This article will describe how to start yield farming as a beginner. If you missed our previous article about what is yield farming and are unfamiliar with how yield farming works, make sure you check it out to get a better understanding of what will be discussed here.
Rust Has Created a Beginner-friendly Yield Farming Landscape on Solana
When you first begin participating in decentralized finance (DeFi), it can be difficult to figure out how to choose a good yield farm. After yield farming became popular in the summer of 2020 and through most of the bull run, tons of yield farms popped up offering unsustainably high APYs for inflationary tokens representing projects with no real value.
Most of these farms first appeared on Ethereum and then on other Ethereum Virtual Machine (EVM) compatible blockchains. So, if a shady developer wanted to launch a yield farm, all they had to do was copy and paste the open-source code from another project, add a new user interface, and with a little guerrilla marketing, they could attract millions of dollars in liquidity.
Since decentralized applications (dApps) on the Solana blockchain run on a very different kind of code from EVM chains (Rust vs. Solidity), developers must build their Solana projects from scratch. Consequently, there are extremely few projects launching on Solana with the sole intention of yielding inflationary tokens for a quick buck.
Make Sure a Protocol Has Audited Their Code with Third-Party Security Firms
Although Solana hasn’t been plagued by hundreds of fly-by-night yield farming operations like most EVM chains, you should still do your due diligence before yield farming Solana. It can be said there have been few rug pulls in the Solana yield farming community, but projects with unaudited code are still more vulnerable to attackers than if they undergo an audit.
Users approaching yield farming for the first time should play it safe, and they should make sure the projects they interact with are also playing it safe. Some Solana projects have launched their code with the best intentions of building real DeFi utility, but in their haste to enter the market, they’ve failed to properly test and audit their code.
If a project gets hacked due to its exploitable code, you, the yield farmer, will lose your tokens. It might be exciting to get in early on a project that shows a lot of promise and has clearly explained its vision in multiple AMAs. Still, it’s probably best to avoid yield farming opportunities that a trusted security firm hasn’t audited if you’re a newbie.
In this article, all protocols mentioned will have undergone security audits except for Atrix Finance. However, as of July 11, Atrix has publicly stated on their Discord that they will pursue a security audit following the latest updates to their automated market maker (AMM) smart contracts.
A Plethora of Decentralized Exchanges Offer Great Yield Farming Opportunities for Beginners
Some of the oldest and most trusted projects that offer yield farming opportunities on Solana are decentralized exchanges (DEXs). A DEX will provide yield farming rewards to attract liquidity to their AMM, and yield farming with a DEX is a great way to become familiarized with how yield farming works.
For some background information, there are multiple DEXs available on Solana that operate in different ways.
For example, the Raydium exchange and Atrix Finance rely on Serum’s order books as an underlying protocol to facilitate decentralized Solana swaps. In contrast, Orca Solana swaps are facilitated by Orca’s liquidity pools instead of an order book.
While stablecoins can be traded on all the protocols already mentioned, Saber specializes in swapping stable assets. By using an algorithm that increases capital efficiency and reduces price fluctuations when swapping tokens like USDH and USDC, larger amounts of tokens can be swapped with reduced slippage for traders and almost no impermanent loss (IL) for liquidity providers.
What all of these DEXs have in common is that you must take an extra step of depositing your LP token on the site to begin yield farming after you’ve deposited liquidity in a pool. However, Saber is an exception to this rule, as users must navigate to Saber’s sister site, Quarry, to deposit LP tokens to begin earning yield farming rewards.
Step-by-Step Yield Farming for Raydium Crypto Rewards
Let’s look at Raydium yield farming as an example of the multiple steps necessary to begin yield farming on Solana. Raydium crypto rewards, like many of the other protocols mentioned above, can be distributed in the DEX’s native token as well as tokens from projects that want to incentivize users to provide liquidity.
