Exactly 1 month ago, I kicked off an ambitious experiment. The goal was to demonstrate an alternative path to earn from crypto — something different from the far more popular speculative trading, or airdrop hunting. My proposed solution was LP farming, and over the last 31 days, I’ve generated over 6% yield from ₱5M ($89k) in capital via this semi-passive investment strategy.
Now, the LP farming strategy has existed since 2020, but it's only been more recently that the technology and support tools have matured to the point where (I think) you can now do this professionally.
So how does it work?
It's actually quite simple: decentralized exchanges are basically online marketplaces, requiring both customers and suppliers.
Customers are the regular users who want to trade BTC for ETH, or USDC for SOL, and pay a percentage-based trading fee accordingly (0.04% to 0.1%, typically). In order for those transactions to be possible, someone needs to supply the other side of the trade — the ETH, or the SOL, or whatever the other token is.
Those suppliers earn the fees that result from the trade.
Those suppliers are us — the Liquidity Pool farmers.
So on August 1st, I split a total of ₱5M ($89k) worth of crypto between a BTC/ETH position on Aerodrome and a SOL/USDC position on Orca. Every day since then, I've been writing about the earnings, the challenges, the drawbacks, and the solutions. I can't really summarize the whole journey here, but if you want to see my farming diary, I've made my Google doc publicly viewable.
After 31 days, the yield is over ₱360,000 ($6,300) in fully-realized gains, which is a bit over 6%. (Or 72% gain, annualized.)
The principal ₱5M is still intact, plus or minus a few hundred dollars. We're talking about volatile assets here, so the principal has gained or lost as much as 10% throughout the month, and it will continue to fluctuate whether I keep it in the farm or not. That’s just the nature of crypto.
We were lucky that, as of this writing, we're nearly back at the exact principal amount that we started at, but I don't expect that to happen when we revisit this again a month from now. I also don't expect us to hit the same 6% profit next month because the earnings are based on how much trading activity there actually is on the DEXs we’re supplying.
The best thing about having an LP farm is that you harvest a little bit everyday. In my case, ₱11,000 ($200) on average everyday.
I was looking at a friend’s Potato Corner franchise recently and thinking about how fun it must be to have cashflow at the end of every business day. LP farming is somewhat similar — you can also harvest your yield daily, or even hourly — although it’s admittedly lacking the fragrance of deep-fried carbohydrates. Did you know that a Potato Corner franchise costs ₱800,000? If you can net ₱2,000 per day, it actually outperforms this LP farm by a bit, but I’m not sure I would enjoy all the real-world logistics. I’ve always been more of a click-buttons-on-the-screen kind of entrepreneur.
As you can probably guess, the LP earnings are relative to the size of the principal. If you came in with ₱500,000, then you would average ₱1,100 daily (assuming you did exactly the same things I did).
… Or you could be bringing in ₱110,000 daily, if you were a DPWH contractor and supplied ₱50M. 😅
For many people, 6% earnings in a month is insanely good. That's 11x better than the best peso savings instruments we have in this country. For some crypto people, it seems small, because they could've traded that ₱5M aggressively and generated a heck of a lot more profit.
(Of course, they could've lost most of it also, so there's that.)
To me this feels like a solid way to generate revenue from the capital you already have. It’s not a totally passive investment because you do have to make some quick decisions every now and then, but it’s nowhere near as stressful as day-trading. I’ve spent a lot of time documenting my process this month, but if I were just managing the farm, I’d say it’s only 2 hours of work each week.
This was supposed to a one-month experiment and my original goal was just to hit at least $1,800 (₱100,000) in order to call it break-even. Given that we blew past that point very quickly and are now in a very profitable range, I'm going to just keep going and see how far we can take it.
Critically, I'm not going to compound my earnings back in to the principal. This seems counter-intuitive, but my instinct is telling me that compounding would destroy the earnings in the event of a multi-day downturn. It's a complicated issue, and I'm sure many farmers will argue the other side of that easily. But for now, all I do is harvest my earnings as USDC every day or so, and then stuff them into a 12% p.a. yield account on Nexo, and that's it. Seems to be working fine so far.
Catch you all in the next one, cryptofam!
Just wanted to add that the APRs are going to be highly correlated to volume that goes through the LP. In bull market (e.g. the past 6 months, pretty much), there's tons of liquidity in the market so volume is very high. Not so much in a bear market.
That said, LPs are a great way to earn passively during the lull of the bull & bear market as prices tend to chop sideways (hence keeping your positions active, assuming CLMM). But during the ramp up / wind down of a bull and a bear market, respectively, CLMM LPs is just a PITA as you have to "baby" the ranges to make sure that your LP doesn't go out of range.
I've also used CLMM LPs as kind of an on-chain take-profit / stop-loss mechanism by creating an LP just outside of current prices. That way, I only need to provide the token I'm "selling".
For example, if the current SUI price is $3.20 and I create a SUI/USDC LP at 3.50 to 4.00, if SUI reaches 4.10, all of my SUI becomes USDC with average sell-price of 3.75 (middle of the LP range). Because the LP is out of bounds, I only need to provide SUI when creating the LP.
If I don't take it out and SUI reaches 3.49 again, then all of my SUI is back (and some because of fees).
The same works the other way, so it becomes a buy low mechanism assuming you close off the LP by the time it falls through the bottom of the range.
Good article. LP farming is also my favorite strategy in the DeFi world: easy to understand where the yield came from, no trading needed, very profitable. Good luck with your investments and keep aware of Impermanent Loss!