Yield farming strategies for dummies

Hi there students,

Last time we talked about some basic checks that you can do to spot the early rug pulls. Today, now that you think you’ve found a safe platform to farm, let’s look at some of the strategies you could do. Obviously you could have a lot of different variations of the strategies, so I just summarized the basic ones.

But before going through the strategies, let’s look at how does farming work on these platforms and what are your risks.

1. How does farming work?

Usually platforms such as PancakeSwap or its clones have 3 kinds of farming products available:

• LP token farming: you provide liquidity on a pair in equal amount (BNB-CAKE for example) and receive LP tokens. LP tokens are a “proof” that you provided x BNB and x CAKE in the liquidity pool. As a result, you earn a share of the trading fees of this pair, and on top of that, you can stake your LP tokens in the farms of the platform. When you stake your LP tokens in the farm, you are remunerated in the native token of the platform (CAKE for PancakeSwap for example).

• Single token staking: You provide a single token to earn the native token of the platform. For example, stake CAKE to earn CAKE
• Single token staking with third party token: You stake the native token of the platform to earn another token of a partner project. These usually are limited pools operated with the marketing budget of the partner projects. It’s usually found in big platforms with visibility, and rare in small, new platforms. For example, stake CAKE to earn ALPACA.

2. Risks associated to farming

If you’ve been following well the lesson, you can see the risk immediately: most of the rewards you get for farming are in the native token of the platform. Usually, these tokens (like CAKE) have a unlimited supply: they can be minted forever. What does it mean? It means that it’s inflationary: if the supply keep increasing, without a mechanism to counteract it (like a burn mechanism) the price will keep going down. So the APR you see at the beginning of farming, might not be what you actually get.

Typical graph of a new yield farming native token

It’s even more risky for newer projects. While tokens like CAKE have shown their value over time despite their inflationary nature (mostly thanks to the multiple burn mechanisms put in place by the team), new tokens’ value are quite a mystery. Moreover, platforms’ native tokens usually get a pump and dump at the beginning of the project: indeed, at the beginning there are a few tokens. But with the high APR the new platforms give early farmers to attract them, soon the supply of the tokens explode and brings the price down. This is something you need to keep in mind when farming in new platforms.

3. Strategies

Finally, we can talk about strategies. I will try to go from the safest, to the most risky type of strategy.

Strategy 1: Safe Whale

Don’t buy the native token and sell all rewards

As explained above, most projects will give you native tokens when you stake LP tokens. Well the safest way to farm in the new platforms is to be exposed to the native tokens as little as possible. For example, you could provide liquidity for BNB and BUSD, get the LP tokens, and use these tokens to farm for the native tokens. And then, you sell all your rewards as soon as you get them to minimize your exposure.

For example:

• Provide BNB-BUSD to PancakeSwap.
• Stake the LP tokens to get CAKE.
• Sell CAKE for BNB or BUSD every day.

This strategy is a strategy usually used by whales: it’s an easy way to farm for yield without too much risk, IF the platform is secured.

Strategy 2: Bullish whale

Don’t buy the native token and compound the rewards

This is similar to strategy 1, but you don’t sell the native tokens you earn. Instead, you stake them in the single stake pool that most platform provide. This strategy is to use when you don’t wish to risk your own capital, but you are fairly bullish on the native token of the platform as well.

For example:

• Provide BNB-BUSD to PancakeSwap.
• Stake the LP tokens to get CAKE.
• Stake the CAKE to get more CAKE.

Strategy 3: Bullish speculator

Buy the native token and compound the LP tokens

In this strategy, you provide the LP tokens of the native token and BNB (or BUSD) to the platform to earn rewards. And then, once you earn the native token, you sell half of it for BNB (or BUSD) to increase your LP tokens. This way, you get to lock half of your rewards as BNB or BUSD, while compounding your yield to get more rewards.

For example:

• Provide BNB-CAKE to PancakeSwap.
• Stake the LP tokens to get CAKE
• Sell half of the earned CAKE to BNB
• Provide BNB-CAKE to PancakeSwap
• Repeat

This strategy is for people willing to take on a bit more risk because they believe in the long term growth of the platform. Moreover, it still allows you to accumulate BUSD or BNB my selling half of your reward every time you compound.

Strategy 4: Degens

Buy native tokens only and single stake them

This is the most risky strategy: you only buy the native token and stake them in a single pool, and hope it moons.

For example:

• Buy CAKE
• Stake CAKE in the CAKE pool
• Earn CAKE and compound them

This is extremely risky, only to do if you are absolutely convinced the platform is secured AND have a wonderful growth potential.

These are the 4main strategies that you can think of at the beginning. Of course, there are more variants: if you are very aggressive you can keep injecting fresh capital (not recommended personally..), or have some combinations of the 4strategies. But I recommend that you try all 4in some manners and find out what risk profile works for you.

More advanced students among you must have noted that I didn’t talk about impermanent loss at all in the risk section. That’s because I’m dedicating the next lesson entirely on impermanent loss, which is one of the biggest “risk” you get on LP farming. It’s getting exciting, stay tuned!