Yield Farming

Yield farming is the term used to describe the way DeFi participants generate yield or extra return on their crypto assets. Generally speaking, DeFi participants shift their liquidity around to earn the highest available yields from the different options available in the DeFi ecosystem. Those options include borrowing/lending, Liquidity mining, staking, flash loan arbitrage etc. Yield farming strategies usually involve many different steps and protocols, utilizing most of the existing DeFi features and functionality. For example, a yield farming strategy may be as follows:

• Deposit ETH on ‘Maker DAO’ as collateral, borrow DAI stable coin at x% interest.

• Deposit DAI to any Curve.fi stable coin liquidity pool supporting DAI. Receive LP token as proof of deposit. (Liquidity Providing to Curve DEX/AMM)

• Lock/Stake the Curve LP token in Curve protocol to earn CRV tokens on top of the trading fees earned by providing liquidity to the pool. (Liquidity Mining)

• Stake CRV rewards to receive a share of overall platform fees/profit.

This type of strategy allows a user to keep their core position in ETH, borrow and leverage against it to carry out a variety of yield generating activity.

With regards to shariah compliance, it is important to note that most yield farming strategies may contain both impermissible and permissible subset strategies and tokens. Yield farming strategies are very rarely exclusively permissible or impermissible.

Hence, in general we can deduce that a yield farming strategy that contains both permissible and impermissible subset strategies and tokens would ultimately be impermissible to execute. In the above example, if DAI itself is not Shariah compliant, so all aspects of the above yield farming strategy would be impermissible. However, if DAI was permissible, we can say that the liquidity mining aspects of this strategy ((ii) and (iii)) can be seen as permissible.