Yield farming, or liquidity farming, is the act of lending or staking your cryptocurrency into a liquidity pool, through DeFi (Decentralized Finance) to receive rewards such as interest and more of their staked cryptocurrency. Similar to traditional staking, it can be seen as the equivalent of lending fiat money to a bank.
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Step 1 — Find your farm
- Access https://defi.alphafinance.site
- Upon landing, connect your Alpha wallet
- Browse the available farms and choose the one that you would like to farm.
- You will need to provide liquidity on Alpha Finance in order to receive an equivalent amount of Liquidity Provider (LP) tokens that signifies your share of the pool. These LP tokens can be staked in the farms in order to receive additional yield in the form of incentivized tokens that are emitted by the protocol.
Step 2 — Provide liquidity as a Liquidity Provider (LP)
- For this example, we’ll choose BNB-USDT LP, which here will provide 40.51% APR
- First we will need to acquire BNB-USDT LP tokens.
- For LP tokens, most protocols will generally require you to have a 50/50 ratio for the pairs used in the farm in the amount of liquidity you would like to provide (with a few exceptions that use other ratios such as 80/20 and so on). In this case, we will first need to either swap or already have a 50/50 ratio of BNB and USDT available in order to provide liquidity.
- This can easily be achieved via any swaps as shown in Chapter 2.
- Once you have obtained a 50/50 ratio, just click on the Liquidity tab or head to https://app.alphafinance.site/liquidity
- For the Inputs, click the pairs you would like to LP with. In this case, BNB and USDT.
- Then, input the amount of capital you would like to LP in at a 50/50 ratio.
- Click “Supply” and approve the transaction on your wallet.
- When you see that the transaction has been confirmed, you’ll have successfully provided liquidity and received LP tokens to signify your share of the pool.
- Now that you have provided liquidity, you are automatically receiving a portion of all fees from every swap transaction in the liquidity pool (On raydium, 0.25% of every transaction is charged as fee; 0.22% is given to Liquidity Providers and 0.3% is given to USDT stakers).
Step 3 — Staking LP Tokens for additional yield
- Head back to https://app.alphafinance.site/stake
- Click Stake LP
- Click Confirm and approve your transaction
- Once your transaction is confirmed, you will have successfully staked your LP tokens and started yield farming. Your yield will start to accrue and you can harvest it whenever you like.
Step 4 — Harvesting your yield
- Click Harvest and approve the transaction
- Your yield will be sent to your wallet automatically.
- In this example, the farm yields RAY — by harvesting, you will receive RAY tokens.
Yield farming is lucrative, but what are the risks? Throughout your DeFi journey you will come across many projects and protocols that offer high amounts of yield, to the tune of 4,5 or even 8 figure APYs. We would advise caution and deep research to understand the mechanics behind yield farming before attempting to allocate your capital into such farms.
Here are the two main risks you should be aware of:
Smart Contract Risk
- Smart Contract risk is present in all projects with yield farming being no exception. Some projects have bad actors who seek to steal or “rug” users who interact with the smart contract. This can be especially dangerous for new and unknown projects that promote high APYs.
Impermanent Loss Risk
- Impermanent Loss refers to the temporary or permanent loss of funds due to volatility leading to divergence in price between token pairs provided by liquidity providers. Arbitrageurs change the ratio of assets in the pool to reflect the price disparity, meaning that when you withdraw the percent of liquidity you provided to the pool, after factoring in yield your profit may not be as much as if you just HODL’d the tokens directly.