The Benefits and Risks of Yield Farming in DeFi


23 May 2023
The Benefits and Risks of Yield Farming in DeFi

In the cryptocurrency industry, Decentralized Finance (DeFi) has risen as a transformative power, allowing people to engage in various financial activities without requiring intermediaries. Yield Farming, a notable DeFi feature, has captured significant interest and popularity in recent years. It presents the opportunity for investors to earn considerable returns by supplying liquidity to decentralized protocols. Nevertheless, comprehending both the advantages and risks related to this practice is crucial for making informed investment choices and effectively navigating this ever-changing environment.

Yield Farming in DeFi Explained:

Essentially, Yield Farming is an approach that enables cryptocurrency holders to use their assets productively and receive additional rewards. In the realm of DeFi, it entails contributing liquidity to decentralized protocols, usually via liquidity pools, in return for appealing yields. This method allows users to lend or stake their assets, which the protocol subsequently employs for various purposes such as lending, borrowing, trading, or other financial actions. Participants obtain incentives in exchange for their involvement; these can take the form of interest, fees, or governance tokens. Yield Farming harnesses the potential of smart contracts and blockchain technology to establish a decentralized ecosystem where users can optimize their crypto holdings and produce passive income.

More about yield farming

Benefits of Yield Farming in DeFi

Engaging in Yield Farming within the DeFi realm presents numerous benefits for cryptocurrency owners, such as:

  • Elevated Yield Possibilities: Compared to traditional financial tools, participants can potentially attain significantly increased returns.
  • Generation of Passive Revenue: Decentralized protocol liquidity suppliers can accrue passive income via interest, fees from transactions, or governance token rewards.
  • Growth and Diversification of Portfolio: Yield Farming in DeFi enables individuals to broaden their crypto portfolios by distributing assets among various protocols and strategies, thereby potentially enhancing overall portfolio expansion.
  • Token Rewards and Governance Involvement: Governance tokens can be obtained by participants, offering not only financial incentives but also granting voting privileges and sway over the protocol's ongoing development.
  • Leveraging Competitive Inducements: Due to the competitive aspect of the DeFi landscape, protocols frequently present appealing incentives to encourage liquidity contributions, enabling users to capitalize on these enticements.
  • Opportunities for Compounded Returns: By re-investing earned rewards into the Yield Farming process, participants may compound their returns progressively, resulting in exponential growth.

Possible Risks of Yield Farming in DeFi:

When participating in Yield Farming within the DeFi sector, there are specific risks one must be cautious of, such as:

  • Impermanent Loss: Fluctuations in asset values may lead to impermanent loss, where the worth of the supplied liquidity might decline compared to holding the assets individually.
  • Smart Contract Threats: DeFi platforms depend on smart contracts that might have weak spots or coding mistakes, possibly causing financial losses or exploitation by ill-intentioned individuals.
  • Market Unpredictability and Rug Pulls: The unpredictable nature of cryptocurrency markets can affect the value of rewards obtained through Yield Farming. Furthermore, participants are exposed to the danger of deceptive projects or "rug pulls," where developers desert the project and confiscate investors' money.
  • Intricacy and Emerging Project Dangers: The quickly developing DeFi field results in a constant influx of new projects and protocols. Engaging with unproven or unfamiliar projects entails inherent risks.
  • Regulatory and Compliance Concerns: DeFi operates in a relatively unregulated setting, and shifting regulations or legal ambiguity may influence the landscape, presenting risks for participants.

Managing Risks in Yield Farming within DeFi

In order to successfully engage in Yield Farming in the DeFi realm and minimize potential dangers, adhering to best practices and adopting risk management tactics is vital. Here are some essential factors to consider:

Due Diligence and Investigation: Prior to participating in Yield Farming, thoroughly study projects, protocols, and teams. Thoroughly evaluate the fundamentals of the project, security audits, community reputation, and past performance to make educated choices.

Strategies for Reducing Risk: By investing in a variety of projects and protocols, you can limit your exposure to any single hazard. Set attainable goals and dedicate an appropriate percentage of your portfolio to Yield Farming initiatives.

Maintain Your Knowledge: Stay up-to-date on market trends, news updates, and regulatory developments. To keep informed about possible risks and opportunities, join community forums, follow social media channels, and consult reliable sources.

