How to Yield Farm on BNB Chain

What is Yield Farming

Yield farming is the process of staking, lending, and even borrowing cryptocurrency in return for cryptocurrency rewards. It is one of the main drivers of decentralized finance (DeFi) and is closely related to liquidity mining. Liquidity mining is a major subset of yield farming in which a person lends their liquidity to a platform in return for token rewards. If those two descriptions sound similar, it’s because they are. 

The difference between yield farming and liquidity mining is that yield farming involves a broader range of financial activities. Still, yield farming and liquidity mining are fairly synonymous, and the terms may even be used somewhat loosely as synonyms. The important point to understand is that by locking tokens into a DeFi protocol, a user may expect to make a profit through additional cryptocurrency from their existing cryptocurrency.

Yield Farming on BNB Chain

For users looking to farm on BNB Chain (BSC), there is no shortage of options available. Some of the most popular protocols include ApeSwap, BakerySwap, Venus Protocol, and of course, PancakeSwap.

Let’s take a closer look at PancakeSwap since it is one of the most popular options. The PancakeSwap automated market maker (AMM) can be visited here, but the Farms page is available directly here. 

One of the nice features of PancakeSwap is that it comes with both day and night mode options, so how the Farms page displays will depend slightly on your personal preference.

Before we start to yield farm, we will want to consider which of the farms we want to enter. Here CAKE-BNB sounds like a good bet since CAKE is the native token of PancakeSwap and BNB is the native token of Binance and BNB Chain. Since both tokens are very popular, their respective ecosystems will be quite robust and carry less risk in the longer term.

Here we see that CAKE-BNB will give us an annual percentage return (APR) of 38.07%. That means that if you were to lock up $1,000 of CAKE-BNB liquidity in the protocol for a year, you could expect to receive around $380 in return over a year. Smaller and less well-known tokens may have higher APRs but will probably also carry higher risk.

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Connecting Your Wallet

If you haven’t already done so, you will, at this stage, need to connect your crypto wallet to PancakeSwap. There are many wallet options available for PancakeSwap, including TrustWallet, WalletConnect, and MathWallet, but we’ll use Metamask. Before you use your Metamask wallet with PancakeSwap, you’ll first need to set up BNB Chain on Metamask. If you don’t know how to do that, we’ve produced a helpful guide - “How to Connect MetaMask to BNB Chain.”

That done? Good. Simply click the “Connect Wallet” button in the top right-hand side of the screen and approve.

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Providing Liquidity

Before you lock up any liquidity for yield farming, you must first split your capital between the two farmed tokens. For the CAKE-BNB farm, $1,000 of BNB would need to become $500 of CAKE and $500 of BNB. Use PancakeSwap’s token swap feature to convert $500 of your BNB into $CAKE. Similarly, for the BUSD-BNB farm, you would need to swap $500 of your BNB into BUSD.

Click on the ‘Trade’ page, select ‘exchange’ and swap your assets between the two tokens you wish to farm. You will need to wait until the transaction completes before you move to the next step, but because this is the ultra-fast BNB Chain, that will probably take about as long as it takes to read this sentence.

Now you need to add liquidity to the platform. Above the token swap screen, you will notice a toggle between Swap and Liquidity. Click “Liquidity.” Now enter the numbers of tokens to stake and select “Supply.” A pop-up will appear asking you to “Confirm Supply” - click this, and then also approve the transaction in your Metamask wallet.

Now that you have provided liquidity, you will have your LP tokens or liquidity provider tokens. These tokens are a proof of deposit, similar in some regards to the ticket you receive when you hand over your jacket at the cloakroom of a nightclub.

Now that you have your LP tokens, you want to return to the Farm page, click on the farm you wish to join (in our case CAKE-BNB), and in the right-hand column, you should see a button for CAKE-BNB staked. Click on this, and enter the amount of CAKE-BNB LP tokens you wish to stake. If you want to stake all your tokens, simply click “Max” and click “Confirm.” Once again, you will need to confirm the transaction in Metamask.

Presto, you are now yield farming on PancakeSwap and BNB Chain. While different protocols may look slightly different, the process is largely the same. Once you have gone through the process on one platform, you’ll quickly learn to find your way around others.

We’d be remiss if we didn’t explain one more thing before deciding whether yield farming is for you. Yield farms have some risk factors, especially that of impermanent loss.

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Impermanent Loss Explained

Liquidity pool tokens entitle their holder to a percentage of the liquidity pool.  For instance, if a person places money into a liquidity pool at 10% of that pool, they will receive 10% of the pool when they exit. Over time, the exact nature of what is in the pool may change. This may mean that the liquidity pool is bigger or smaller than when they entered. 

It could also mean that the price of the tokens in the pair has diverged. For instance, one of the tokens may have increased in value while the other token decreased in value. In effect, the tokens separate in value from each other.

Impermanent loss occurs when the price difference between the two locked-up tokens changes too much. Since the pool must remain balanced, traders can remove the appreciating asset in return for the devaluing or stable asset. When the liquidity provider returns their LP token and receives 10% of the pool in return, they may find that the value of what they receive is less than it would have been if they had simply hodled their tokens.

This ‘impermanent loss’ does not necessarily mean the person has lost money. Impermanent loss only refers to the value of withdrawn tokens compared to deposited tokens and doesn’t consider the value of yield faring gains in its calculation.

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How to Yield Farm on BNB Chain

As we explained at the start of the piece, yield farming is a broad topic that involves many different strategies. If you’ve followed this guide, you should now understand some of the basic concepts involving yield farming on BNB Chain. However, there are always innovations in this space and new things to learn. To keep up to date with all the happenings in DeFi, Yield Farming and everything else BSC related on BNB Chain, don’t forget to bookmark BSC News.