One of the newest Smart Contract platforms on the block(chain…hehe) just launched their decentralized exchange (DEX). It’s not everyday a new Layer 1 protocol releases a DEX, so this presents a fantastic opportunity if you’ve yet to try your hand at yield farming. You can earn some of those insanely high yields (10,000% and at this writing!) all the Ethereum OG’s always talk about without the insanely high gas fees.
Before we begin I must give fair warning that yield farming is not for the faint of heart. You are pushing into the extremes of financial risk, even by the decidedly aggressive standards of crypto investors. None of this is financial advice, in fact any qualified financial advisor (which I am not) would likely recommend against yield farming with prejudice. Consider this content disclaimed, and join me as we travel further down the crypto rabbit hole.
What is Yield Farming?
Just like in real life farming sounds easy, but it takes a lot of hard work and knowledge to do it well. At a high level, yield farming is the process of providing liquidity to a liquidity pool on a decentralized exchange, and then staking those liquidity pool tokens to earn further yield.
There’s a lot to unpack there, so we’ll take it step by step and use a few examples from the Elrond decentralized exchange. There are two tokens worth discussing (we’ll introduce a third later on, but it’s not necessary to understand this just yet).
EGLD: This is the coin that provides Elrond Network Ownership, Utility and Governance. It’s likely the one you bought from Binance or other centralized exchanges when you first encountered Elrond.
MEX: This token provides Maiar Exchange Ownership, Utility and Governance. It’s a newly launched token, and will be used to incentive actions on the Maiar Exchange.
A decentralized exchange relies on liquidity pools to facilitate a swap between one coin or token and another. In our example, it will be used to allow someone to trade EGLD for MEX, or MEX for EGLD. In order for the liquidity pool to function it needs, well liquidity.
That’s where you come in. You can add liquidity to a liquidity pool by providing a pair of tokens to the liquidity pool. That pair must have an equal value of each token. Hypothetically if each EGLD was worth 1,000 MEX your pair could look like 1 EGLD + 1,000 MEX or 5 EGLD + 5,000 MEX.
By providing this pair of tokens to the liquidity pool you will earn a percentage of all trades done, proportional to the share of liquidity you have provided to the pool. This compensates you for the risk you take when providing liquidity.
Risks Of Providing Liquidity
Assuming the decentralized exchange and smart contracts it uses are well secured, there are at least two additional risks you need to be aware of when you provide liquidity.
As you recall, you provide liquidity with a pair of tokens, EGLD and MEX. The first risk is actually holding those tokens. Like any cryptocurrency, their value will fluctuate, and by fluctuate, I mean it not only goes up, but also down. If the value of the token goes down then your overall value in US Dollars will be less.
The second risk is the byzantine concept of impermanent loss. The full nuances of impermanent loss are well beyond the scope of this article. The important thing to be aware of is that not only can the value of the tokens change compared with the US Dollar, but the value can change relative to each other.
Your liquidity pair always needs to have 50% of it’s value in one token, and 50% in the other token. It automatically rebalances to achieve this ratio. This rebalancing means you may end up with fewer of one token or another. For example if the value of EGLD goes up, and MEX stays the same, you will have fewer EGLD.
Did I mention this wasn’t for the faint of heart? Seriously, if you’re not comfortable with your investment going to zero you should reconsider liquidity farming.
What Is Liquidity Farming (Actually)
When you provide liquidity to a liquidity pool your EGLD/MEX pair will earn additional MEX for each transaction in the liquidity pool, based on the proportion you have contributed to the liquidity pool.
But that’s just the beginning.
You can also stake this pair to earn additional yield. By staking the pair you help to ensure the DEX continues to have sufficient liquidity. On the Maiar exchange you will incur a small penalty of 1% if you unstake within 72 hours. This encourages those who staked to keep providing liquidity.
The Maiar Exchange also includes a significant yield powerup if you choose to earn yield in ‘Locked MEX’ instead of MEX. You will earn 2x yield by choosing to earn in locked MEX that gradually unlocks over a year. This helps ensure the price stability of the MEX token.
