DeFi on Avalanche: How to get started yield farming
Get started farming on Avalanche and enjoy Ethereum dapps without the high fees
If you missed the golden days of high yield and low fees on Ethereum, then Avalanche has you covered. It is cementing itself as the DeFi hub for low-cost, high-yield farming.
After a year of operation, the Ethereum competitor now hosts a whopping $10 billion of assets (TVL), making it the fourth largest economy in cryptocurrency.
Despite the success, you can still easily find APRs in excess of 100% on leading asset pairs, with fees less than a dollar.
This growth has been fuelled by Avalanche Rush – a $180 million incentives program to attract everyday users like you and me with bonus yield for liquidity providers and farms.
Right now you will find this extra yield in blue-chip services including Aave, Curve and SushiSwap or with new Avalanche-only protocols such as Trader Joe, Snowball and Pangolin.
Using Avalanche is easy enough, but even seasoned Ethereum users need a few more details before jumping in.
Here's what we will cover today
- Why use Avalanche
- Where to farm and a detailed breakdown of rewards
- How to create an Avalanche wallet and onboard funds (important – don't skip this)
- Next steps with some useful links
This content originally appeared in Finder's cryptocurrency newsletter. Sign up for regular guides on how to get the most out of DeFi and grow your portfolio.
Why Avalanche?
The reason that Avalanche has protocols like Aave and Curve is that it is compatible with the Ethereum Virtual Machine (EVM).
This basically means that any application that runs on Ethereum can also run on Avalanche. But for a fraction of the fees.
Last week fees on Ethereum eclipsed $100 for a standard Uniswap transfer, once again making it prohibitively expensive for most users.
On Avalanche the same type of transaction costs around 50c.
Avalanche is able to do this because it uses a different consensus algorithm from Ethereum, while still maintaining the same application layer.
So in some ways, Avalanche is a cheaper and faster version of Ethereum.
In addition to Rush is a program for developers, called Blizzard. It provides $200 million of funding for developers to bring Ethereum dapps over to Avalanche, or simply build brand new ones.
If everything goes as planned, Avalanche will have many of your favourite Ethereum services and then some – all for a fraction of the cost.
So let's take a look at where you could be earning yield and how to get the most out of bonus Rush rewards.
Where to earn Rush bonuses on Avalanche
Avalanche Rush is one of the biggest incentive programs in history, allocating $180 million of additional capital to yield farms and other DeFi services.
Here's a look at some of the major players in the Avalanche ecosystem that are currently doling out rewards.
Trader Joe
Trader Joe is the largest full-service DeFi protocol on Avalanche, offering an exchange, liquidity pools, farms, JOE staking and even single asset lending. It is currently the third-largest DeFi protocol by trade volume – behind PancakeSwap and Uniswap.
It has $20 million of incentives to give away, which can be found in the form of extra AVAX and JOE by staking your LP tokens in farms.
Right now there are only 3 farms with additional rewards, which are reserved for "native" Avalanche projects.
Here's what the current rates and bonuses look like as of 16 November 2021, as well as what tokens they are actually paid out in.
JOE/AVAX – total APR = 98%
- Liquidity pool rewards paid in JOE/AVAX = 20% APR
- Farming rewards paid in JOE = 54% APR
- Bonus farming rewards paid in JOE and AVAX = 24% APR
I'm personally farming JOE/AVAX. Getting rewarded with the same tokens as the underlying pair is really convenient. It allows me to easily reinvest them into LP tokens and continue the cycle over and over – increasing my earning potential every time.
You can also stake any spare JOE tokens. It currently pays around 25% APR with rewards auto-compounded.
SNOB/AVAX – total APR = 124%
- Liquidity pool rewards paid in SNOB/AVAX = 5% APR
- Farming rewards paid in JOE = 68% APR
- Bonus farming rewards paid in JOE and AVAX = 51% APR
Note: Snowball pays a higher APR for this pair, but the rewards are paid in SNOB instead of JOE and AVAX. Personally, I would rather earn rewards in AVAX.
