Note: This article is not financial advice. Hubble Protocol does not endorse any of the tokens or platforms mentioned in this article.
Key Takeaways
- Solana offers many opportunities for yield farming.
- Research yield farming opportunities before beginning.
- Every user should develop their own strategies for yield farming and acknowledge risks.
This article will describe how to start yield farming as a beginner. Users should read the previous Crypto Basics article about what is yield farming if they are totally unfamiliar with how yield farming works.
Rust Has Created a Beginner-friendly Yield Farming Landscape on Solana
When users first begin participating in decentralized finance (DeFi), it can be difficult to determine 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 fly-by-night projects.
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 have been few projects launching on Solana with the sole intention of yielding inflationary tokens for a quick buck.
Rust is a difficult language to learn, and there are not many Rust smart contracts out there to copy!
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, users should still do their 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 yield farmers will lose their tokens. It might be exciting to participate early in a project that has clearly explained its vision in multiple AMAs, but it’s probably best to avoid yield farming opportunities that a trusted security firm hasn’t audited as 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 Yield Farming Opportunities for Beginners
Some of the oldest and most prominent 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 liquidity pools, and yield farming with a DEX can be an instructive exercise in becoming familiar 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 with almost no impermanent loss (IL) for liquidity providers.
What all of these DEXs have in common is that users must take the extra step of depositing their LP token on the site to begin yield farming after they’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
Raydium yield farming is 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 to the Farms page on Raydium to see what pairs offer rewards. When chasing rewards from yield farming, users should check what’s on offer for different token pairs, and they should be able to discern which pools are best suited for their risk profile by looking at several metrics.
Under the Raydium subsection of farms, there are pairs solely rewarded with RAY tokens. In the Fusion subsection, there are liquidity pairs 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, users should look for ways to minimize risk as they start yield farming, and this means doing your own research (DYOR) about the projects offering rewards for providing liquidity. If users find a token pair with an outlandishly high APR, they should ask themselves 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), users can see how much liquidity other liquidity providers have deposited. 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 to prevent the chance of becoming exit liquidity.
Provide Liquidity for a Chosen Farm
Once users find a token pair for two projects—or a project and a stablecoin—that they have researched and feel comfortable holding both tokens for (much less providing liquidity for), they can start providing liquidity. Begin by swapping for an equal value of each token, and this can be done by selecting the “half” option on the Swap page.
After acquiring 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 to provide. Once done, users should check that they’ve read Raydium’s guide to providing liquidity (not a bad idea to read the guides for any DEX), and click “Add Liquidity.”
Users will receive an LP token as a receipt of their deposit. After they receive this LP token, they can deposit it on the yield farm to begin earning rewards on top of the fees earned from providing liquidity.
Stake the LP Token to Begin Farming
Navigate to the Farm page again and find the token pair matching the 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 to confirm how many LP tokens users want to deposit. By pressing “Max” and clicking “Stake LP,” users will deposit the entirety of their LP token position. They can keep some LP tokens if they want to deposit them elsewhere.
Once users confirm with their wallet that they want to stake their LP token, they will begin earning token rewards. Users can watch these rewards accrue in the same tab where they started making their LP token deposit, and if they’d like to claim these rewards, press “Harvest” and follow the instructions.
Maintaining Yield Farming Positions
Providing liquidity involves several risks. For example, tokens can drop to zero if a project fails, or users can also incur impermanent loss (IL) if a token increases in value so much that they would have made more by holding the token instead of providing liquidity (see this previous article on yield farming for more about IL).
Yield farming rewards are one way to offset IL, but users cannot rely on rewards alone. Remember, other users are yield farming, too, and this means some users are probably swapping their rewards into stablecoins immediately. This sell pressure can sharply reduce the value of token rewards.
Yield farming can be time-consuming when chasing optimal token pairs and rewards. Users 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 a First Step
If users DYOR and create a plan for their yield farming endeavors, they can try to yield farm on Solana. Sometimes, success can mean holding rewards tokens until market conditions become more favorable; other times, swapping tokens for stablecoins could be a more successful strategy. There's no magic formula, and yield farming outcomes are highly dependent on one's own outlook and goals.
Everyone has their own strategy for yield farming, and most users will likely form one as they become more experienced with yield farming on Solana.
The information provided in this article is not financial advice. Users should only use this information as a guideline to better inform their research as they increase their participation in DeFi.
Check out the rest of Hubble's yield farming series as it tackles intermediate and advanced farming techniques in other articles.
Additional Resources
- The Basics of Yield Farming in Crypto
- What are the Best Yield Farming Strategies on Solana?
- What is Leveraged Yield Farming?
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