Safeguard Your Assets: Give priority to the protection of your assets by using best practices such as hardware wallets, multi-factor authentication activation, and regular security updates. Exercise caution concerning phishing attacks and refrain from divulging sensitive information.

Examine and Assess: Keep an eye on your Yield Farming activities' performance continuously. Pay close attention to any changes in project dynamics, protocol modifications, or market factors that may impact your investments.

Seek Expert Advice: Consult with professionals like financial advisors or blockchain specialists if you require guidance or are unsure about anything. They can offer tailored recommendations based on your individual situation and risk preferences.

By adhering to these best practices and employing risk management techniques, you can improve your likelihood of success and safeguard the capital you invest while participating in Yield Farming in the DeFi space.


In conclusion, Yield Farming in DeFi offers both enticing benefits and associated risks. As a method for cryptocurrency holders to maximize their assets and generate passive income, Yield Farming presents the potential for high yields, diversified portfolios, and token rewards with governance involvement. Participants can leverage competitive incentives and compound their returns over time. However, it is essential to navigate this landscape with caution, as impermanent loss, smart contract vulnerabilities, market volatility, fraudulent projects, and regulatory uncertainties pose risks to participants.

To engage in Yield Farming in DeFi successfully, thorough research and due diligence are crucial. It is important to evaluate the risks and rewards of individual projects, understand the smart contract mechanisms, and stay informed about market conditions. Implementing risk management strategies, diversifying investments, and setting realistic expectations can help mitigate potential risks.

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Token Engineering Process

Kajetan Olas

13 Apr 2024
Token Engineering Process

Token Engineering is an emerging field that addresses the systematic design and engineering of blockchain-based tokens. It applies rigorous mathematical methods from the Complex Systems Engineering discipline to tokenomics design.

In this article, we will walk through the Token Engineering Process and break it down into three key stages. Discovery Phase, Design Phase, and Deployment Phase.

Discovery Phase of Token Engineering Process

The first stage of the token engineering process is the Discovery Phase. It focuses on constructing high-level business plans, defining objectives, and identifying problems to be solved. That phase is also the time when token engineers first define key stakeholders in the project.

Defining the Problem

This may seem counterintuitive. Why would we start with the problem when designing tokenomics? Shouldn’t we start with more down-to-earth matters like token supply? The answer is No. Tokens are a medium for creating and exchanging value within a project’s ecosystem. Since crypto projects draw their value from solving problems that can’t be solved through TradFi mechanisms, their tokenomics should reflect that. 

The industry standard, developed by McKinsey & Co. and adapted to token engineering purposes by Outlier Ventures, is structuring the problem through a logic tree, following MECE.
MECE stands for Mutually Exclusive, Collectively Exhaustive. Mutually Exclusive means that problems in the tree should not overlap. Collectively Exhaustive means that the tree should cover all issues.

In practice, the “Problem” should be replaced by a whole problem statement worksheet. The same will hold for some of the boxes.
A commonly used tool for designing these kinds of diagrams is the Miro whiteboard.

Identifying Stakeholders and Value Flows in Token Engineering

This part is about identifying all relevant actors in the ecosystem and how value flows between them. To illustrate what we mean let’s consider an example of NFT marketplace. In its case, relevant actors might be sellers, buyers, NFT creators, and a marketplace owner. Possible value flow when conducting a transaction might be: buyer gets rid of his tokens, seller gets some of them, marketplace owner gets some of them as fees, and NFT creators get some of them as royalties.

Incentive Mechanisms Canvas

The last part of what we consider to be in the Discovery Phase is filling the Incentive Mechanisms Canvas. After successfully identifying value flows in the previous stage, token engineers search for frictions to desired behaviors and point out the undesired behaviors. For example, friction to activity on an NFT marketplace might be respecting royalty fees by marketplace owners since it reduces value flowing to the seller.


Design Phase of Token Engineering Process

The second stage of the Token Engineering Process is the Design Phase in which you make use of high-level descriptions from the previous step to come up with a specific design of the project. This will include everything that can be usually found in crypto whitepapers (e.g. governance mechanisms, incentive mechanisms, token supply, etc). After finishing the design, token engineers should represent the whole value flow and transactional logic on detailed visual diagrams. These diagrams will be a basis for creating mathematical models in the Deployment Phase. 

