Farming, Staking, risks, rewards… This article breaks down farming in Cryptocurrency.
First of all let’s get this confusion out of the way. Farming is not staking. Farming is for Defi only. Yield Farming in crypto is literally what it is, PLANTING.
Look at it like traditional farming, you bring a Mango Seed plus Water and then put them inside a fertile soil leave for some time and then come back to a whole tree with so many Fruits as reward for your Patience.
Staking is like simply leaving your Cash in your Bank account and earn little interests. You won’t necessarily “Plant it”.
Now how do you plant your Crypto assets?
Yield farmers lock up their crypto assets in a smart contract-based liquidity pool.
Why do they reward you for farming?
Yield Farming helps an exchange have enough backup “cash” per se to make your transactions easier without necessarily fluctuating the price. In return, the exchange gives you a % of the platform fees people pay when they swap tokens.
WHERE CAN I FARM?
You can Farm on most DEX like PancakeSwap, Uniswap, Julswap etc.
Each platform gives different amount of rewards from 200% to as high as 10,000% percent.
HOW CAN I FARM?
Before you can farm, you have to put your assets in a Liquidity Pool. I’ll use PANCAKESWAP as an example, if you understand how to use it here, you will on another DEX.
First of all, check what Farming Pair you want to stake your assets. Go to Farms
For example you can see there are both $CAKE and $BNB in a pair which means you must have both in your wallet to be able to Form a Liquidity pool on that pair.
Then go to Liquidity pool, Click on Add Liquidity and add both assets.
Liquidity Pool works on a 50:50 ratio, which means you must put in Equal value of $BNB and $CAKE.
In the screenshot, 1 $BNB = 16 $CAKE.
This means if you’re putting in 1 $BNB, you must also have 16 $CAKE in your wallet. If you don’t have up to 16 $CAKE, let’s say you have 8 but have 1 $BNB, the DEX Protocol will only take 0.5 $BNB so as to maintain the 50:50 ratio.
After you have successfully approved and Supplied the Liquidity pool, then you can go back to Farms.
Click on the pair and then Stake your assets. Your APR will be calculated and you’ll start receiving rewards within few minutes.
Just like traditional farming, you don’t plant what you plan on eating in the evening. Don’t Farm money you’ll be needing soon.
As much as you can withdraw at anytime, some platforms will charge you high withdrawal fees if you Unstake too early.
FARMING IS RISK FREE, yeah?
Errrm not exactly. Nothing is risk free as far as cryptocurrency is concerned but with risks comes rewards. Now what are the risks?
You could lose some units of your assets while farming in a situation called IMPERMANENT LOSS.
The DEX protocols are controlled by a formula that adjusts the ratios of the assets in the pool to simultaneously determine their prices.
While this formula allows the market to function, it is also what is responsible for Impermanent Loss. Something like a collateral damage.
Let’s say when you start, the price of 1 BNB token equals around 16 CAKE tokens. You deposit 1 BNB and 16 CAKE into the pool. However, the price of CAKE starts to rise as more and more people are starting to buy CAKE tokens in the secondary market.
As a result, the protocol adjusts the ratio of your deposited tokens to ensure the value remains split 50:50 across the two assets. Which means if 1 BNB is now equal to 14 CAKE, the protocol will adjust your 16 $CAKE to 14 $CAKE to be able to meet up the price of the BNB.
If BNB also increases in Value too in the market then it could meet up CAKE halfway and also if CAKE falls too then your assets go back to 16 CAKE. The protocol is just interested in balancing the 50:50 ratio.
That’s why it’s called “Impermanent loss” and not Permanent loss.
DEFI LPs with less appetite for risk can Farm on more Stable pairs with BUSD or farm on a Single Pool. A Single Pool involves staking only one asset. This eliminates the 50:50 protocol risk and you still earn rewards but not as high as the pair pool.
HODLING & FARMING are not mutually exclusive. You can do both at the same time but I advice separately. I do not Farm assets I intend to HODL, same way you don’t trade assets you intend to HODL.
Always apply discretion when investing.