What is Farming and how is it easiest to farm?

Contents

What is Farming?
The role of liquidity pools.
How much can you earn with profitable farming?
Risks of income farming.
What is the difference between farming and mining?
What cryptocurrencies can be mined?

What is Farming?

Nowadays, farming is beginning to actively occupy the niche of one of the most popular passive ways of cryptocurrency earnings in the DeFi industry. But how does this profitable farming work? In answer to this question, it should be mentioned that farming is the process of accruing tokens as a reward for providing liquidity to a project by placing a certain pair of tokens in a pool. Nowadays, there are more complex pools consisting of 3 pairs, but this is not the point of this article.

The role of liquidity pools.

Liquidity pools are a kind of token repository that provide the process of trading a particular currency pair by receiving liquidity from users, who in return receive a reward from the project depending on the share they have invested. Decentralized exchanges (DEX) are levers that set orders to buy or sell crypto, where liquidity pools are some kind of smart contracts of these exchanges. The project’s smart contract distributes a strictly defined number of tokens to farmers depending on their share of investment. So, if “X” invested a USDT/BTC pair of $10,000, and “Y” invested the same pair, but in the amount of $5,000, then the total pool is $15,000. The share of the first one is 66%, and the second one is 33%. accordingly, they are credited with rewards. The exchange gives us the opportunity to buy and sell tokens within the pool at the expense of the token’s liquidity. The higher the demand for a token, the more profitable it is to sell it.

Liquidity pools can be compared to bank deposits. Only tokens are placed at a more favorable interest rate.

Currently, banks cannot provide the same effective solutions as decentralized exchanges. This is why crypto exchanges are very popular and why there is an outflow of capital from banks and its migration to markets. Because, decentralized exchanges continue to actively develop their products, offering their customers more and more simple, fast and profitable financial crypto solutions. This is very popular among crypto exchange users. Despite the profitability of DeFi projects, the risk of crypto assets falling in value must be taken into account. However, if there is USDT in the pair, the funds are only half at risk. The reliability of farming is ensured by smart contracts (contracts based on program code), which are digital agreements on the fulfillment of the conditions of all parties.

How much can you earn with profitable farming?

Farming profitability can be calculated based on annualized interest, which is tracked through the annualized percentage rate (APR) and annualized percentage yield (APY), the latter of which can also be used to track interest accrual or compounding (a process that involves reinvestment that leads to higher profits). The process of reinvestment of profits occurs more frequently in profitable farming than in other markets due to the use of smart contracts. For reinvestment, there are already many trading strategies that bring farmers more than 50% per annum.

Risks of income farming.

The main risk of farming is a drop in the cryptocurrency rate, which can cause holders to lose part of their profitability and their own funds (therefore, it is better to add stablecoin to the pair, which will reduce income but also significantly reduce risks).

Another risk is fraudsters who can hack into the exchange and steal assets. New platforms do not always undergo a comprehensive security audit, and smart contracts may be vulnerable to cyberattacks.

What is the difference between farming and mining?

Cryptocurrency mining requires the purchase or lease of cryptocurrency and the setup of equipment. In addition, miners incur electricity costs for crypto mining, which negatively affects the profitability of mining.

Another important difference from mining is that for farming, the investor buys digital assets, while miners do not need to invest in cryptocurrencies, but need to buy mining farms. When farming, income is generated by purchased crypto assets.