Crypto Farming: A New Way To Earn Money From Crypto
Previously we discussed two ways to make money from crypto, namely by investing and trading. Litedex never discussed trading, you know. You can read about it in the article Learning Crypto Trading For Beginners. In addition to the two ways, it turns out that there are other ways, namely farming.
Farming? Yup, this farming carries a concept like farming. Where when you lock a crypto asset, you cannot retrieve the asset for some time. This is the same as farming, farmers have to wait for their crops to be able to harvest the results. Interesting right? Let’s see an explanation of crypto farming below.
What is Farming?
Farming is a way of making a profit from the results of betting or lending crypto assets. People who stake or lock crypto assets into a liquidity pool are called liquidity providers (LP). Farming is the same as regular savings in a digital wallet, the difference is that you lend the savings funds to other users to get “interest” aka yields. Keep in mind, to do farming you have to store crypto assets on a Defi platform based on a liquidity pool by utilizing smart contracts.
Farming aims to be a place for crypto asset owners to contribute to trading liquidity. The yield offered by farming is considered higher than staking. This is due to the assumption that farming is business-oriented. Usually staking has an Annual Percentage Yield (APY) between 5% to 15% per year. Meanwhile, the yield from farming can reach more than 100%.
How Farming Works
Farming uses an automated market maker (AMM) model that utilizes a decentralized liquidity pool. In farming, the liquidity pool acts as a market when users lend their assets to other users or only exchange them for ERC-20 tokens. Asset borrowers will be charged a certain fee which is then paid to the liquidity provider according to how many assets they provide in the liquidity pool. Even though the distribution rules for each protocol are different, the liquidity provider will still get a return.
Usually, the funds are stored in USD-pegged stablecoins such as DAI, USDT, USDC, BUSD, and others. For example, you are farming the ETH-DAI liquidity pool. You have to fill in ETH and DAI liquidity first. When charging, you will get an LP token which is proof of the percentage of pool ownership. Next, you have to stake the LP token to get passive income from farming.
The results of farming are usually calculated on an annual basis. The matrices commonly used are Annual Percentage Yield (APY) and Annual Percentage Rate (APR). The difference between the two matrices lies in the calculation of the value of the compounding token. APR takes this value into account, while APY does not. APR and APY cannot be estimated accurately due to very competitive and volatile market conditions.
Advantages of Farming
What are the benefits that we can get from farming? There are several advantages that you can get from farming, let’s see!
Open and transparent system
The Defi ecosystem makes all activities there open to everyone and does not require any third parties. So that you have full power and do not depend on trust assets to others.
Popular
There are already many applications and exchanges that allow you to do farming because the level of popularity is quite high and the utility is wide.
Easy
How does farming be practically easy? You only need to have the crypto asset and the wallet.
Interoperability
With interoperability, users have many financial options. You can use this to increase your profits. Interoperability in the context of crypto itself refers to the process of exchanging between currencies without any fees.
Farming Risk
In addition to having advantages, farming also has investment risks. The following are the risks of crypto asset farming activities.
Bugs and errors
Bugs can occur when an audit change checks or an error occurs in the Defi compiler that causes the network to crash. This can threaten user funds that have been locked in the protocol.
Abuse of smart contracts
Smart contracts can be created by parties who do not understand the algorithm so this can be a loophole for abuse. Therefore, you must pay attention to the smart contract protocol so as not to experience losses in the future.
Well, that’s the explanation of the farming feature in cryptocurrency. How, are you interested in farming? Litedex also provides farming features, you know. It’s also very easy! You can read How to Use Yield Farming and see the step-by-step, yes!
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