This article will give UX Designers an understanding of staking tokens and yield farming in DeFi. This is how people earn yield on their crypto. This article is part of an overall Web3 Design Bootcamp that teaches UX Designers about Web3 concepts and design patterns so they can land a job in the rapidly merging field.
Staking is the idea of locking tokens to receive other additional token rewards, paid out over time. This is an odd idea at first, but locking tokens in stake pools can be beneficial to DeFi protocols – let’s look at why this might be.
Remember back to the first section how users receive LP tokens for depositing their tokens in a DEX liquidity pool. Not only is it important for DEXs to initially attract liquidity, but they also must retain liquidity to maintain good UX for its users. Some DEXs encourage users to stake their LP tokens in order to receive additional incentives.
Curve is a DEX for stablecoin swaps that offers this kind of LP token staking. Liquidity providers deposit tokens into a Curve liquidity pool, and receive Curve LP tokens. These LP tokens can be staked in Curve Gauge Pools where the user receives regular payouts of CRV tokens. Users are unable to remove their liquidity so long as their LP tokens are staked, and they are receiving CRV rewards. Do you see how this incentivizes users to keep their liquidity on Curve?
Staking increases yield for Curve liquidity providers. For example, in the first Curve liquidity pool above (“tricrypto2”), the yield is 1.89% from the pool’s trading fees; however, users receive additional yield – anywhere from 4.23% to 10.59% – paid in CRV tokens. This means, if I deposit $100-worth of liquidity in the pool, I’d expect to earn $1.89-worth of trading fees, plus $4.23-worth of CRV, annually.
Things do not end here on Curve. It has additional staking opportunities. Users can stake CRV in the Curve DAO for veCRV in return. veCRV is the governance token, so it allows users to make Curve governance decisions; however, it also boosts CRV rewards by up to 2.5x, which is veCRVs main draw. That’s why the CRV APYs – shown two images above – are displayed as a range (e.g. +4.23% – 10.59% CRV). Looking at the image above, CRV is time-locked anywhere from one week to four years. This takes CRV off the market, making it a deflationary asset, which some believe has led to its favorable price performance compared to other DeFi tokens.
Are you starting to see how yields can be stacked on top of each other? On Curve, users can deposit tokens into a liquidity pool to earn trading fees. They can then stake their LP tokens to earn CRV rewards. And then stake their CRV tokens to boost their CRV rewards. This is what “yield farming” is all about – stacking yield to maximize return on investment.
But all this makes my head spin. The yield farming I’ve described here is complex, manual, and costly. For example, CRV rewards accumulate over time and users must manually claim CRV on Curve’s UI (image above), which requires a transaction and costs a network fee. Yield aggregators – another class of DeFi dapps – solve these problems by automating yield farming for users. Users’ funds are pooled together in vaults that follow pre-programmed yield farming strategies designed for efficiency and maximal return.
If you enjoy videos over reading when it comes to online learning then checkout the course on YouTube. This is part 6 of 10 in the DeFi for UX Designers Course. Also, make sure to stay tuned for future Web3 Design Courses, which will cover emerging Web3 product categories.