Today in DeFi - Yield Farming Strategies & Meta Strategies
Hey guys, not a lot of news today - at least not much I can share without leaking alpha, so I will leak some meta-alpha.
Yield farming always entails risk, but there are different types of risk. In today’s letter I will lay out three main types of strategies for Yield farming that let you choose the type of risk you are willing to take on.
Staking Tokens or Stable Pairs
Pros
No Impermanent Loss
No Crop Price Risk
Cons
Smart Contract Risk
This is when you stake a token itself, or a stable-pair pool, such as USDC-DAI. In this type of farm, you will not lose money to Impermanent Loss. You are also not directly holding the crop token, so you have less exposure to the risk of the crop price dropping.
However you are subject to smart contract risk. Let’s say you locked LEND up to get YAMs. If the staking contract had issues, your LEND could potentially be locked or drained. This can be less of an issue if the token being staked is the crop itself, as you have “less at stake”.
This strategy is best if you know the contract is safe to use.
Staking Volatile LP Tokens
Pros
Higher Yield (usually)
Cons
Impermanent Loss
Smart Contract Risk
Many farms will ask you to stake pool tokens for pairs such as DAI-ETH or other pairs that move against one another. In this case you have potential for impermanent loss, so most farms will reward you with higher yield.
Staking Crop LP Tokens
Pros
Higher Yield (usually)
Cons
Impermanent Loss
Permanent Loss if Crop fails
Smart Contract Risk
This is a subset of staking LP Tokens, but is higher risk. If you stake the Crop token of the farm you are farming, and that crop token loses value, your impermanent loss can turn very permanent.
This has happened before with YFFI, as well as YAMs. LPs who staked regular coins along with these crop tokens in a balancer pool or uniswap pool got “impermanent rekt”.
Buying Crops, or Farmed Tokens
Pros
Price exposure to Crop/farm success
No smart contract risk
Cons
Market risk
One last strategy to take advantage of yield farming is to buy the crop, or the seed tokens for the farm. This lets you partake in the farm’s success, without subjecting you to smart contract risk.
At first, this seems like a galaxy brain move, but in fact you are trading smart contract risk for market volatility risk. To do this strategy, you will need to understand the price dynamics of the crop. If you are betting on seed tokens, you will need to understand their yield dynamics.
You will also need to pay attention to the farm’s news and governance, as these decisions can significantly affect the price of the tokens you’re betting on.
Conclusion
Farming can be a profitable game, but each type of farming strategy has its own risks. Understand the risks of each farm you are interested in and think about what strategy is best for that farm’s risk profile and your risk appetite.