- 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:
- 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.
- Things started ok and I gained a few percentage points per week, until a small market crash put me down 24%.
- 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%:
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:
- Bridging protocols failing (the Optics risk above).
- Stablecoins depegging (perhaps for reasons of insufficient collateral).
- Crypto price risk (i.e. crypto prices in general falling).
- Smart contract risk of farming protocols (e.g. harvest.finance or Ubeswap).
- 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/.
Towards the end of the year, I moved $1,000 over to ValoraApp to take advantage of their 50% annual rewards program.