Calculating Yield Farming ROI: Is It Worth It?

Yield farming can be highly profitable—or a costly mistake. The difference? Understanding your true ROI. Many farmers focus only on the APY number while ignoring impermanent loss, token depreciation, and fees. Let’s calculate what you’ll actually earn.

The Yield Farming Equation

Your true profit from yield farming is:

Net Profit = Farming Rewards + Trading Fees – Impermanent Loss – Gas Costs

Many farmers only look at the first part (rewards) and get surprised by the subtractions.

Breaking Down the Components

1. Farming Rewards

These are the tokens you earn for providing liquidity. Typically shown as APR or APY.

• Usually paid in the protocol’s governance token
• Token value can (and often does) decline
• High APY often means high inflation = selling pressure

2. Trading Fees

LPs earn a cut of every trade in the pool (typically 0.3%).

• More sustainable than token emissions
• Depends on trading volume
• Often 5-20% APY on popular pools

3. Impermanent Loss

The hidden cost when token prices diverge.

• Can be 0% (stable pairs) to 25%+ (volatile pairs)
• Works the same whether price goes up or down
• Often larger than people expect

4. Gas Costs

Transaction fees to enter, exit, and claim rewards.

• Can be $10-100+ per transaction on Ethereum mainnet
• Much lower on L2s and alt-L1s
• Bigger impact on smaller positions

Real Example: $10,000 Farm

Let’s walk through a realistic scenario:

Setup:

• Deposit: $10,000 into ETH/USDC pool
• Pool APR: 75%
• Time: 1 year
• ETH price change: +50%

Calculations:

1. Farming rewards: $10,000 × 75% = $7,500
2. Impermanent loss: 2.02% of $12,500 (position value with price change) = -$252
3. LP position value: $12,247 (HODL value minus IL)
4. Net result: $12,247 + $7,500 – $10,000 = +$9,747 profit

That’s 97.47% return—even with impermanent loss, the farming rewards made it worthwhile!

Calculate Your Yield Farming ROI

Use our calculator to model different scenarios. Adjust the APR, time period, and expected price change to see your potential returns.

When Yield Farming Makes Sense

Good Conditions for Farming

• High APR relative to expected IL — Rewards should exceed potential loss
• Sideways market expected — Less price movement = less IL
• Correlated pairs — Stablecoin pools or assets that move together
• Strong reward token — Token has utility and isn’t just being dumped
• Large position — Gas costs become negligible percentage

Risky Conditions

• Very high APY (1000%+) — Usually means hyperinflationary token
• Extremely volatile pair — Memecoins, new tokens
• Small position on mainnet — Gas eats your profits
• No exit plan — “I’ll just leave it” is not a strategy
• Unaudited protocol — Risk of losing everything to a hack

Strategies to Maximize ROI

1. Choose the Right Pool

• Higher volume = more trading fees
• Lower TVL = larger share of rewards (but more IL risk)
• Stable pairs for lower risk
• Volatile pairs only if rewards significantly outpace expected IL

2. Compound Strategically

• Use auto-compounders to maximize APY
• On L2s, compound more frequently (cheap gas)
• On mainnet, compound less often or use aggregators

3. Harvest and Convert

• Don’t let rewards sit in inflationary tokens
• Regularly harvest and convert to ETH, stables, or compound back
• Take profits—don’t let gains evaporate

4. Monitor and Adjust

• APRs change as TVL changes
• Be ready to move if better opportunities arise
• Exit before rewards end (APR will crash)

The Yield Farming Decision Framework

Before entering any farm, answer these questions:

1. What’s the worst-case IL? — Model a 2-3x price move
2. Do rewards exceed worst-case IL? — If no, reconsider
3. What’s the reward token’s outlook? — Will it hold value?
4. What are total gas costs? — Entry + exits + claims
5. Is the protocol safe? — Audited? Time-tested?
6. What’s my exit strategy? — When will I leave?

Key Takeaways

• True ROI = Rewards + Fees – IL – Gas (not just APY)
• Impermanent loss is real—factor it into every calculation
• High APY ≠ high profit, especially with inflationary tokens
• Stable pairs are safer; volatile pairs need much higher rewards
• Gas costs matter more on small positions
• Have an exit strategy before you enter
• Use the calculator above to model scenarios before committing capital

Related tools:

• Impermanent Loss Calculator
• APY/APR Converter
• Gas Cost Calculator