One is a Grammy Award-winning musician with lots of spare time. Another is a software engineer with nowhere to go during the pandemic. There’s also an editor for a data site and a fund manager who invests in digital assets.
What these people have in common is an obscure side gig known as “yield farming,” a type of cryptocurrency trading and investing that didn’t really even exist until 2020. Yield farming is producing fixed-income-like returns that can, at least for brief stretches, provide annualized interest rates equivalent to percentages investors cannot find anywhere else.
Yield farming, simply put, is when cryptocurrency holders sock digital assets like bitcoin (BTC) and ether (ETH) or dollar-linked tokens like tether (USDT) and dai (DAI) into blockchain-based, semi-autonomous lending and trading platforms in exchange for additional tokens as rewards. In the fast-growing subsegment of the crypto industry known as decentralized finance, or DeFi, yield farming offers a quicker and more lucrative way of making money than, say, parking extra dollars in a JPMorgan Chase savings account at a paltry 0.01% interest rate.
The yield farming DeFi boom started in June when the DeFi projects Compound and Aave launched. They were soon followed by Kyber, Balancer and Yearn.Finance. More creative names like Spaghetti, Tendies and SushiSwap followed.
Partly because cryptocurrency traders realized they could make so much money simply from using the protocols, the growth has been staggering: Since June, these systems have mushroomed eightfold, with a total of $11 billion of crypto collateral locked into them according to DeFi Pulse. According to the site DeFi Rate, it is possible to net an annual percentage yield of more than 53% APY staking crypto on lender Fulcrum – and sometimes much more on new projects for those who get in early.
But who are these yield farmers? Why have they flocked to this arcane corner of the digital-asset industry and how did they learn how it all works? Is it a full-time or part-time endeavor? How insanely risky is all this?
CoinDesk talked to several yield farmers to get their stories.
André Allen Anjos, also known as RAC, is a music producer and recording artist with over 2 million monthly listeners on Spotify, winning a Grammy in 2015 for Best Remixed Recording. “I discovered Ethereum around late 2016,” he said.
In 2017, Anjos worked with the ConsenSys-backed Ujo Music to sell the first full-length album of music via Ethereum’s blockchain. Fans sent ether to a smart contract on the blockchain, and the album’s files were hosted on the decentralized interplanetary file system, or IPFS, a distributed storage system.
Just as Anjos was getting involved with the crypto-verse, by 2018 cryptocurrency prices came crashing down. Interest in the space waned, but Anjos stuck with it. He learned about a DeFi project called MakerDAO and was quickly captivated by the concept of collateral locked into the software protocol to create dollar-linked stablecoins called dai. “That was my entry to what we call DeFi,” Anjos says. “At the time there wasn’t really a name for it.”
The irregular schedule of a music-maker lends Anjos ample hours to explore yield farming. “I'm obviously a musician,” he said. “That's what I do full time. Because of my job, my day-to-day is pretty loose. I can kind of do whatever I want.” That includes spending time on social media and reading up on new DeFi projects. “You pull up Twitter and everyone’s freaking about Yams,” Anjos said, referring to one DeFi yield-farming project that exploded in popularity in August before quickly flaming out once a bug was discovered in the unaudited software protocol.
Spend a few minutes chatting with Anjos and it gets deep into the weeds pretty fast. He’s fascinated by the stablecoin decentralized exchange Curve. “It's a pool of stable tokens and it's on a more efficient bonding curve.”
Yield farmers like Anjos are able to reap trading fees from the exchange in return for providing their tokens as liquidity. Other cryptocurrency users can then borrow them to deploy in trades, or even engage in another round of yield farming.
“Curve generates a fair amount of fees, which then go to the pool, which attracts more attention,” Anjos says. More recently, Anjos has become obsessed with a Curve copycat called Swerve; he recently Tweeted that while his traditional bank account reduced savings-account interest rates to zero, the project Swerve was offering 250% returns.
Anjos continues to think of ways to use DeFi in music. He recently sold 100 limited-edition tokenized cassettes called $TAPE of his newest album via Ethereum with help from a startup called Zora. “I think there's a lot of opportunity to do something in music,” said Anos. “We're sort of riddled with intermediaries. It's kind of like the perfect use case.”
Arising early and firing up a MacBook Pro, a yield farmer who goes by “devops199fan” on Twitter checks his feed. He’s on the prowl for new ways to make money in DeFi.
