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The DeFi (decentralized finance / decentralized financial services) industry is attracting more and more attention from the crypto community, and at the same time, a form of passive income such as profitable farming or cryptocurrency farming is developing.
What does it mean?
Cryptocurrency farming (yield farming) is a type of investment that involves generating income to provide liquidity by placing tokens in a pool or providing loans to other users.
Therefore, there are two ways to earn from farming: extract liquidity or provide funds on credit.
- Liquidity mining: eThe user selects the platform and the pair in which he will supply liquidity →connects his wallet to the DEX platform →allows the smart contract to make transactions →deposits assets in the pool →receives a reward.
- Loan:the user sends their funds to a smart contract on the DeFi platform →another user takes them on credit →the lender starts receiving interest on the platform tokens.
What is cryptocurrency farming?
- Profitable agriculture:a new strategy to make money in the crypto market. In simple words, you cannot keep your assets idle, but rather send them “to work”, to engage in profitable farming. Profits from a crypto farm depend on the capabilities of a particular chosen liquidity protocol, asset, and strategy. Farming in the decentralized finance industry has high earning potential. Furthermore, liquidity providers, also known as “farmers”, can reinvest their funds in other DeFi projects in search of higher profits.
- How profitable farming works and how much you can earn, as well as which farming platforms are the most popular: everything is detailed in a new review of experts in cryptonization.
- How yield farming works: Income farming became actively talked about/written in the summer of 2020, when Compound began issuing the COMP governance token to those using the Compound app. There are two ways to farm cryptocurrencies: adding tokens to liquidity pools (or liquidity mining) and lending to other users:
-Liquidity mining:the user invests their assets in liquidity pools, which increases the overall liquidity of DeFi platforms. And for the supply of liquidity they receive 20 ERC tokens as a reward.
-Loans:a user signs up for a DEX that supports loans and lends their assets to another user. The parties discuss the repayment terms, that is, when and how much the borrower will repay.
What is cryptocurrency farming: how to start, possible income, risks
Cryptocurrency farming, as a rule, involves working with protocols that run on the Ethereum blockchain. Therefore, payments are also made in ERC20 tokens. The main concepts of cryptocurrency farming are liquidity and liquidity pools.
Liquidity is the property of an asset to be sold quickly and at a price close to the current market price. A liquidity pool is a type of storage for tokens that are used to provide a supply of liquidity on decentralized sites.
What is a collateral in DeFi?
The funds that liquidity providers add to the pools are locked in a special smart contract account and used by decentralized exchanges for trading and trading operations.
Thus, through the pools, the level of liquidity necessary for the effective operation of the DEX sites is provided. Earnings from farming can be different. The concept of Total Value of Locked Assets (TVL) is used to calculate the maximum return.
How to calculate the value of blocked assets?
TVL (Total Value Locked) is the total value of digital assets held in smart contracts on various DeFi platforms. TVL is a kind of performance indicator for various DeFi platforms. It shows the market share of a particular platform and allows you to keep track of its liquidity. TVL can also be calculated for a given coin, giving an idea of its total capitalization.
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