In previous articles, we’ve mostly focused on how the Brink platform will benefit institutions and drive growth in DeFi. Here, we’ll discuss how Brink will help the average user minimize risk and maximize returns from Yield Farming.
What is Yield Farming?
Yield farming allows users to earn passive income by providing liquidity to AMMs (Automated Market Makers) like Uniswap. In exchange for providing liquidity, yield farmers receive fees from each transaction on the AMM (generally 0.03%), and they often receive rewards from another source, like protocol-specific incentives.
Problems with Yield Farming
The two main challenges that DeFi users face when yield farming is that it’s time-intensive and it exposes the farmer to impermanent loss. We’ll be using Harvest.finance to showcase this, but you can apply this article to almost any other yield farming protocol. Harvest allows users to farm across several different assets like stablecoins, BTC, or ETH. For the purposes of this article, we’ll be looking at the MIC-USDT pair. Users that enter this pair stake an equal portion of USDT, an established stable coin, with MIC (Mithril Cash), an unproven algorithmic stablecoin.
Time-Intensive
Entering this liquidity pool takes the following steps:
- Purchase equal amounts of USDT and MIC
- Supply them as liquidity to Sushiswap and receive LP tokens
- Navigate to harvest.finance and ‘Stake’ those LP tokens
- Claim rewards in the form of $FARM (Harvest’s unique rewards token)
At this point, the user must then decide between three time-consuming strategies. They can (a) continuously sell the reward token for profit, (b) stake the reward token itself in a new staking contract, or (c) sell the reward token and add more liquidity to Harvest by acquiring more LP tokens. Option A is the least risky, while B and C carry additional risk. Whatever strategy the user chooses, this a very hands-on, manual process. As long as the yield farmer is still locked in the liquidity pool, they must monitor their assets.
Impermanent Loss
Aside from a rug pull, impermanent loss is the most significant risk that a yield farmer faces. Simply put, impermanent loss occurs when the value of one or both of the underlying tokens in the liquidity pool changes when compared to the price at which the tokens were deposited. If you’re not familiar, it’s worth reading up on this before apeing into a high-yield farm. It’s also essential to use an advanced impermanent loss calculator to price out potential scenarios.
Impermanent loss can quickly eat away or entirely erase a yield farmer’s profits or push the farmer into the red. To avoid this, yield farmers must continuously monitor the liquidity pools they’re invested in and the underlying assets.
Brink plans to solve these problems by automating many aspects of yield farming
At Brink, we are building critical infrastructure for conditional orders on DeFi. Aside from traditional conditional orders like limit orders and stop losses, we’re also going to add DeFi native conditional order types. We plan to release the following three features by allowing users to enter into liquidity pools through the Brink infrastructure.
Stop Loss on Impermanent Loss
The Brink platform will consistently monitor for impermanent loss. If the deposited value dips below the farmer’s pre-selected threshold, the entire position will be liquidated and converted to a stablecoin. We believe this will help give farmers peace of mind and reduce their workload since it removes the need to continually monitor their investments.
Limit Orders on Rewards
Generally, farmers must manually liquidate their rewards and decide what to do with them. With Brink, users will be able to choose to automatically liquidate their rewards through the Brink platform after the rewards have reached a selected threshold. This will allow farmers to invest passively and will help them earn back their principal investment ASAP or redeploy capital elsewhere.
Automated Compounding
At Brink, we’ve noticed that different yield farms display their current yield in APY, which factors in compounding interest and is often extremely misleading. Check out Harvest’s advertised yields below:
Unfortunately, these aren’t the actual rewards that someone who enters any of these pools receives. Yield farmers are paid out rewards in Harvest’s $FARM token, which is an entirely separate token and must be manually withdrawn from the platform. If you wanted to achieve the advertised APYs, you’d need to continuously claim $FARM and then stake it in the Harvest platform again. This is time-intensive and gas-intensive.
At Brink, we plan to launch an auto-compounding feature that automatically liquidates reward tokens and reinvests them back into the protocol. This will allow farmers to actually earn the stated APY.
Help us decide what to launch first
Because Brink is a community-driven project, we want to see which service would be most helpful to you. Please click here if you’d like to vote!
About Brink
At Brink, we are building critical infrastructure for conditional orders on DeFi. Brink is a fully permissionless, decentralized, and community-driven project that allows users to execute conditional orders against any on-chain liquidity source.
Brink Ninja Beta
Our ninja beta app is live at brink.ninja. The beta is currently closed to users that meet certain criteria for early adopters. Talk to us about joining.
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Disclaimer
We’ve done our best to deploy secure code, but Brink has not been audited by a 3rd party. Like any Dapp, use caution, and be aware that there is always a risk of fund loss.
