Yield Farming: Safe & Smart Strategies for Beginners

This guide is part of the “Guide to Yield Farming” series.

The idea of earning a passive income in crypto is one of the main reasons decentralized finance (DeFi) exploded in popularity. Unlike a savings account at your local bank paying you only 1% annually, yield farming provides returns that sound much better in today’s age of increased inflation. For people new to crypto, this world of liquidity mining, lending, and staking is exciting but also intimidating. Don’t worry, we are here to make sense of all this and more, we’ll go over terms like APY, impermanent loss, and liquidity in a way that’s easy to understand.

We’ll start with a step-by-step beginner checklist, and then move into strategies that have been tested and proven to work in the past. Think of this as your entry point into yield farming, we have structured everything in a way to be safe and forward thinking.

What is yield farming?

Yield farming is a way for crypto holders to earn extra income by putting their assets to work on decentralized finance (DeFi) platforms. Instead of just holding their tokens in a wallet, investors deposit them into smart contracts that run lending markets and liquidity pools. In return, the initial investors earn rewards, interest, or bonus governance tokens. 

This is the return that is often compared to interest at a bank, but the yields in crypto are much higher, ranging from single digits to triple digits in rare cases. The tradeoff is risk, specifically in: smart contract bugs, impermanent loss, and volatile reward tokens. This means that yield farming isn’t free money, but a strategy that requires research and active management.

5-step yield farming checklist

Before diving into specific strategies, beginners need to understand the whole process. This 5-step yield farming checklist lays out the perfect roadmap to getting started in yield farming and earning your first interest payment from crypto yield farming.

Step 1: Set up a Web3 wallet

Your first tool is a Web3 wallet. Web3 is a new kind of internet that uses blockchain so people can own and control their money, data, and online activity directly (instead of corporations).  

Popular non-custodial wallets include MetaMask, Trust Wallet, and Phantom (for Solana). These wallets let you hold crypto in your control, interact directly with smart contracts, and connect directly to yield farming platforms. 

Write down your recovery phrase offline, preferably in more than one place. You want to keep this safe, you are now in charge of your funds security. The golden rule is not your keys, not your crypto. For larger balances, we recommend using a hardware wallet (Ledger, Trezor).

Step 2: Acquire cryptocurrency on an exchange

To farm yields, first you’ll need to acquire the right assets like ETH, stablecoins (USDC, USDT, DAI), or blue-chip tokens such as WBTC. The easiest way to buy them is on a centralized exchange like Coinbase or Binance, then transfer them to your Web3 wallet. 

Always double-check the blockchain network and your wallet address details before sending funds, since any mistakes made here can’t be reversed. Once you click send, that’s it, there is no customer support chat to reverse the transaction.

Step 3: Choose a reputable DeFi platform

This is where most of the mistakes happen. We recommend using yield farming platforms with proven security, high liquidity, and good community trust. Well-established names are Aave (they do lending and borrowing), Compound (the lending market pioneer), and Uniswap (a decentralized exchange). 

Always do your own research (DYOR), check for audits, look up the total value locked (TVL), and check out what the team is like. A legit DeFi platform team should have transparent identities with verifiable experience in blockchain or finance, a history of delivering working products or code, and a strong track record of engaging openly with their community. 

Signs of a good platform are audited smart contracts (CertiK, Trail of Bits), backing from reputable investors (the bigger the better), and consistent updates. All together, that shows long-term commitment. 

Step 4: Connect your wallet and deposit tokens

After selecting a platform, click the “Connect Wallet” button, which is often located in the upper right corner of the website, to link your Web3 wallet to its app. Your wallet will ask you to approve this connection, and once you confirm, the dApp can interact with your wallet balance. 

You must deposit two tokens, such as ETH and USDC on Uniswap, into a shared pool that traders use in order to become a liquidity provider. You receive liquidity provider (LP) tokens from the platform in return, which serve as a kind of receipt that indicates your pool share and the benefits to which you are entitled.

Step 5: Stake your LP tokens

You can stake the LP tokens you just earned on a number of yield farming platforms to get additional rewards on top of the trading fees you will already receive. These incentives are frequently unique to the platform or come in the form of governance tokens.  

Because cryptocurrency markets can move quickly, it’s critical to monitor your position by looking at the APY, the gas fees you pay, and the actual dollar value of your assets.

Top yield farming strategies for beginners

Alright, now that you’ve set up the basics, the next step is choosing a strategy. These beginner-friendly yield farming approaches balance safety with growth so you can start earning without taking on unnecessary risk no matter how big your starting capital is. We even recommend starting small to double check the strategy and get a feel for things.

Strategy 1: Stablecoin yield farming (low risk, low reward)

USDC, USDT, and DAI are examples of stablecoins that are based on the US dollar. You can avoid the volatility of cryptocurrency markets by lending stablecoins on sites like Aave or farming in stablecoin pools. 

Although yields are modest when compared to riskier pools, stablecoin yield farming is very popular because it almost completely eliminates impermanent loss. Anticipate yearly returns of 4–10%, which are higher than those of any conventional savings account in developed nations.

Strategy 2: Lending and borrowing (low risk)

You can deposit a single asset to earn interest on platforms such as Aave and Compound. You don’t have to provide two tokens, so you avoid impermanent loss entirely. The interest rate is paid by borrowers who use your funds as collateral for loans. Although yields vary according to supply and demand, this is among the safest ways to invest in DeFi.