Three Ways to Earn Yield on the Maiar Exchange
We’re getting to the how-to soon, promise! There are three ways to earn yield on the Maiar Exchange:
- Provide Liquidity – Provide equal value of EGLD and MEX to a liquidity pool. Earn 0.25% per trade proportional to your share of the Liquidity Pool
- Stake Token Pair – Stake your EGLD/MEX pair to earn additional liquidity mining rewards. These rewards will be highest at the launch of the DEX, so get in early to get the best rewards.
- Earn in Locked MEX – Elect to earn in Locked MEX instead of MEX to double your APR.
If you would like to more information on the Elrond DEX I highly recommend this comprehensive Master Class Video. You’ll learn everything you need to know about the Elrond DEX.
Now, we’re ready to farm some yield!
How To Earn Yield With Elrond Defi
To start earning yield with Elrond Defi you need to follow these steps:
- Swap some of your EGLD for MEX
- Provide Liquidity to a Liquidity Pool
- Stake Your Liquidity Token Pair in a Farm
Head over to the Maiar Exchange at https://maiar.exchange/ to get started. Make sure to doublecheck the URL if you’re typing it – undoubtedly scam websites will popup before long, so always be on your guard!
You will see a screen similar to the below. The first step is to connect your wallet by clicking ‘Connect’ in the top right. You can connect your Maiar app, Hardware Wallet or Elrond Web Wallet.
Swap EGLD for MEX
The first step is to swap EGLD for MEX. Click Swap at the top of the screen. You will see a fairly standard token swap interface. Since you likely don’t have MEX, this will let you swap some EGLD for MEX.
Don’t swap more than half your EGLD, since you’ll use the other half in the next step to provide liquidity. Choose an amount you’d like to swap, click swap and sign the transactions.
As the Maiar Exchange is still very new, the price of MEX is highly volatile. You can set how much slippage you will tolerate as well before swapping. Slippage is basically how much the price can change and the transaction still go through as a valid transaction. The default is 1%. If you get a lot of failed transactions you could try increasing it.
You’re not yet earning any yield. In order to earn yield you’ll need to provide liquidity. Click the Liquidity tab, and you will be presented with a screen prompting you to add liquidity. Click Add Liquidity.
You will then be able to add liquidity. Select EGLD for the first option, and MEX for the second option. EGLD/USDC is left as an exercise for the reader – watch Wesley’s video and you’ll get a good overview.
Once you have selected the EGLD/MEX pair you can decide how many tokens you would like to add to the liquidity pool. Since I didn’t have much other use for MEX I just opted to max my MEX and it will match the appropriate amount of EGLD to balance the pair.
Slippage applies in a similar fashion here as it does to the swap. Click Add Liquidity and sign the transactions.
Back on the My Liquidity tab you will see the new liquidity pair you just created. You’ll notice a new token, the LP token, which represent your EGLD/MEX token pair. Right now you are earning yield from providing liquidity. And you can earn more by staking your LP tokens.
When staking your LP tokens you can choose how many of them to stake by dragging the slider, and also whether you would like to lock your MEX rewards to receive ‘Locked MEX’, which will double your APR.
Click Stake and viola! You’re earning all the yield from Elrond Defi.
Now comes the fun part, harvesting profit! If you started participating early on you’ll likely see rewards quickly accumulate, and in real time! Once your earned MEX is more than $5 you will be able to harvest your profit to get your MEX rewards.
Once you have MEX you can choose to start from the beginning and pair it with more EGLD to more liquidity again, directly stake your MEX, or swap your MEX back to EGLD. If you opted for Locked MEX you will be able to do the first two, but you won’t be able to swap it back to EGLD. After all, it’s locked for a reason 😀
Yield farming is not simple or straightforward, but it can be rewarding. Congratulations for making it this far, and if this is your first time farming yield, for starting a fun and potentially lucrative journey!
If you have any question please drop a comment down below and I’ll answer as best I can.
May the sun shine on your crops and your yield be blessed with abundance!