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How to Yield Farm on Solana (included Yield Aggregators)

The whole concept of Decentralized Finance (DeFi) started with yield farming.

In yield farming, crypto assets are staked or lent on a protocol to generate high returns or rewards in the form of additional cryptocurrency. Users allocate capital to DeFi protocols which in turn provide services to end-users; the protocols compensate for this liquidity by offering rewards, such as a percentage of transaction fees, interest from lenders, or a governance token. Liquidity is essential for protocols to function (AMMs require pools to form exchange pairs, lending protocols require pools to lend and borrow). There are sometimes fees associated with this service, which are divided between the capital providers (yield farmers) and the protocol.

Furthermore, protocols often provide incentives for yield farmers in the form of token emissions to bootstrap growth of the protocol.

DeFi’s concept of earning steady income on capital was extremely attractive to early users, and it quickly gained traction as more projects and protocols adopted this strategy. It is important to note, however, that there are risks involved in yield farming, as described in this chapter, which illustrates how to navigate the yield opportunities in the Solana ecosystem.

How to Yield Farm #

You should already have a Solana wallet installed (Phantom / Sollet / Coin98 / are good choices) and are ready to do some yield farming. We will use one of the earliest and biggest yield farming protocols – Raydium.

Step 1 — Find your farm #

  1. Access https://raydium.io/farms/
  2. Connect your Solana wallet upon landing
  3. You can browse the available farms and select the one you want to farm.
  4. You will be required to provide liquidity on Raydium in exchange for an equivalent amount of Liquidity Provider (LP) tokens that represent your share of the pool. 
  5. LP tokens can be staked in the farms to receive additional yield in the form of incentives emitted by the protocol.
Farms on Raydium

Step 2 — Act as a liquidity provider (LP) #

  1. In this example, we will use RAY-SOL LP, which offers a 40.51% APR
  2. To begin, we will need to acquire tokens for RAY-SOL LP.
  3. In order to provide liquidity for LP tokens, most protocols will generally require a 50/50 ratio for the pairs used in the farm (with a few exceptions that use other ratios such as 80/20, for example). To provide liquidity in this case, we will have to either swap or already have a 50/50 ratio of RAY and SOL available.
  4. Once you’ve reached a 50/50 ratio, click the Liquidity tab or go to https://raydium.io/liquidity/.
  5. You can choose the pairs you want to LP with from the Inputs. SOL and RAY in this case.
  6. Next, enter the amount of capital you wish to LP at a 50/50 ratio.
Add liquidity to Raydium farm

7. Approve the transaction on your wallet by clicking “Supply.”
8. After you see that the transaction has been confirmed, you will have successfully completed the transaction liquidity and received LP tokens to signify your share of the pool.
9. Your liquidity provider status means that you will automatically earn a portion of all fees from swap transactions in the liquidity pool (On Raydium, 0.25% of every transaction is charged in fees; 0.22% goes to Liquidity Providers and 0.3% goes to RAY Stakeholders).

Step 3 — Staking LP Tokens for additional yield #

  1. Head back to https://raydium.io/farms/
  2. Click Stake LP
Stake LP on Raydium

3. Click Confirm and approve your transaction

Confirm staking raydium

4. You will successfully stake your LP tokens and begin yield farming once your transaction has been confirmed. You will be able to harvest your yield whenever you like.

Step 4 — Harvesting your yield

Harvest yield on Raydium
  1. Click Harvest and approve the transaction
  2. You will receive your yield automatically in your wallet.
  3. You receive RAY tokens by harvesting the farm in this example.

Step 5 — (Optional) Compounding your yield

  1. By harvesting and providing liquidity, some yield farmers compound their yield for stakes again by harvesting and providing liquidity.
  2. Over time, this strategy will increase the amount of yield received.
  3. It is possible to automate this step by using Yield Aggregators (explained below).

Step 6 — Exiting the yield farm

Remove your liquidity from farm
  1. Click the “-” button

2. The transaction will be confirmed if you click Confirm
3. Upon confirmation, your LP Tokens will be unstaked successfully.
4. You must now remove your liquidity from the pool
5. Head back to https://raydium.io/liquidity/. Here you will be able to view the liquidity that you have provided

Raydium total liquidity provided by user

6. Click Remove
7. Select Max to remove all liquidity
8. Click Confirm and Approve the transaction
9. Once it has been confirmed, the underlying tokens will be sent to your wallet. In this case, it will be RAY and SOL tokens.

