Overview
Yield farming is the process of deploying capital across DeFi protocols to earn rewards, typically by providing liquidity, lending assets, or staking tokens. However, there are now thousands of DeFi projects across hundreds of blockchains, meaning that finding the best yield is time-consuming, complex and inefficient for the vast majority of users.
This has led to the rise of automated yield farming, where smart contracts and algorithms allocate funds to the most profitable strategies in real time.
Key Terms
- Yield Optimization: The process of maximizing returns by constantly reallocating assets to the highest-yielding DeFi strategies.
- Auto-Compounding: A mechanism that automatically reinvests farming rewards to maximize earnings over time.
- Yield Aggregator: A DeFi protocol that automates yield farming by pooling assets and redistributing them across multiple platforms.
- Vaults: Smart contract-based pools where users deposit funds, and strategies automatically execute yield farming.
- Cross-Chain Strategies: Automated strategies that bridge assets between blockchains to chase the best yields.
How Automated Yield Farming Works
Automated yield farming protocols streamline DeFi investing by actively monitoring yield opportunities and reallocating assets to maximize returns. Instead of requiring users to track and move funds across multiple platforms manually, these protocols use smart contracts and algorithms to execute optimized strategies automatically.
Key features of automated yield farming include:
- Aggregating Yield Sources: The platform continuously scans various lending markets, liquidity pools, staking protocols, and other DeFi opportunities across multiple chains.
- Optimizing for Highest Returns: Algorithms assess risk-adjusted yield by analyzing APYs, platform reliability, and market conditions to direct funds toward the most profitable opportunities.
- Auto-Compounding Rewards: Farming profits, including interest, governance token incentives, and trading fees, are automatically reinvested to maximize compounding effects.
- Mitigating Risk: Some platforms integrate risk management strategies, such as impermanent loss protection, dynamic hedging, or diversification across multiple pools and protocols.
For example, if a USDC strategy determines that lending on Morpho on Base currently offers the highest APR, it will allocate funds there. However, if a different lending protocol on Base (e.g., Aave or Compound) starts offering a higher APR or better risk-adjusted returns, the strategy may reallocate funds accordingly.
Additionally, some automated yield farming projects differentiate themselves by integrating new protocols and networks faster than others, allowing them to capture emerging yield opportunities before they become widely available.
Vaults in Automated Yield Farming
Each Automated Yield Farming project typically has a “vault,” which refers to a smart contract that automatically manages deposited funds to maximize yield. Instead of manually farming rewards, users deposit assets into a vault, which executes optimized strategies. Some also take earnings and reinvest them, a term known as auto-compounding.
For example, a vault might deposit stablecoins into lending protocols like Aave or Compound, automatically harvest interest and rewards, swap them for more stablecoins, and reinvest to maximize compounding returns. Some vaults even adjust strategies dynamically, shifting funds between platforms based on market conditions to ensure optimal yield.
The attached graphic is from Superform, showing two USDC yield farming strategies that use different strategies to derive their yield.
By using vaults, users benefit from automation, gas fee savings (as transactions are batched), and access to sophisticated strategies without actively managing their positions. This makes vaults a powerful tool for passive income generation in DeFi.
Vault can be categorized along a few common factors:
- Asset Class: The type of asset being deposited (e.g., stablecoins, ETH, BTC, LP tokens, LSTs).
- Yield Source: The mechanism by which yield is generated (e.g., lending, staking, liquidity provision, yield farming, restaking).
- Network: The blockchain or layer where the strategy is deployed.
- Risk Level: Some strategies involve low-risk lending on Aave, while others involve high-risk farming with volatile assets or leverage.
Adding Risk Level provides more context because some vaults optimize for safety (e.g., stablecoin lending with low volatility), while others maximize returns with higher risk (e.g., leveraged yield farming).
Key Considerations
- Smart Contract Risk: Automated platforms rely on complex smart contracts, increasing the risk of exploits and bugs. For example, popular Automated Yield Farming project Harvest Finance was exploited for $24M.
- Network Selection: Different blockchains offer varying yields, fees, and protocol support, making network choice critical for automated yield farming. While Ethereum has deep liquidity, high gas fees can make rebalancing costly, whereas Layer 2s and alternative chains provide cheaper transactions but may have fewer farming opportunities.
- Gas Fees & Network Congestion: Frequent rebalancing can result in high transaction costs, particularly on networks like Ethereum with expensive gas fees. This can be mitigated by methods such as optimizing rebalancing frequency or batching transactions.
Automated Yield Farming Key Projects
A few popular Automated Yield Farming projects worth mentioning include:
- Yearn Finance: DeFi’s longest-running yield farming protocol where Yearn Vaults hold user funds and deploy them across various risk-adjusted strategies.
- Beefy Finance: Beefy Vaults deploy user assets across DeFi for yield, and offer both reinvesting and autocompounding on earnings.
- Superform: 800+ earning opportunities, including “SuperVaults” which allow users to optimize yield across 10+ networks with just a single click.
We recommend giving them a try, as that’s the best way to learn about a new concept in DeFi.