Step-by-Step Guide to Yield Farming on Compound and Uniswap

Introduction

In late May 2020, decentralized lending platform Compound introduced its governance token COMP alongside a liquidity mining incentive program. This move quickly propelled Compound into the spotlight, surpassing MakerDAO as the leading DeFi lending protocol. At its peak, COMP’s price soared to $372.27, highlighting the explosive growth of decentralized finance (DeFi).

The success of Compound injected new energy into the DeFi ecosystem, inspiring numerous projects to adopt similar liquidity mining mechanisms. As a result, DeFi’s total market cap surged from $10 billion in April 2020 to over $70 billion within three months.

With DeFi’s rapid expansion, many tokens have delivered 10x or even 100x returns, sparking widespread interest in yield farming. This guide explains:

1. What liquidity mining is
2. How to participate in Compound and Uniswap yield farming
3. Key risks to consider

What Is Liquidity Mining?

Liquidity mining (Yield Farming) is a token distribution mechanism designed to boost liquidity for decentralized protocols. Unlike Bitcoin mining, which secures the network and distributes BTC, yield farming incentivizes users to deposit or borrow assets in exchange for rewards.

Why Liquidity Matters

• Liquidity ensures efficient trading with minimal price slippage.
• Platforms with deep liquidity attract more users, creating a positive feedback loop.
• Poor liquidity leads to extreme volatility, discouraging participation.

How It Works

DeFi projects like Compound and Uniswap reward users for:

• Supplying assets (e.g., ETH, stablecoins) to lending pools.
• Providing liquidity to automated market maker (AMM) pools.

Yield farming also helps projects bootstrap adoption—similar to FCoin’s “trade-to-mine” model.

Popular DeFi Platforms Offering Yield Farming:

• Compound
• Uniswap
• Balancer
• Curve
• Yearn Finance

How to Farm Yield on Compound

Overview

• Protocol: Decentralized lending/borrowing on Ethereum.
• Rewards: COMP tokens (50% to suppliers, 50% to borrowers).
• Daily Distribution: ~2,880 COMP (over 4 years).

Step-by-Step Guide (Using imToken Wallet)

1. Access Compound: Open imToken → "Market" → "Compound."
2. Supply Assets: Select "Ether" → Enter amount (e.g., 0.01 ETH) → Confirm.
3. Receive cTokens: After depositing ETH, you’ll get cETH (interest-bearing ERC-20 tokens).
4. Earn Rewards: Hold cTokens to accrue interest + COMP.

👉 Maximize your DeFi earnings with these strategies

Pro Tip

cTokens (e.g., cDAI) can be reused in other DeFi protocols (e.g., Uniswap pools) to stack rewards:

• Lending interest + COMP + trading fees.

How to Farm Yield on Uniswap

Overview

• Protocol: Decentralized exchange (DEX) with AMM pools.
• Rewards: 0.3% trading fees distributed to liquidity providers (LPs).

Step-by-Step Guide (ETH/AMPL Pool Example)

1. Access Uniswap: Open imToken → "Browse" → "Uniswap."

2. Add Liquidity:

   • Click "Pool" → "Add Liquidity."
   • Select token pair (e.g., ETH/AMPL).
   • Approve token spending → Confirm deposit.
3. Receive LP Tokens: These represent your share of the pool.

Automated Market Maker (AMM) Explained

Uniswap uses the formula:

X (Token 1) × Y (Token 2) = K (Constant)

Example:

• Initial pool: 10 ETH + 100 AMPL (K = 1,000).
• Trader swaps 6 ETH for AMPL → Pool adjusts to 15.982 ETH and 62.57 AMPL (K ≈ 1,001 after fees).

Risks of Liquidity Mining

1. Smart Contract Vulnerabilities: Hacks (e.g., Curve, Lendf.Me) remain a threat.
2. Liquidation Risk: Volatile markets can trigger undercollateralized loans.
3. Governance Disputes: Community splits (e.g., Yearn Finance fork).
4. Speculative Bubbles: Many DeFi tokens are overvalued.
5. High Gas Fees: Ethereum transactions can cost more than small deposits.

👉 Secure your assets with trusted platforms

FAQs

1. Is yield farming profitable?

Yes, but returns vary. High APYs often come with impermanent loss or volatility risks.

2. What’s the minimum investment?

No strict minimum, but gas fees make small deposits inefficient.

3. How do I track rewards?

Use tools like Etherscan or DeFi dashboards (e.g., Zapper.fi).

4. Can I lose money?

Yes—via smart contract bugs, market crashes, or failed protocols.

5. Which wallet is best?

MetaMask, imToken, or hardware wallets (Ledger) for security.

Conclusion

DeFi is still in its early stages, and while liquidity mining offers lucrative opportunities, it’s critical to:

• Diversify across protocols.
• Audit projects before investing.
• Monitor risks like gas fees and governance changes.

What’s your take on DeFi yield farming? Share your thoughts in the comments!