Token Engineering Artonomous Design Diagram
Artonomous design diagram, source: Artonomous GitHub

Objective Function

Every crypto project has some objective. The objective can consist of many goals, such as decentralization or token price. The objective function is a mathematical function assigning weights to different factors that influence the main objective in the order of their importance. This function will be a reference for machine learning algorithms in the next steps. They will try to find quantitative parameters (e.g. network fees) that maximize the output of this function.
Modified Metcalfe’s Law can serve as an inspiration during that step. It’s a framework for valuing crypto projects, but we believe that after adjustments it can also be used in this context.

Deployment Phase of Token Engineering Process

The Deployment Phase is final, but also the most demanding step in the process. It involves the implementation of machine learning algorithms that test our assumptions and optimize quantitative parameters. Token Engineering draws from Nassim Taleb’s concept of Antifragility and extensively uses feedback loops to make a system that gains from arising shocks.

Agent-based Modelling 

In agent-based modeling, we describe a set of behaviors and goals displayed by each agent participating in the system (this is why previous steps focused so much on describing stakeholders). Each agent is controlled by an autonomous AI and continuously optimizes his strategy. He learns from his experience and can mimic the behavior of other agents if he finds it effective (Reinforced Learning). This approach allows for mimicking real users, who adapt their strategies with time. An example adaptive agent would be a cryptocurrency trader, who changes his trading strategy in response to experiencing a loss of money.

Monte Carlo Simulations

Token Engineers use the Monte Carlo method to simulate the consequences of various possible interactions while taking into account the probability of their occurrence. By running a large number of simulations it’s possible to stress-test the project in multiple scenarios and identify emergent risks.

Testnet Deployment

If possible, it's highly beneficial for projects to extend the testing phase even further by letting real users use the network. Idea is the same as in agent-based testing - continuous optimization based on provided metrics. Furthermore, in case the project considers airdropping its tokens, giving them to early users is a great strategy. Even though part of the activity will be disingenuine and airdrop-oriented, such strategy still works better than most.

Time Duration

Token engineering process may take from as little as 2 weeks to as much as 5 months. It depends on the project category (Layer 1 protocol will require more time, than a simple DApp), and security requirements. For example, a bank issuing its digital token will have a very low risk tolerance.

Required Skills for Token Engineering

Token engineering is a multidisciplinary field and requires a great amount of specialized knowledge. Key knowledge areas are:

  • Systems Engineering
  • Machine Learning
  • Market Research
  • Capital Markets
  • Current trends in Web3
  • Blockchain Engineering
  • Statistics


The token engineering process consists of 3 steps: Discovery Phase, Design Phase, and Deployment Phase. It’s utilized mostly by established blockchain projects, and financial institutions like the International Monetary Fund. Even though it’s a very resource-consuming process, we believe it’s worth it. Projects that went through scrupulous design and testing before launch are much more likely to receive VC funding and be in the 10% of crypto projects that survive the bear market. Going through that process also has a symbolic meaning - it shows that the project is long-term oriented.

If you're looking to create a robust tokenomics model and go through institutional-grade testing please reach out to Our team is ready to help you with the token engineering process and ensure your project’s resilience in the long term.


What does token engineering process look like?

  • Token engineering process is conducted in a 3-step methodical fashion. This includes Discovery Phase, Design Phase, and Deployment Phase. Each of these stages should be tailored to the specific needs of a project.

Is token engineering meant only for big projects?

  • We recommend that even small projects go through a simplified design and optimization process. This increases community's trust and makes sure that the tokenomics doesn't have any obvious flaws.

How long does the token engineering process take?

  • It depends on the project and may range from 2 weeks to 5 months.

What is Berachain? 🐻 ⛓️ + Proof-of-Liquidity Explained


18 Mar 2024
What is Berachain? 🐻 ⛓️ + Proof-of-Liquidity Explained

Enter Berachain: a high-performance, EVM-compatible blockchain that is set to redefine the landscape of decentralized applications (dApps) and blockchain services. Built on the innovative Proof-of-Liquidity consensus and leveraging the robust Polaris framework alongside the CometBFT consensus engine, Berachain is poised to offer an unprecedented blend of efficiency, security, and user-centric benefits. Let's dive into what makes it a groundbreaking development in the blockchain ecosystem.