PEFI/AVAX – total APR = 130%
- Liquidity pool rewards paid in PEFI/AVAX = 20% APR
- Farming rewards paid in JOE = 63% APR
- Bonus farming rewards paid in JOE and AVAX = 47% APR
Note: You can farm this pair in Penguin Finance and still receive the Rush rewards (JOE and AVAX) plus PEFI.
PEFI rewards can be automatically staked and currently give around 154% APY.
Going this route gives an estimated 271% APY, but seems to be reliant on that massive PEFI APY, which can easily drop if more people come back to Penguin Finance. I recall PEFI staking being around 30% APY when it was more popular.
That being said... this is where I'm farming my PEFI/AVAX.
Aave
By now you should know what AAVE is and why it's important.
Aave went multichain a while ago, starting with Polygon and now onto Avalanche.
The Aave market on Avalanche ($6 billion) is the largest market after Ethereum ($16 billion), eclipsing Polygon ($4 billion).
Here's a look at some of the perks you'll get by switching your Aave liquidity over to Avalanche (in addition to fees that won't make you want to remortgage your home).
Generally speaking, base yields on Avalanche are higher than Ethereum, yet comparable to Polygon. These are then boosted with AVAX rewards.
Currently there are only 7 markets available and rates look competitive with Trader Joe's lending market.
Snowball
Snowball is Avalanche's answer to Yearn.
It's an auto-compounding farm which means that rewards are automatically reinvested into pools. So your deposits compound several times a day without you needing to lift a finger. If you're a set-and-forget kind of farmer this could be a good option for you.
It also has a stablecoin vault akin to Curve made up of DAI, FRAX, TUSD and UST. So if you need stablecoin swaps with low slippage, this is where to go.
Personally, I found v1 of the protocol buggy with inaccurate APYs and the volatility of SNOW a bit off-putting. But it's overhauled the UI, now gives more reliable APY (I think) and is due for its share of Rush rewards, which could help stabilize SNOB.
I'm putting these together because you typically won't use one without the other.
Pangolin is essentially Uniswap, while Penguin is a yield farm for LP tokens, very similar to PancakeSwap.
You deposit liquidity on Pangolin, then stake your LP tokens in Penguin for extra yield. Recently, Penguin added support for LP tokens from Trader Joe and Lydia as well.
Together, these 2 protocols launched DeFi on Avalanche but have since lost market share to Trader Joe.
Although that could soon change, with $2.5 million of incentives coming to Penguin, which may be used to support an upcoming NFT market and play-to-earn game.
Pangolin is set to receive $2 million of rewards and supports card purchases of AVAX thanks to an integration with crypto payments provider Wyre. Yes, that's fiat to crypto on a DEX. How f___king cool.
These 2 cross-chain titans are now on Avalanche.
I trust you know how each works by now, so I'll get straight to the Rush rewards.
Both only have a month of Rush rewards left, so you will have to be quick.
SushiSwap rewards are paid in both SUSHI and AVAX to liquidity providers.
Curve rewards are paid in AVAX and CRV, with only 3 pools eligible: Aave stablecoins, renBTC and tricrypto.
Transactions on Avalanche: The C-chain and X-chain explained
You're going to need to pay attention here.
Once you're set up, Avalanche is just as easy to use as Ethereum. Metamask and dapps work the same way.
But getting set up takes a bit more effort than usual.
You're best off using the official Avalanche guide to get started.
That being said, I will highlight some of the key points you need to know.
Avalanche uses a multichain architecture, so sending funds to the wrong chain could see them lost forever.
There are 2 main chains you need to know about for now.
The C-chain – The home of DeFi, smart contracts and tokens
This is where you will spend most of your time.
It is the contract chain and is used to interact with Ethereum-compatible smart contracts.
It essentially hosts dapps and tokens, allowing you to work your DeFi magic.
Addresses on the C-chain start with a "0x" which is an easy way of making sure you're in the right place.
The official Avalanche Bridge (AB) supports token transfers from Ethereum to Avalanche's C-chain. This is an easy and safe way to transfer tokens across, as it only lets you transfer compatible tokens (basically, ones that exist on both Ethereum and Avalanche).
