Are you lacking new ideas to make profits? We’re coming up with an answer — farms. It’s a very practical approach, especially for those who are in a possession of a larger sum of tokens and look for a new investing strategy that does not require a lot of effort.
What are farms?
Farms are pools consisting of token pairs for which traders provide liquidity. Through this practice, users make passive income in the form of interest and rewards.
How does yield farming work?
The first fact you need to know is that yield farming is closely connected with AMM (Automated Market Marker). AMM consists of liquidity pools, which make exchange transactions possible.
Yield farming is performed when a liquidity provider deposits tokens into a pool (which, in other words, is lending). This allows other users to borrow and exchange. These transactions generate fees from which rewards for liquidity providers are distributed.
What is APY?
APY — Annual Percentage Yield — allows calculating a yearly interest on your investment. Unlike in traditional banks, in DEX the rate isn’t fixed — it’s variable and changes based on the supply in liquidity pools.
What is the difference between yield farming, liquidity mining, and staking?
Liquidity mining — works the same as yield farming, the difference is that the LP also receives a new token in return for their contribution.
Staking — the first and most significant difference is the purpose of staking. While yield farming and liquidity mining are designed to maintain sufficient liquidity on a platform, in staking the deposited tokens are used to validate blockchain transactions (In most cases).There is no impermanent loss that could incur (as in the case of yield farming and liquidity mining).
What are the benefits?
As already mentioned — LPs receive rewards for making deposits. What yield farming allows is “growing” your funds by simply locking them up on a platform. Instead of having your tokens inertly sit in your account, you can make more profit on them.
What’s the catch?
Obviously, every profitable technique also comes with some risks — most important are:
- impermanent loss
- smart-contract risk
- rug pulls
- volatility
We hope this article stimulates you to use the full potential of your capital. Especially it’s a better strategy than just hodling.
You can do it on Invariant through our new Farms feature.
