How to make it as a DeFi Investor / Yield Farmer: 15 Rules for Success

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How to make it as a DeFi Investor / Yield Farmer... 15 rules for investors & farmers, visually explained 👇 [1/x] (Mega-🧵)

1. Create a plan This is the most important part. Failing to plan = planning to fail Creating a Yield Farming plan means asking questions like...

• How many positions am I comfortable managing? • Which coins am I holding long-term? • What’s my reward harvesting strategy? • What’s my plan for tracking returns? • How much time do I have per week for yield farming?

• Which coins are in my moonbag? • How do I optimize for taxes? • What are my target portfolio allocations? • How often am I harvesting rewards? • How much % do I keep in stablecoins?

2. Choose Coins, then Farms Pick good coins first Then find good places to farm then Not the other way round...

Too many people fall for the trap of buying coins because it's a "high-APR yield farming opportunity" High APR crap is still crap. 💩 Only farm coins you feel comfortable holding.

3. Determine how much time you want to spend on yield farming. Yield farming can be active or passive. Passive is lower yield, active is higher yield. But actively farming takes a LOT of time.

Passive Yield Farming This could be as simple as sticking your coins into yearn / anchor protocol and moving them around infrequently (perhaps once a month or so). Or some safe liquidity pools where you feel comfortable keeping your coins for several months.

Active Yield Farming This is a lot more work, including: • Identify the current trends • Getting into new chains & protocols early • Hunting for airdrops • Tracking your portfolio

• Using more advanced tools like leverage, options, etc • Farming for inflationary tokens and harvesting rewards regularly • Moving coins frequently between transient yield opportunities • Spending MANY hours on twitter, telegram, and discord researching. +++

It's not a binary choice between active and passive - you can be somewhere in the middle. But be honest with how much time you have or wish to commit to spending, and determine how active or passive you wish to be with this knowing the tradeoffs.

4. Have a reward harvesting strategy I'm working on a small thread to explain this in a bit more detail, but generally, you have a few options: 1. Let rewards accumulate. 2. Harvest & swap for stables. 3. Harvest & swap for blue chips. 4. Compound rewards back into the farm.

You should be clear about your reward harvesting strategy. This strategy may be different for different investments.

For example: if a yield farm is paying you in inflationary shitcoins, you may want to harvest & swap for stables every few days. But if a yield opportunity is paying in a coin you are bullish on, you could just let the rewards accumulate.

5. Don’t Farm Shitcoin Liquidity Pairs If you're in an ETH / Shitcoin LP (deposited $1,000 / $1,000), and the shitcoin goes to 0, you also lose your $1,000 ETH.

You may find my past thread on Impermanent Loss useful: twitter.com/shivsakhuja/status/1482188295488430086?s=20

Farming against shitcoins that you are bearish on is very dangerous. It should only be done for short periods if there is a VERY good reason to do so. (ex: Shitcoin has some short-term bullish catalyst ahead, rewards are abnormally high temporarily, etc)

6. Have a High-Level Target Portfolio Allocation in mind I like to break this up into • Stablecoins • Blue-Chips (ETH, BTC, etc) • Medium-Risk (High-Conviction Altcoins) • High-Risk (Moonbags)

For example, a sample portfolio could be: • 20% Stablecoins • 20% BTC • 40% ETH • 15% Medium-Risk Altcoins • 5% High-Risk Altcoins This is just an example - your allocation depends on your strategy, plan, goals, situation in life, etc.

But you should always: • Have some stablecoins • Have some blue-chips • Have some moonbags

7. You should have a VERY good reason to invest in an altcoin ... And no, high APR is not a good enough reason. Most altcoins underperform BTC & ETH long term. Many die a painful death - could be a sudden blow or a slow bleed over a long time.

In bull markets, you can throw darts at the coin rankings to build a portfolio, and chances are it’ll make money. But if it doesn't make more money than BTC or ETH, then what was the point of the time you spent and the risk you took.

And it's MUCH harder to pick good altcoins in a bear market. So make sure you have a really good reason to invest in an altcoin over just investing in Bitcoin or Ethereum. Pick coins with strong utility, narratives, demand drivers & tokenomics. twitter.com/shivsakhuja/status/1505288833700487168?s=20

8. Moonbags can make you rich I'm all for playing it safe, but make sure you have at least a small % allocation into moonbags. These are coins that: • You are fundamentally bullish on long-term • Have done deep research on these • Are typically low-medium market cap

Blue-chip coins like BTC and ETH will probably do well, and give great returns over the years, but it's really hard for such large market cap coins to 100x. Moonbags can reasonably go up 10-100x and still have realistic market caps.

9. Portfolio Allocation & Farming strategy doesn't have to be the same in bull and bear markets You can take more risk in bull markets. This is when your moonbags will (hopefully) rocket. But when the music stops and we go bear, you want as little risk as possible.

Bear markets can last years. That's years that you have to watch your net worth decline every day. Make sure you have a farming strategy that can survive a bear market. Personally, I like buying high-conviction HODL coins during the bear market.

If the majority of your portfolio is long-term HODLs, you don't have to change it as much based on market conditions. That's good because you can't predict when markets will turn bull or bear. And you can sleep worry-free. I call that an "evergreen" portfolio.

