This intermediate-level article will describe some of the best yield farming strategies on Solana. If you’re a beginner and haven’t read our prior articles about yield farming, go back and read:
This article is not financial advice. There are many risks inherent in yield farming, and the information given here should help users build their own “best” strategy rather than provide a recipe for success.
The strategies presented below are grouped into three categories based on the risks posed by impermanent loss (IL) and market volatility.
Lower Risk: Yield Farming Stablecoins and Stable Pairs
One way to minimize risk when chasing farm yield is by providing liquidity for stablecoins like USDH and USDC and stable pairs like SOL and mSOL. The tokens’ values are meant to be the same or follow each other closely, so the possibility of incurring IL is diminished.
Stablecoin yield farming provides the least exposure to directional risk. By yield farming stablecoins, it’s possible to take a more passive approach to yield farming in decentralized finance (DeFi). Still, anything can happen in DeFi, so make sure you do your own research (DYOR) and stay on top of your positions.
Theoretically, with stablecoin yield farming strategies, you shouldn’t have to worry about token prices taking a nose dive or IL. Since stablecoins are supposed to remain statically priced at one dollar, yield farming with them can be considered something like USDH and USDC staking.
However, if a smart contract is exploited or one of the stablecoins you’re farming loses its peg, you may incur some loss. Now that we’ve established that stablecoin yield strategies are not 100% risk-free, there are tons of ways you can earn interest on stablecoins by farming.
Every decentralized exchange (DEX) on Solana facilitates stablecoin swaps. So, instead of farming with tokens that have volatile prices, all you have to do is provide stablecoin liquidity on a DEX to start yield farming rewards.
Saber and Mercurial specialize in swapping stable assets by using an algorithm that increases the capital efficiency for these kinds of trades. Additionally, there are several options for providing stablecoins as concentrated liquidity on CLMMs (Concentrated Liquidity Market Makers), which we’ll discuss further in another article.
Since deep liquidity is an incredibly important part of maintaining a stablecoin’s peg, stablecoin projects will incentivize users to help provide liquidity with rewards. It’s a win-win for projects that need liquidity and users who want to earn yield with minimum risk and exposure to the market.
Stable Pair Strategies
Stable pairs are two tokens that should follow each other closely in value. Yield farming with these tokens can reduce the effects of IL as long as the tokens remain closely pegged in value, but market forces can and have caused some divergence in prices.
The problem with IL is that you will end up with more of the least valuable token you’ve deposited if the other token performs well, and then you would have been better off holding instead of yield farming.
Yield farming with stable pairs is more comparable to HODLing, since the value of both tokens should rise and fall in tandem, so this strategy shields you from IL. However, you are still exposed to the price action of the tokens you are farming, so this strategy is not as conservative as yield farming stablecoins.
Examples of stable pairs include:
- Liquid staking tokens (stSOL, mSOL, daoSOL) pooled with SOL
- Bridged tokens (aeUSDC from Allbridge or USDCet from Wormhole) pooled with Solana native USDC
- Collateral receipt tokens like cSOL and cmSOL from Solend or pUSDC and pUSDT from Port
Medium Risk: Farming Volatile Assets Paired with Stablecoins
When the automated market maker (AMM) was first introduced with Uniswap v1, tokens had to be paired with ETH. However, with the launch of Uniswap v2, any two tokens could be paired together, and it became apparent that tokens paired with stablecoins incurred lesser amounts of IL.
Nowadays, project tokens on DEXs are most commonly paired with stablecoins, and projects will bootstrap their liquidity by distributing rewards to users who pair their tokens with stablecoins.
We have already covered this extensively, and you can find out more about yield farming volatile assets paired with stablecoins in our article “How to Start Solana Yield Farming as a Beginner.”
One thing to note about yield farming on Solana these days is that there are many opportunities to yield farm token rewards from stablecoin projects and the other projects with which they are partnered.
For example, users can earn HBB and LDO rewards for providing stSOL-USDH liquidity on Raydium.
Higher Risk: Farming Volatile Asset Pairs
Pairing two volatile assets can expose you to greater IL than pairing volatile assets with stablecoins. Still, there are several reasons why users pair volatile assets for yield farming.