The catch though is that you will need to pay gas fees on Ethereum, which are currently quite expensive.
On the other hand, if you transfer over $75 of assets, you will receive some free AVAX to help pay for gas fees once on Avalanche.
Another way to transfer assets to the C-chain is to use an exchange that supports C-chain withdrawals.
C-chain compatible exchanges include:
Using an exchange instead of the bridge to get assets onto AVAX is much cheaper as you avoid the Ethereum network altogether. Think of $50 versus 50c.
Remember you will need to specify the C-chain, as AVAX can also be withdrawn to the X-chain (more on that below).
Remember: C-chain addresses start with a "0x"!
The X-chain: AVAX and gas fees
The X-chain is where AVAX coins live. AVAX is the native coin of the network and equivalent to ETH on Ethereum or ADA on Cardano.
It is used to pay for gas fees and can be staked for rewards.
To use Avalanche, you will need to maintain your AVAX balance on the X-chain. If you run out, you will be unable to pay for gas and need to send more AVAX to your X-chain account.
Once again, you can use an exchange to do this and avoid fees.
Several support X-chain withdrawals, more so than C-chain withdrawals. Although I expect the gap will rapidly decrease between now and the end of the year if Avalanche's success continues.
Remember, if you use the Avalanche Bridge and transfer over $75 of assets or more, then Avalanche will donate some AVAX into your X-chain address to help pay for your first round of fees.
Not bad at all, but given the fees on Ethereum, I chose to deposit AVAX via an exchange.
Using the C-chain and X-chain together
Understandably, 2 chains might sound like a headache and be putting you off.
So let's recap the key points:
X-chain
- Keep the X-chain topped up with AVAX to pay for gas fees. Think of it like a train or bus pass you need to top up once in a while.
- If you run out of AVAX, you can send more from an exchange or use the built-in fiat on-ramp and top up with a credit card.
- You can also transfer wrapped AVAX (wAVAX) from the C-chain back to the X-chain using the cross-chain tab of the wallet.
C-chain
- Your C-chain wallet is where all of your tokens and non-AVAX crypto lives.
- This is the wallet you will use to interact with dapps.
- It can hold wrapped AVAX (wAVAX) too which is a good idea to have, in case your X-chain runs out, you can just swap it back. AVAX is also the base asset for many trading pairs.
- Fund your C-chain by withdrawing AVAX or compatible tokens directly from an exchange. Alternatively, you can use bridge assets from Ethereum if you're not worried about fees. You can also transfer any spare AVAX from the X-chain to the C-chain, where it becomes wrapped AVAX.
Next steps (quick-start guide)
- Set up an Avalanche wallet and connect your Metmask.
- Use the Avalanche bridge to transfer assets from Ethereum to Avalanche for free, or buy some AVAX on an exchange and withdraw it. The bridge will drop you some AVAX to pay for your first few rounds of gas fees, you will still pay ETH fees.
- Remember: If using an exchange, choose one like Binance that allows withdrawals straight to the C-chain.
- Decide on which farms you want to participate in. Weigh up the risk of impermanent loss and consider what token rewards are paid in, rather than choosing the farm with the highest APY.
- Use a DEX like Trader Joe or Pangolin to purchase the assets you need. Remember you will need some AVAX at all times to pay for gas fees. Don't run out!
- Deposit your tokens in the relevant liquidity pool and make sure to stake your LP tokens in a farm for additional rewards. Also consider single asset lending or staking (Aave, Joe, Benqi) if you want to avoid impermanent loss.
- Set a reminder to check on your farms each week to collect the rewards. Consider depositing your rewards to grow your portfolio or swap them for stablecoins to lock in a profit.
- Now you're equipped – go out and learn more about what makes Avalanche tick, explore some of the other protocols on it and keep an eye on its Twitter for official updates and news.
This content originally appeared in Finder's cryptocurrency newsletter. Sign up for regular guides on how to get the most out of DeFi and grow your portfolio.
Disclosure: The author owns a range of cryptocurrencies at the time of writing
