.
***Disclaimer: This post is shared for educational purposes and should not be considered financial advice. DYOR.***
1 thought on “Earning yields through liquidity farming with decentralised applications.”
Binance is probably insolvent so don’t trust pancakeswap. Also CAKE is a shitcoin. One of the last Ponzi’s to crash, apparently