First of all, some users who want to maintain directional exposure to the market will provide liquidity for pairs like stSOL-BTC to earn fees from trades and token rewards while at the same time reaping huge benefits if both tokens pump at the same time.
Conversely, if one volatile token in the liquidity pair loses value–while the other rises in value–you will incur more extreme IL than if you paired each token with a stablecoin. Therefore, it’s probably best to follow this strategy with two tokens from projects you believe in and are willing to hold for a long time.
Some DEXs will reward users for providing liquidity to pairs using their native tokens. For example, Orca has several pools where ORCA is paired with SOL, mSOL, and whETH.
This can be a strategy for holding DEX tokens earned as rewards instead of swapping them right away to capture their current value. So, if you believe that a DEX’s tokens are undervalued, then providing liquidity is a way to stack more rewards tokens while HODLing them.
Productivity Tools for Yield Farming Solana
There are several ways you can optimize your yield farming on Solana. Here are some tools that can help you increase your productivity and decrease the time it will take to manage your positions.
Finding Yield Farming Opportunities
It’s been said that the half of knowledge is knowing where to find knowledge. You can spend hours scouring DEXs and filling out a spreadsheet looking for the best yield farming opportunities, or you can visit a site like Coindix to search and sort through your options for yield farming on Solana.
Beyond looking for the best token combinations and APYs, there are many things you should consider before choosing which Solana yield farming opportunities to take. Following Solana projects on social media (Twitter is your best bet) and joining their communities on Discord or Telegram can provide you with a wealth of knowledge about what you’re getting into before you farm.
There are also several DeFi communities you can join that actively talk about yield farming regularly. The Calculator Guy community on Discord, also known as the DeFi Dojo, is one good place to start.
One major metric in DeFi is APY (Annual Percentage Yield) as opposed to APR (Annual Percentage Rate). The difference between these two metrics is that APY reflects compounding interest, about which Benjamin Franklin said, “Money makes money. And the money that money makes, makes more money.”
A common yield farming strategy is compounding rewards into a liquidity position so that it can earn larger rewards. The more and faster one compounds their rewards, the more one’s potential to earn rewards increases.
There is a substantial boost in APY when positions are compounded daily versus weekly or monthly, and DeFi offers ways to compound yield farming gains in your sleep.
Tulip Protocol provides several services for earning yield in DeFi. Among the tools in its Tulip Garden is a service to help you autocompound your liquidity pools every 10 minutes, improving your position’s APY much faster than manually compounding.
To begin autocompounding liquidity pool positions with Tulip, you’ll need to deposit your LP token into one of its autocompounding vaults. Only use this strategy if you do not want to hold the tokens you’re earning as rewards, since they will be sold to increase the value of your LP token.
Tracking Your Positions
If you start entering multiple yield farming positions on Solana, it can get hectic trying to keep up with what’s happening. In addition, you’ll spend a lot of time clicking from site to site to check your positions if you don’t use a dashboard like Step Finance.
Using Step, you can track your yield farming activity across all of Solana DeFi. When you connect your wallet or enter your wallet address, Step will show you your current positions, current APYs, and pending token rewards.
For some yield farms, you can also claim your rewards directly through Step instead of having to open another page.
Final Thoughts and Considerations on the Best Yield Farming Strategies on Solana
Participating in DeFi can be very risky, so you should never put in more than what you can afford to lose. Although we have described several yield farming strategies on Solana by risk profiles ascending from lower to higher, all of these positions carry multiple risks due to the volatile nature of crypto.
Prices can fluctuate wildly, and smart contracts can be exploited. Make sure you understand the risks involved with each yield farming strategy and how increasing your exposure to multiple projects (each token, the DEX, the yield farm, the yield farming autocompounder) also increases your exposure to smart contract risk in multiples.
Finally, make sure you have a plan. It might be worth holding some tokens instead of dumping them right away. You’ll likely kick yourself if the tokens you’ve been dumping go 10x in a month.
On the other hand, you’ll most likely kick yourself if the tokens you’ve been stacking for a month go -99% tomorrow. In DeFi, anything can happen.
Keep in Touch