10. Always have stablecoins, and farm the shit(coins) out of them Stablecoins are a great way to collect low-risk interest. And it's always useful to have dry powder sitting around for a rainy day or to buy dips on heavy dumps.

Stablecoin farming can also be passive or active. 🏝 Passive stablefarming: @anchor_protocol pays 18% APY, so I see that as the minimum amount of interest I'd expect to receive passively on stablecoins currently.

💪 Active stablefarming: You can get 30-40%+ but you have to keep looking around, spend time moving $ frequently, harvesting rewards, monitoring, researching, etc.

Here are a few things to think about for your stablefarming strategy: • Which stablecoins am I comfortable holding? • What is a safe passive stablefarm where I can park $ without thinking? • How frequently am I willing to move stablecoins around?

Also, remember that farming and moving coins around always comes with transaction costs so you should keep those in mind. Here are some tips on how to mitigate tx costs. twitter.com/shivsakhuja/status/1487715969594126337

11. Understand Different Types of Yield Products There are many ways to earn yield in crypto: • Lending • Staking • LPs • Leveraged LPs • Looping Strategies • Delta-Neutral Strategies • Option Vaults +++

Check out my DeFi Yield 101 guide ..also consider following for regular threads like this about DeFi & Yield Farming twitter.com/shivsakhuja/status/1480336210887249921?s=20

And more intermediate-advanced yield strategies: twitter.com/shivsakhuja/status/1491679865040359426?s=20

Even within LPs, there are some options: • Crypto-Stable LPs (ETH-USDC) • Crypto-Crypto LPs (ETH-BTC) Understand when to use which ones.

Crypto-Stable Pools Pros: • Can have higher yield than Lending, Staking, etc • Automated Buy the Dip & Profit Taking Strategy Cons: • Low correlation between coins, so risk of Impermanent Loss is high.

Crypto-Crypto Pools Pros: • Can have high yield • Great if you are indifferent between both assets • IL is minimized if assets are correlated Cons: • Either of the coins crashing can wreck your position. • IL Risk still exists

12. Limit your farms to a (small-ish) finite number It's really hard to manage too many farming positions. Ideally, you need to monitor: • Coin prices • Rewards • APR • News events (catalysts, token unlocks, etc) • Team movements

Having too many farming positions also makes it hard to: • Track returns • Stick to your high-level strategy • Balance time spent researching vs maintaining positions • Move funds around (if you're spread thinly across chains, protocols, etc)

Also, there are diminishing returns to diversifying beyond a certain point. I'd rather have my money in 10 high-conviction investments over 5 high-conviction investments and 25 medium-conviction investments

I've fallen for the over-diversification trap before and actively made efforts to consolidate. I think 10-20 farming investments is the optimal range. Anything beyond 20 becomes really tough to manage well.

13. Optimize for Taxes Taxes are really complicated for DeFi. You should consider the following tax questions (among others) when planning your yield farming strategy.

• How are capital gains taxed? If you're actively yield farming, you'll be moving your funds around a lot. So you might have lots of short-term capital gains. But this depends on where you live. Some countries don't distinguish between long-term / short-term gains.

• How is interest income from lending crypto taxed? • Can you invest in crypto through a retirement account to shield your gains from tax? • Does your reward harvesting strategy need to change based on tax implications.

• How do you track all your Crypto / DeFi transactions? Every tx in every wallet, exchange & protocol you have used needs to be accounted for to accurately calculate tax liability. Transfers b/w wallets and chains have to be accounted for, and price data isn't always perfect.

You can use software like @koinly to help calculate your Crypto / DeFi returns. But it can still be quite complicated if you're actively yield farming. Speak to an accountant to understand the tax implications, and create your farming plan with those constraints in mind.

14. Crypto Safety Don't take crypto safety lightly. Some mandatory steps for crypto safety: • 2FA wherever possible • Hardware wallet(s) • Make sure you have a completely separate wallet to experiment with new protocols.

Also, watch out for common mistakes like: • Going all-in on one coin or one protocol • Investing in too many microcap coins • Chasing APRs • Falling for ponzis • Falling for crypto scams +++ twitter.com/shivsakhuja/status/1479879576427778048?s=20

Quick tip: Back up your Google Authenticator codes in case you lose your phone to avoid getting locked out of exchanges. twitter.com/shivsakhuja/status/1476126710424752128?s=20

15. Research, research, research Ultimately, your success in Crypto & DeFi will all boil down to how well you are able to separate the signal from the noise.

This means you'll have to: • Spend a lot of time on Twitter, Telegram & Discord. • Find the right people and groups • Working on your bullshit detector • Understand everyone's incentives - influencers, team, twitter shillers, etc

Following the right people is a great source of knowledge & alpha. • Curate lists on Twitter • Determine which of your Telegram / Discord groups are good sources of alpha or not. Don't waste any time on the groups that are not.

• Being in the right groups is a great way to leverage the power of a group to bounce ideas, ask questions and help with research. • Don't trust influencers. Follow @zachxbt - he exposes big names doing shady things in crypto.

If you actually made it all the way to the end, you should follow me for more mega-threads like this about Crypto & DeFi. Here are my past threads: twitter.com/shivsakhuja/status/1470898910218440708?s=20