What is Berachain?


Berachain is an EVM-compatible Layer 1 (L1) blockchain that stands out through its adoption of the Proof-of-Liquidity (PoL) consensus mechanism. Designed to address the critical challenges faced by decentralized networks. It introduces a cutting-edge approach to blockchain governance and operations.

Key Features

  • High-performance Capabilities. Berachain is engineered for speed and scalability, catering to the growing demand for efficient blockchain solutions.
  • EVM Compatibility. It supports all Ethereum tooling, operations, and smart contract languages, making it a seamless transition for developers and projects from the Ethereum ecosystem.
  • Proof-of-Liquidity.This novel consensus mechanism focuses on building liquidity, decentralizing stake, and aligning the interests of validators and protocol developers.


EVM-Compatible vs EVM-Equivalent


EVM compatibility means a blockchain can interact with Ethereum's ecosystem to some extent. It can interact supporting its smart contracts and tools but not replicating the entire EVM environment.


An EVM-equivalent blockchain, on the other hand, aims to fully replicate Ethereum's environment. It ensures complete compatibility and a smooth transition for developers and users alike.

Berachain's Position

Berachain can be considered an "EVM-equivalent-plus" blockchain. It supports all Ethereum operations, tooling, and additional functionalities that optimize for its unique Proof-of-Liquidity and abstracted use cases.

Berachain Modular First Approach

At the heart of Berachain's development philosophy is the Polaris EVM framework. It's a testament to the blockchain's commitment to modularity and flexibility. This approach allows for the easy separation of the EVM runtime layer, ensuring that Berachain can adapt and evolve without compromising on performance or security.

Proof Of Liquidity Overview

High-Level Model Objectives

  • Systemically Build Liquidity. By enhancing trading efficiency, price stability, and network growth, Berachain aims to foster a thriving ecosystem of decentralized applications.
  • Solve Stake Centralization. The PoL consensus works to distribute stake more evenly across the network, preventing monopolization and ensuring a decentralized, secure blockchain.
  • Align Protocols and Validators. Berachain encourages a symbiotic relationship between validators and the broader protocol ecosystem.

Proof-of-Liquidity vs Proof-of-Stake

Unlike traditional Proof of Stake (PoS), which often leads to stake centralization and reduced liquidity, Proof of Liquidity (PoL) introduces mechanisms to incentivize liquidity provision and ensure a fairer, more decentralized network. Berachain separates the governance token (BGT) from the chain's gas token (BERA) and incentives liquidity through BEX pools. Berachain's PoL aims to overcome the limitations of PoS, fostering a more secure and user-centric blockchain.

Berachain EVM and Modular Approach

Polaris EVM

Polaris EVM is the cornerstone of Berachain's EVM compatibility, offering developers an enhanced environment for smart contract execution that includes stateful precompiles and custom modules. This framework ensures that Berachain not only meets but exceeds the capabilities of the traditional Ethereum Virtual Machine.


The CometBFT consensus engine underpins Berachain's network, providing a secure and efficient mechanism for transaction verification and block production. By leveraging the principles of Byzantine fault tolerance (BFT), CometBFT ensures the integrity and resilience of the Berachain blockchain.


Berachain represents a significant leap forward in blockchain technology, combining the best of Ethereum's ecosystem with innovative consensus mechanisms and a modular development approach. As the blockchain landscape continues to evolve, Berachain stands out as a promising platform for developers, users, and validators alike, offering a scalable, efficient, and inclusive environment for decentralized applications and services.


For those interested in exploring further, a wealth of resources is available, including the Berachain documentation, GitHub repository, and community forums. It offers a compelling vision for the future of blockchain technology, marked by efficiency, security, and community-driven innovation.


How is Berachain different?

  • It integrates Proof-of-Liquidity to address stake centralization and enhance liquidity, setting it apart from other blockchains.

Is Berachain EVM-compatible?

  • Yes, it supports Ethereum's tooling and smart contract languages, facilitating easy migration of dApps.

Can it handle high transaction volumes?

  • Yes, thanks to the Polaris framework and CometBFT consensus engine, it's built for scalability and high throughput.