Disclaimer: I am not a financial advisor and this article should not be considered investment advice, it is for educational purposes only. Do your own research before investing into anything!
What is Harvest.Finance?
Harvest.Finance was launched in September of 2020 by some anonymous developers and had no pre-mine, no ICO, and no venture capital. The initial supply was zero and there will only be 690,420 $FARM tokens in total, created over a period of 4 years at a rate of 4.4% a week. By offering $FARM tokens to people who provided liquidity, Harvest.Finance was able to fund itself into existence from nothing. It was designed to be a cooperative of yield farmers who pool their resources to make the entire community stronger and richer. Due to lower Ethereum gas fees, it makes yield farming more accessible to the "little guy", who might not have enough capital to handle higher transaction costs on other platforms. On some other platforms, if you wanted to compound your profits, then you would have to spend a bunch in gas fees to take your profits out, switch them back into your initial asset, and restake them into whatever pool you were using. This is more of an issue today then ever before with gas fees averaging over $20 per transaction! Harvest Finance fixes this with a part of their code called "DoHardWork" which automates this process once a day while saving on gas fees. The power of this cannot be understated, every bit you save on gas fees is more money being compounded exponentially for you. Harvest.Finance makes yield farming easier, cheaper, and more lucrative. It continues to grow every day, but it can be intimidating to a new farmer. There are so many different liquidity pools, which one should you use?
What's the best liquidity pool?
Where on Harvest.Finance should a first time farmer go to grow some tendies (that's money) with relatively low risk? If you're just starting out as a farmer, you don't want to lose a bunch of capital on your first attempt, after all. I think the best strategy for the beginner farmer is a two pronged approach. First decide how much you want to invest and make sure you are comfortable with the small but real risk of losing the entire amount if there is a black swan event. Also this amount needs to be significant enough to make the gas fees worth it. Although Harvest.Finance helps you save a lot on gas fees, there is still the cost to deposit into the platform, and if you only put in $100 you're going to spend so much on gas it will take a long time to make any profit. A good amount to start with would probably be about $500. I would put half of it into the $USDC pool and half of it into the $FARM profit sharing pool. Since these are both one asset pools, you don't have to worry about the risk of impermanent loss(see below for an explanation). The capital that's in $USDC will remain stable, since its a stable coin, but the reward is still decent at 43.79% APY currently. The low risk of the $USDC pool will compensate for the riskier half of your investment that's in the $FARM pool. This is kind of like raising chickens on your farm as well as growing a crop, if a drought comes and ruins or reduces your crop, you'll still have plenty of eggs.
With this two pronged approach you would be getting the best of both worlds, stability and growth. By investing in the $FARM pool, you get to participate in the growth of the platform (if it continues to grow, which I think it probably will), and share in it's profits. Instead of struggling all alone trying to grow some sad looking potatoes or something on your own tiny farm, you can just invest in the entire farming community and share in the bigger farmer's tendies.
The $FARM profit sharing pool is a very popular place to park $FARM tokens. In fact almost 3/4ths of the entire token supply is currently staked there. The APY is currently 76.12% which helps explain why it is so popular. Every single day 70% of each pool's earnings are distributed back to the liquidity providers and the other 30% is used to buy $FARM tokens to be distributed back to those farmers who are smart enough to stake $FARM tokens. Staking in the $FARM pool is kind of like putting your investment in all the different pools on Harvest.Finance at once, because some of the profits from each of them go into buying $FARM to reward $FARM stakers. This is a great way to easily diversify your investment and another reason the $FARM pool is one of the best pools to use.
What In The #$%@ is impermanent loss?
One of the biggest risks of liquidity pools is called impermanent loss. This is only a risk in pools where there are two different assets that might decouple from each other. If its two versions of a stable coin or different versions of the same coin then impermanent loss is usually not a risk. The only active pools without risk of impermanent loss on Harvest.Finance are the single asset pools, but on other platforms an example might be the $USDT/$USDC pair or the $RBTC/$TBTC pair. This is because the price difference between the two assets will always be minuscule(unless a black swan comes swooping in). The price difference between the assets is what causes the impermanent loss. If you have $1,000 and you put it into the $SUSHI-$ETH pool on Harvest.Finance, you will start out with exactly equal amounts of $SUSHI and $ETH based on their USD value at the time of entry. If $SUSHI is at 14 dollars and $ETH is at $1,700 you would have 0.294117 $ETH and 35.714285 $SUSHI at the start. Imagine the price of $SUSHI goes up 10% and the price of $ETH only goes up 5%. Because AMMs(Automated Market Makers) like the pools on Harvest.Finance are disconnected from external crypto markets, the difference in price creates an arbitrage opportunity. Arbitragers have an incentive to come in and sell $ETH for $SUSHI until both sides are equal in dollar amount again. This profit opportunity for the arbitragers comes out of the liquidity provider's pockets. This is why the yield on volatile pairings is so much greater than stable pairings, because the yield is supposed to hopefully make up for and exceed the impermanent losses. The reason it is called an impermanent loss when this happens is because it doesn't become permanent until you withdraw your funds from the pool, and theoretically if the prices of both assets return exactly to where they both were at the time you invested, then your impermanent loss disappears. If one of your assets moves significantly more than the other one, this can cause significant losses to your initial investment that might not be covered completely by the yield you earn. One of the most important reasons why I would choose the $FARM and $USDC pools is to avoid this risk completely.
Read This Part!
REMEMBER DON'T EVER INVEST WHAT YOU CAN'T AFFORD TO LOSE! Harvest.Finance isn't the place for you to park next months rent until you need it, it's a place for risk capital and risk capital only. There is always the chance of a black swan event happening and you losing everything, although I think this chance is relatively small and the reward is more than worth the risk in my opinion. What is a black swan event? It is an unpredictable event that has a negative effect on your assets. Some examples would be; a bug in a smart contract, a hack, or people could just get so sick of high gas fees that they stop using $ETH based DeFi altogether and migrate to a more scalable blockchain (although this is supposed to be fixed by ETH 2.0).
My Conclusion
So is Harvest.Finance a good place to invest some capital? From what I've seen so far I think it is. Its kind of like a decentralized hedge fund for the people, and I would feel comfortable putting some of my crypto to work on the platform. After all, one of the best things you can do with your crypto assets is to make more crypto with them, and yield farming is an excellent way to do that. Exponential growth is a wonderful thing (in finance at least, not so much in some other areas of life such as viruses or rats) that can change your entire life if you know how to use it. The longer you leave your investment in the pool, the more you will earn, and the faster you will earn. One of the main benefits of Harvest.Finance is that it does the work of compounding for you, letting your tendies grow and grow automatically. It's like hiring a few robots to work your farm for you while you relax on the couch and watch Netflix. I have a feeling that once the mainstream figures out just how much they can earn on Harvest.Finance compared to letting their fiat rot in a savings account that earns less then 1% interest, $FARM tokens will be much more valuable and very hard to get.
*I originally published this on my Publish.0x blog
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