Note: This article is not financial advice. Hubble Protocol does not endorse any of the tokens or platforms mentioned in this article.
This intermediate-level article will describe some of the best yield farming strategies on Solana. For beginning users who haven’t read Hubble's prior articles about yield farming, go back and check out:
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 or correlated 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 users should make sure they do their own research (DYOR) and stay on top of their positions.
Theoretically, with stablecoin yield farming strategies, users 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 users are farming loses its peg, they may incur some loss. Now that it's established that stablecoin yield strategies are not 100% risk-free, there are tons of ways users can earn yield on stablecoins by farming.
Every decentralized exchange (DEX) on Solana facilitates stablecoin swaps. So, instead of farming with tokens that have volatile prices, all users have to do is provide stablecoin liquidity on a DEX to start earning yield farming rewards.
Saber and Mercurial specialize in swapping stable assets by using an algorithm that increases the capital efficiency for these trades. Additionally, there are several options for providing stablecoins as concentrated liquidity on CLMMs (Concentrated Liquidity Market Makers), which will be discussed 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, but market forces can and have caused some divergence in prices between derivative tokens and their underlying assets.
The problem with IL is that users will end up with more of the least valuable token deposited if the other token performs well. If this occurs, users would have been better off simply 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 can shield users from extreme IL. However, users are still exposed to the price action of the tokens they 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 paired with SOL
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 could incur less drastic IL versus pairing with ETH.
Nowadays, project tokens on DEXs are most commonly paired with stablecoins. Furthermore, projects will bootstrap their liquidity by distributing rewards to users who pair their tokens with stablecoins on a DEX.
Hubble's Crypto Basics series has already covered this topic extensively, and users can find out more about yield farming volatile assets paired with stablecoins in the 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.
Higher Risk: Farming Volatile Asset Pairs
Pairing two volatile assets can expose users 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 maintaining positions in these tokens during favorable market conditions.
Conversely, if one volatile token in the liquidity pair loses value–while the other rises in value–users will incur more extreme IL than if they paired each token with a stablecoin. Therefore, it’s probably best to follow this strategy with two tokens from projects users 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 for stablecoins. If users believe that a DEX’s tokens are worth holding, then providing liquidity is a way to stack more rewards tokens while HODLing them.
Productivity Tools for Yield Farming Solana
There are several ways users can optimize their yield farming on Solana. Here are some tools that can help users increase their productivity and decrease the time it will take to manage positions.
Finding Yield Farming Opportunities
It’s been said that the half of knowledge is knowing where to find knowledge. Users can spend hours scouring DEXs and filling out a spreadsheet looking for the best yield farming opportunities, or they can visit a site like Coindix to search and sort through options for yield farming on Solana.
Beyond looking for the best token combinations and APYs, there are many factors to consider before choosing which Solana yield farming opportunities to take. Following Solana projects on social media (Twitter is a good bet) and joining their communities on Discord or Telegram can provide users with a wealth of knowledge about what they’re getting into before they farm.
There are also several DeFi communities users can join that actively talk about yield farming on a regular basis. 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 the position can earn proportionately 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 while its users are sleeping.
Tulip Protocol provides several services for earning yield in DeFi. Among the tools in its Tulip Garden is a service to help users autocompound their liquidity pool positions every 10 minutes, improving their position’s APY much faster than manually compounding.
To begin autocompounding liquidity pool positions with Tulip, users need to deposit their LP token into one of Tulip's autocompounding vaults. Users should only use this strategy if they do not want to hold the tokens they're earning as rewards, since they will be swapped to increase liquidity in an LP token's position.
If users start entering multiple yield farming positions on Solana, it can get hectic trying to keep up with what’s happening. In addition, they’ll spend a lot of time clicking from site to site to check their positions if they don’t use a dashboard like Step Finance.
Using Step, users can track their yield farming activity across all of Solana DeFi. When connecting a wallet or entering a wallet address, Step will show current positions, current APYs, and pending token rewards associated with that wallet.
For some yield farms, users can also claim their rewards directly through Step instead of opening another page to access the yield farm.
Final Thoughts and Considerations on the Best Yield Farming Strategies on Solana
Participating in DeFi can be very risky, so users should never put in more than what they can afford to lose. Although this article has 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.
Markets can fluctuate wildly, and smart contracts can be exploited. Users should make sure they understand the risks involved with each yield farming strategy and how increasing their exposure to multiple projects (each token, the DEX, the yield farm, the yield farming autocompounder) also increases their exposure to smart contract risk in multiples.
Finally, users should make sure they have a plan. It might be worth holding some tokens instead of dumping them right away. Most experienced yield farmers have kicked themselves when the rewards tokens they dumped over-perform after a few months.
On the other hand, most yield farmers would likely kick themselves if the tokens they’ve been stacking for months hit the basement with a -99% drop. In DeFi, anything can happen.
- The Basics of Yield Farming in Crypto
- How to Start Solana Yield Farming as a Beginner
- What is Leveraged Yield Farming?
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