What is cryptocurrency farming and how can you profit from it? What are the process’s characteristics, and how is it applied??
The crypto industry provides everyone with ample opportunities to make money. Besides traditional trading, investors can benefit from additional benefits. What is farming, and how can you profit from it? To answer this question, it is necessary to delve into the history and understand what decentralized exchanges and DeFi tokens are. And also why it became possible to “grow” the currency and not just mine it.
What is farming?
Farming may be compared with the conventional financial industry, and according to Buidlbee, it is one of the most effective ways to make a profit. For example, if an investor wishes to contribute to a financial instrument, then he is looking for one that gives the highest possible interest with reasonable risks.
Farming operates similarly. Its main goal is to generate more income from cryptocurrencies, which is achieved through decentralized DeFi tokens and protocols. A “farmer” engaged in farming always strives to get the maximum”harvest”. To do this, it constantly switches between the specified protocols.
To multiply the crypto income using farming, comprehensive approaches are being created. Nevertheless, the most effective of them is kept secret by professional traders. This is because the more market players will make similar financial manipulations, the less profitable they will be. Farming as making a profit on native tokens In general terms, the essence of the most successful approaches is to combine the following actions:
- Provision of loans.
- Placement of tokens in the pool.
It is important to note that currently farming is among the most famous methods of profiting from the cryptocurrency industry. It has absorbed the technologies of stacking and landing.
The history of farming cryptocurrencies appeared in June 2020. It was then that the decentralized COMP token was released, which was released by the Compound credit market. Since automatic distribution has become a feature of the token, the demand for it has grown significantly in a short time. The price, accordingly, also went up sharply. Asa result, COMP quickly reached the leading positions in the list of DeFi tokens. This approach was appreciated by investors who began to employ multiple decentralization protocols to increase profitability.
Farming profit growth can be determined based on annual interest, which is tracked through the annual interest rate(APR) and annual interest yield (APY), the latter indicator can also be used to track interest accrual or compounding(a process containing reinvestment that results in higher earnings). The process of reinvesting profits occurs in profitable farming more often than in other industries because of the usage of smart contracts. For reinvestment, there are already many trading strategies that bring farmers more than 50% per year.
The primary risk of farming is a decrease in the value of the crypto assets exchange rate, which may cause holders to lose some of their profitability and own funds (therefore, it is better to add a stablecoin to the pair, as this will reduce income, but also significantly reduce risks).
Currency volatility in the pair leads to non-permanent losses. When withdrawing their assets from the pool, liquidity providers may receive fewer tokens in dollar terms.
Another risk is fraudsters who can hack the exchange and steal assets. New platforms do not always pass a comprehensive security audit, and smart contracts may be vulnerable to cyber-attacks.
The initial step is to invest in a liquid pool. Next, a set of smart contracts is selected in which these funds are blocked. Pools ensure the operation of the market while the rest of its participants carry out normal activities: buying, selling, and exchanging tokens. As a result, the user who deposited funds into the pool and became a liquidity provider gets a reward.
Cryptocurrency mining requires buying or renting cryptocurrencies and setting up equipment. In addition, miners incur electricity costs for mining crypts, which negatively affects the profitability of mining.
Another important difference from mining is that for farming, an investor buys digital assets while miners do not need investments in cryptocurrency, but they need to buy mining farms. When farming, the revenue is brought by the purchased crypto assets.
Farming is open to the following cryptocurrencies, the functionality of which includes the capability of creating smart contracts:
- Binance Coin (BNB) and BEP-20 Tokens (Binance SmartChain);
- Ethereum (ETH) and ERC-20 tokens;
- TRON (TRX) and TRC-20 tokens.