Flexibility is an additional benefit. Unlike locking up tokens in a pool, you can typically withdraw your money whenever you want, which makes managing positions easier.

Strategy 3: Farming with blue chip assets (moderate risk)

If you’re bullish on Ethereum or Bitcoin long term, then this strategy is for you. Farming with blue-chip assets is a little different, you can put your holdings to work by providing liquidity in pairs like ETH/WBTC. Providing liquidity means putting your tokens into a shared pool that other users will then trade against.

These are considered “blue-chip” assets because they’re more established than the newer tokens. 

Impermanent loss is the primary risk, which arises when the price of one token fluctuates significantly more quickly than the price of another. Your share is then automatically rebalanced by the pool, giving you less of the stronger asset and more of the weaker one. As a result, your gains may be less than if you were to hold both separately. 

The advantage is that, unlike when paired with volatile altcoins, the risk of suffering a significant, transient loss is reduced because ETH and WBTC typically move in the same general direction.

Strategy 4: Aggregators and auto-compounding vaults

You can utilize auto-compounding services such as Yearn Finance, Beefy, or Autofarm if you prefer not to manually harvest and restake rewards. Your deposited assets are taken by these vaults, which automatically reinvest rewards and make the best use of the money to increase yield. 

Pros: Automated vaults save you time and effort by harvesting and reinvesting rewards automatically. Because the rewards are compounded more frequently, your returns can grow faster than if you were doing it manually. In addition to pooling user funds, vaults can lower gas prices when compared to individual transactions.

Cons: If there is a bug or exploit, you are putting your trust in an additional set of smart contracts, which creates an additional point of failure. Additionally, the majority of vaults charge management or performance fees, which marginally lowers your total yield. Therefore, even though they’re convenient, you’re giving up simplicity for a little bit more expense and risk.

Strategy 5: Incentive farming and liquidity mining

When a DeFi project gives out extra tokens to encourage people to add funds to its pools, this process is called liquidity mining. For example, a new platform might reward liquidity providers not only with trading fees but also with its own governance token. 

The idea is to grow liquidity quickly so traders can use the platform more easily. The benefit is that your yields may appear very alluring at first, but there is a chance that these bonus tokens will depreciate after the initial excitement subsides. 

Therefore, rather than depending on this as a source of consistent revenue, it would be wiser to treat it as a short-term benefit that you maximize and sell.

Strategy 6: Examining opportunities at layer-2 and cross-chain levels

Smaller positions may be impacted by Ethereum gas fees. For this reason, a lot of novices try yield farming on the BNB Chain, Polygon, Arbitrum, or Solana. Compounding small yields is more feasible in these networks due to their lower transaction costs. Just keep in mind that more recent blockchains frequently have higher systemic risk and less-tested smart contracts.

Crucial factors related to risk and expenses

Finally, it’s crucial to understand the hidden costs and risks in DeFi, because knowing where things can go wrong will be the difference between your steady gains or sudden losses.

Risk associated with smart contracts

Smart contracts are the foundation of DeFi. On a blockchain, smart contracts are self-executing programs that automatically carry out agreements like sending money or exchanging tokens, without the need for a middleman.

A bug or exploit can drain funds. Even audited projects have faced issues in the past. All jokes aside, there’s no FDIC insurance in DeFi, so risk management is on us the users.

Reward token volatility

Governance or incentive tokens you earn may skyrocket, or they may crash by 90% in a month. If you rely solely on reward tokens, you’re speculating as much as you’re farming.

Fees and gas costs

Ethereum gas fees can eat $10 per transaction during busy times. For small deposits, this kills profitability. Beginners often find better returns farming on lower-cost chains like Arbitrum or Polygon.

Rug pulls, scams, and project failures

Some yield farming platforms launch quickly, lure deposits, then disappear with the money. Others fail due to poor tokenomics or lack of adoption. Be wary of such things. Stick with platforms that have been tested and verified by the market.

Regulatory risk

Governments worldwide are still figuring out what yield farming is and how to regulate it. Rules for things like yield farming, lending, and stablecoins can change at any time, and when they do, it will affect how you pay taxes, what you need to report, and how easily you can use these services. So, if you plan to participate in yield farming you need to be monitoring the news periodically.

Start small, stay safe and grow over time

Yield farming is a powerful new way to earn passive income in crypto, but it’s not free money. Stablecoin yield farming and single-asset lending are what we recommend as low-risk starting points. 

For more advanced investors, becoming a liquidity provider on Uniswap with blue-chip assets and using auto-compounding vaults could increase returns substantially. Here is a final checklist to get you started:

• Start small. Only invest what you’re willing to lose.
• Diversify across strategies, mix stablecoin yield farming with lending and one blue-chip LP position.
• Track everything. Use dashboards like DeFi Llama or Zapper to monitor APY and net profit.
• Take profits. Don’t let everything ride indefinitely, especially if you earn volatile governance tokens.
• Consider DeFi insurance products that cover smart contract hacks.
• Keep learning. DeFi changes weekly.

Prioritize safety and education over chasing the highest yield. DeFi rewards the patient, not the reckless. Start small, build confidence, and let your knowledge compound alongside your returns.