Finding the opportunities means spending a lot of time on Twitter. Devops199fan follows about 144 people ranging from Robert Leshner, founder of the DeFi lender Compound, to pseudonymous actors like himself such as Hasu, a researcher with almost 30,000 followers. Then it is over to the website Yieldfarming.info, which has a terminal-like user interface providing a wealth of resources.
“At any given time, there are a bunch of different opportunities that are available,” devops199fan told CoinDesk via videoconference, speaking on condition that his real name not be used. “And then as time is going on, more and more opportunities are launching.”
It’s still a part-time gig. Devops199fan has a day job as a software engineer and he doesn’t intend to quit, despite the fact that his profits from yield farming are becoming a more significant part of his income. The coronavirus pandemic and the associated lockdowns have meant work from home for devops199fan, and there are long hours in quarantine sequester for the pursuit, which he still considers a hobby.
Devops199fan particularly likes a DeFi platform called Yearn.Finance, which directs users toward profitable opportunities by aggregating various projects and taking a cut in return. “It's one of the coolest things to happen in DeFi,” according to devops199fan.
Cooper Turley was working as a writer and editor for the website DeFi Rate when the yield-farming craze hit. “I was just trying to figure out what the next trend in crypto is, sort of at the end of the bear market,” said Turley, also known Coopertroopa on Twitter. “The yield farming thing started coming to my attention with Synthetix when they were doing their liquidity trial,” he said, referring to a DeFi project that serves as an automated manufacturer of cryptocurrency derivatives.
Cooper said the amount of yield doesn’t matter when he’s plowing crypto into a project.
“It's more about the legitimacy of the farm that's presented – basically the people who are either behind it or sort of the amount of time that was put into curating whatever the product is,” he said.
Cooper usually spends a couple hours researching new projects to make sure they’re legit. Getting in at the beginning is key.
“That's kind of the weird nature of these opportunities popping up is that those first 24 hours are by far the most lucrative,” Cooper said.
Most projects offer extra-juicy token rewards during the first few days. “So literally like getting in in that first hour or so can actually make a world of difference for what returns you're getting on your capital,” he said.
The nominal interest rates often look high, sometimes 1,000% or upward, because they’re only available for short spurts. “The reason why SushiSwap was so hot is because there were 10-to-one rewards for the first week,” he said.
“I think just cycling into new farms as they pop up and sort of getting that first window has proven to be the most lucrative opportunity for the vast majority of these products,“ he added.
The fund manager
Even professional cryptocurrency investors are getting into yield farming. Jake Brukhman is managing partner of the five-year-old digital-asset investment firm CoinFund, which puts money directly into various crypto projects but also yield farms.
As of September, according to Brukhman, about 20% of CoinFund’s liquid portfolio was devoted to yield farming and liquidity mining.
“The liquidity profile of tokens is now significantly better than it was a few years ago,” said Brukhman, a Brooklyn, N.Y., resident who has been following and investing in crypto for well over half a decade. “A few years ago, it was very hard to get a token listed on a centralized exchange,” he added.
Now, liquidity is easy: Any Ethereum-based token can easily be listed on a number of decentralized exchanges. The trend has provided a foundation for the growth of yield farming.
Brukman defines yield farming as “optimizing yield across many yield opportunities, sometimes by stacking them on the same capital.”
In March 2018, CoinFund launched Grassfed Network for what it called “generalized mining strategies,” defined as “crypto economic games implemented by decentralized protocols that users can play to earn cryptocurrency-denominated compensation.” Essentially, it was an early iteration of yield farming. Even the most die-hard yield farmers will acknowledge that it all does feel like a big game, played with digital tokens but with real-money equivalents.
Brukhman is a fan of decentralized exchanges like Balancer because providing liquidity in return for fees charged on the exchange is the best yield farming play on the market today - also known as liquidity mining.
When Brukhman talks about yield farming, it’s with a casual, matter-of-fact stream of DeFi lingo that almost obscures the fact that none of this really even existed until recently. “Anyone can go on the supply side of these protocols and provide liquidity for some of these assets,” he said. “With Uniswap version 2 it’s only two assets per pool. With Balancer, you can provide up to eight assets per pool.”
It’s all part of the job.
The risk factor
While this may seem very ephemeral, yield farming could result in promising developments in the cryptocurrency ecosystem. Nonetheless, each yield farmer told CoinDesk the same thing: This stuff is really, really risky.
“I'm sure there's all kinds of risks that we don't really know,” said the musician Anjos.
Perhaps the most foreboding warning came from Cooper Turley: “I see this as incredibly risky – f**king mad risky,” he said.
And while the early returns were perhaps great, the cryptocurrency market is entering an uncertain fourth quarter.
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