Summary:

  • A year in review: Up 75% for the year.
  • 75% is bad compared to the crypto market.
  • Quality matters. Farming tokens in projects I believe in.
  • Re-farming of rewards.
  • Exploits and Failures happen.
  • If paying taxes, it quickly gets complicated.
  • Total donation of $3,500 for the year to Father's Uplift.

Disclaimer: Yield farming is high risk. For anyone trying I recommend assuming you will lose all of your funds.

Up 75% for the year

I started off with $2,000 to invest in yield farming, and took it to a value of $3,500 by year end. In short:

  1. I started farming on Binance Smart Chain via Harvest.Finance with $1,000. Fees on Ethereum are prohibitive for farming so that wasn't an option at this dollar amount.
  2. Things started ok and I gained a few percentage points per week, until a small market crash put me down 24%.
  3. I realised that I didn't understand the tokens I was farming on Binance Smart Chain and diverted my efforts all over to Celo (in the meantime, adding another $1,000 of funds to my farming), where yields were high and I know the projects better.

The rest of this post summarizes my lessons over the remainder of the year - since I didn't write in detail on my Celo farming. Overall, I took a more conservative strategy that focused on tokens I knew and this brought me from being 24% down to being 75% up on my total investment of $2,000.

75% is bad compared to the crypto market

A 75% return sounds good, but isn't when compared to the crypto market. For example, if I had invested in 50% stables and 50% split evenly between BTC, ETH and CELO, then my return for the year would have been 131%:

Return from a portfolio of 50% cEUR, and 50% split between BTC, ETH and CELO (no rebalancing)

So, ultimately I wasn't able to generate an edge by yield farming.

Quality matters. Farming tokens in projects I believe in.

Perhaps the best advice I got on yield farming was to start by considering what portfolio of tokens I want to own. Only then, consider what farming to do.

I decided, for these at-risk funds, that I wanted to hold 50% stables (e.g. cUSD/cEUR, cEUR) and 50% crypto (e.g. BTC, ETH or CELO). My reasoning for this is that I'm bullish on crypto but want to dampen fluctuations somewhat. Then, I would go out and look for pools that together would make up this portfolio (e.g. cUSD-BTC, cEUR-ETH, cUSD-cEUR pools). Notice how I'm avoiding holding any riskier tokens as part of my core farming portfolio.

Re-farming of rewards

These core farming pools, mentioned above, generate rewards. There are a few options for what I might do with those rewards:

a. Immediate sell and reinvest in my core farming pools.

b. Hold the rewards indefinitely.

c. Re-invest the rewards into new pools (usually every three months, to save on hassle).

Option a. is probably reasonable, and a slow and steady approach. In the end, I found it preferable to instead pursue option c. This means that over time I kept my core pools (cUSD-BTC etc.) but then have expanding (high-risk) holdings of the rewards tokens I earned in rewards pools.

The reason I think this makes some sense is that, when tokens are being offered as pool rewards, there is downward price pressure from farmers selling those tokens. If the token/protocol turns out to be a good one, there is the opportunity for the token to appreciate significantly when the rewards period ends. So, my thinking is that immediately selling rewards is a bad idea because it means selling them while there is down-ward price pressure.

Exploits and Failures happen.

At one point during the year, I decided to farm a larger amount of money on CELO in stables pools involving the Optics bridge. After a few months, I started to get uneasy about the collateralisation risk of Celo stables (not due to any event, but just reflecting on the issue in general) for the level of return I was earning.

Coincidentally, a few days after I withdrew that larger amount, it emerged that the Optics bridge had gone into recovery mode.

There are quite a few risks (and likely more) to yield farming:

  1. Bridging protocols failing (the Optics risk above).
  2. Stablecoins depegging (perhaps for reasons of insufficient collateral).
  3. Crypto price risk (i.e. crypto prices in general falling).
  4. Smart contract risk of farming protocols (e.g. harvest.finance or Ubeswap).
  5. Impermanent loss (price movement in non-stable liquidity pools).

If paying taxes, farming quickly gets complicated

I tended to reduce how frequently I would reinvest rewards because:

a. It's a pain and time-consuming

b. It generates complicated transactions if you're reporting taxes

On the second point, I found it such a pain that I started to build Celo.Tax to provide software to automate tax calculations for farming on Celo.

Total donation of $3,500 for the year to Fathers' Uplift

As mentioned in an earlier blog post, the proceeds from this yield farming were to go to Fathers' Uplift, a Boston based charity helping fathers with mental health and overcoming substance abuse. Website here: https://www.fathersuplift.org/.

Added note:

Towards the end of the year, I moved $1,000 over to ValoraApp to take advantage of their 50% annual rewards program.