Begin Searching for Yield Farms
First, navigate the Farms page on Raydium to see what kinds of pairs offer rewards. If you’re chasing rewards from yield farming, you should check what’s on offer for different token pairs, and you should be able to discern which pools are best suited for your risk profile by looking at several metrics.
Under the Raydium subsection of farms, you will find pairs solely rewarded with RAY tokens. If you navigate to the Fusion subsection, you will discover liquidity pairs that are rewarded with tokens from other projects. As a beginner, it’s best to avoid the Ecosystem subsection, as these pools inherently carry more risk.
Again, as a beginner, you should look for ways to minimize risk as you start yield farming, and this means doing your own research (DYOR) about the projects for which you can earn rewards for providing liquidity. If you find a token pair with an outlandishly high APR, ask yourself if this APR is high because the pool is new or because other users are avoiding it for some reason.
By checking the total value locked (TVL), you can see how much liquidity other users have provided. It may be tempting to farm a token pair with low liquidity, but remember that this liquidity might be low because the project itself could be the only one providing its own tokens! Therefore, stick to token pairs with high TVLs as a rule of thumb when starting out.
Provide Liquidity for Your Chosen Farm
Once you find a token pair for two projects, or a project and a stablecoin, that you have researched and feel comfortable holding both tokens (much less providing liquidity for), you can start providing liquidity. You begin by swapping for an equal value of each token, and you can do this by selecting the “half” option on the Swap page.
Once you have an equal value of both tokens, navigate to the Liquidity page. Search for both tokens in the upper and lower dropdown menus of the window and enter the amount of liquidity you’d like to provide. Once you’ve done that, check that you’ve read Raydium’s guide to providing liquidity (not a bad idea to read it), and click “Add Liquidity.”
You will receive an LP token as a receipt of your deposit. After you receive this LP token, you can deposit it on the yield farm to begin earning rewards on top of the fees you earn from providing liquidity.
Stake Your LP Token to Begin Farming
Navigate to the Farm page again and find the token pair for which you’ve received an LP token. Click on the token pair, and a dropdown menu will open. Click the button that says “Start Farming.”
A pop-up will open so you can confirm how much of your LP token you want to deposit. By pressing “Max” and clicking “Stake LP,” you will deposit the entirety of your LP token position. You can keep some LP tokens if you want to deposit them elsewhere.
Once you confirm with your wallet that you want to stake your LP token, you will begin earning token rewards. You can watch these rewards accrue in the same tab where you started making your LP token deposit, and if you’d like to claim these rewards, press “Harvest” and follow the instructions.
Maintaining Your Position
Providing liquidity involves several risks. For example, tokens can drop to zero if a project fails, or you can also incur IL if a token increases in value so much that you would have made more money holding the token instead of providing liquidity (see our previous article on yield farming for more about IL).
Yield farming rewards are one way to offset IL, but you cannot rely on rewards alone to bring you into profit. Remember, other users are trying to make a profit from yield farming, and this means some users are probably swapping their rewards into stablecoins to capture that profit. This sell pressure can sharply reduce the value of your token rewards.
Yield farming can be time-consuming if you’re chasing the highest possible ROI. You can help reduce the work it takes to yield farm by using a yield farming calculator in conjunction with an impermanent loss calculator.
Everyone Starts Somewhere Yield Farming and Solana Yield Farms Could Be Your First Step
If you DYOR and create a plan for your yield farming endeavors, you can end up in profit while yield farming on Solana. Sometimes, scoring a profit means waiting for your rewards tokens to appreciate in value, but if you believe in the projects you’re farming, the returns can be massive if you HODL instead of dump your tokens immediately.
Everyone has their own strategy for yield farming, and you’ll most likely form one as you become more experienced with yield farming on Solana. The information provided in this article is not financial advice. You should only use this information as a guideline to better inform your research as you increase your participation in DeFi.
Check out the rest of our yield farming series as we tackle intermediate and advanced farming techniques in other articles.
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