Risks involved in Yield Farming #

Yield farming is profitable, but what are the risks? On your journey through DeFi, you will come across many projects that offer high yields, such as 4,5 or even 8 figure APYs. Before investing your capital into these farms, we advise caution and thorough research into the mechanics behind yield farming.

Here are the two main risks you should be aware of:

  • Smart Contract Risk– A smart contract is a risk in every project, and yield farming is no exception. In some projects, bad actors attempt to steal or “rug” users who interact with smart contracts. Projects with high APYs, especially those that are new and unknown, are especially susceptible to this.
  • Impermanent Loss Risk – A permanent loss occurs when volatile markets lead to divergence in the prices between token pairs provided by liquidity providers. Due to arbitrageurs changing the ratio of assets in the pool, your profit may be less when you withdraw your percent of liquidity from the pool after accounting for yield than if you directly held the tokens.

Yield Aggregators #

In essence, yield aggregators automate the process of compounding that users would otherwise need to do manually. By investing capital in a variety of yield farms and optimizing the compounding period and gas fees for its users, yield aggregators achieve efficiency. Compounding by an individual user might be economically feasible as the compounded value of yield vs. cost of gas fees might not make the strategy optimal due to the gas fees. As a result, when everyone stakes their tokens together in a yield aggregator, the overall yield harvested increases, as well as the possibility of compounding more frequently, which increases the APY generated.

Using Tulip Protocol the example will show how to aggregate yields using one of Solana’s earliest aggregators.

Step 1 — Find your yield aggregator #

  1. Access https://tulip.garden/vaults/
  2. Connect your Solana wallet when you land
  3. Choose an available farm that you would like to farm from the list.
Tulip aggregator

Step 2 — Provide liquidity and stake #

  1. You will be taken to the respective yield farm for you to add liquidity so you can acquire your LP tokens by clicking on the link next to the farm.
  2. You can then deposit your tokens in the vault once you have completed that step
Provide liquidity on Tulip

3. Once you approve the transaction, you’re done! Your yield will be compounded into LP tokens automatically by the yield aggregator over time.

*Pay attention to the performance fees. Different yield aggregators charge different fees, which will impact the overall yield.

References and Protocols

  1. Orca — Orca is the easiest way to exchange cryptocurrency on the Solana blockchain. Compared to any DEX on Ethereum, this DEX has an extremely low transaction fee and lower latency than any other DEX, all while guaranteeing a fair price.
  2. Mercurial — Mercurial is building new liquidity systems to maximize the utility and yield of stable assets on Solana. As the ecosystem grows, DeFi on Solana will have a wide range of collateralized, wrapped, and synthetic assets. Our most immediate objective is to provide the best liquidity for all the major stable and pegged assets on Solana, which we started with our Mainnet beta.
  3. Raydium — Raydium is an automated market maker (AMM) platform built on Solana where users can swap, trade and provide liquidity to earn yield on digital assets. In contrast with other AMM platforms, Raydium’s provides on-chain liquidity to Serum’s central limit order book, meaning Raydium’s users and liquidity pools can access the order flow and liquidity of the entire Serum ecosystem, and vice versa.
  4. Saber — Saber is the leading cross-chain stablecoin exchange on Solana, providing the liquidity foundation for stablecoins, or a cryptocurrency whose value is pegged to another asset. Saber serves as Solana’s primary cross-chain liquidity network, facilitating asset transfers between Solana and other blockchains. In a Saber liquidity pool, market makers deposit crypto to earn passive yield from transaction fees, token-based incentives, and eventually automated DeFi strategies.
  5. Francium — Francium is a Decentralized Automatic Investment Platform built on Solana.
  6. Tulip Protocol — Tulip Protocol is the first yield aggregation platform built on Solana with auto-compounding vault strategies.
  7. Sunny.ag — Sunny is a composable DeFi yield aggregator.
Updated on January 21, 2022
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One comment

  1. Mostly clear, but you are still talking above those who are just getting into this. Maybe a version that is very basic with explanations for each term would be a good addition to this. Even basic things like “where do I get my SOL or RAY from?” ” Do I need to buy it on an exchange and then put it in my wallet first?” “Can I buy it at the farming site?”

    These seem simple, but they are very real questions for new users.

    Thanks for the write up though.

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*Paid Advertisement. Not financial advice. RugDoc is not responsible for the projects showcased here. DYOR and ape safu.