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Income farming: theory and practice
Yield Farming has become one of the most important DEFI development drivers and cryptocurrency markets in general. In many ways, it was thanks to the pharmacy to poured billions from the sphere of traditional finance into the industry.
If at first the profitable farming has developed only on the Ethereum network, then over the past year, similar Defi services have appeared in more than two dozen alternative ecosystems based on Binance Smart Chance, Polygon, Solana, Fantom, Avalanche, XDai, Heco Chain, Kardiachain Iotex, Tron, Terra and others.
To help beginners avoid typical mistakes, Forklog has compiled detailed instructions for profitable farming. We will talk about the methods of selecting Defi survis and assets for this type of investment and show how to introduce and extract funds from liquidity bullets. We will also discuss how best to dispose of the income received.
- The profitability of the pharmaceutical pools is constantly changing and depends on the policy of Defi services, the volume of liquidity and exchange rates of assets in the bullet.
- Forethleous losses and an active issue of tokens, in which the remuneration is issued, are the main factors that reduce the profitability of the pharmacy.
- Of the hundreds of Defi services rewarding for the provision of liquidity, decentralized exchanges cause the greatest confidence.
- The best way to reduce the risks of profitable farming is diversification on various ecosystems, Defi services and a liquidity pool.
Where does the farmer’s income come from and how the income of the farmer is calculated?
To begin with, we recall that the profitable farm or pharmacy is understood to obtain remuneration for the provision of liquidity of Defi services-decentralized exchanges using the mechanism of automated market maker (AMM-DEX).
The farmer’s income consists of two components:
- shares from trading commissions for the operation of purchasing and selling assets in this pool;
- awards for the provision of liquidity paid in the control tokens (governance token) of this exchange.
Moreover, usually the second component in terms of profitability is many times higher.
A certain amount of tokens is allocated for each of the bullets per day in accordance with the need for the exchange for liquidity according to certain pairs of assets. The remuneration is shared between all participants in the pool in proportion to their contribution.
For example, the pool accounts for 10 tokens per day. If you own 10% of the cost of this pool, then in a day of the pharmacy you will receive 1 token. But if the pool attracted many investors and due to new deposits its size increased by 10 times, then your share decreased to 1% and you will receive 0.1 tokens per day. Accordingly, the profitability of the pharmination will decrease by 10 times.
At the start of new pools, while they are almost empty, you can see incredible profitability of thousands and tens of thousands of percent per annum. This makes a strong impression on beginners.
But as the volume of liquidity blocked in the bullet rises (Total Locked – TVL), its actual profitability is sharply reduced.
Another frequent reason for a decrease in the indicator is the drop in the exchange rate of tokens, in which a reward is issued. This can happen due to the high speed of emission and constant sales of farmers seeking to withdraw income. As a result, the price schedule of such tokens may look like a free fall.
As a result of a combination of these two factors, in a matter of days, attractive 1000-1500% per annum can decrease by tens of times, to average 20-50%.
Thus, the profitability of the pharmaceutical pools is constantly regulated not only by the amount of remuneration, but also by the influx of liquidity and market mechanisms. In many ecosystems, transaction costs are a few cents. Therefore, investors’ capital is constantly in search of optimal profitability and flow into promising pools in a matter of minutes.
What and where to farm?
Literally every day, new Defi services appear that promise awards for providing liquidity. But do not trust your funds to the first pool.
The overall impression of the variety of Defi services with pharmaceutical pools can be compiled in the corresponding sections of CoinmarketCap and Coingeco cryptorrhability. Here you can find out the TVL hundreds of pools, relevant profitability, and also sort them according to different parameters. It is worth paying attention to the presence of audits of smart contracts, which significantly reduces the risks of hacks and thefts.
One of the most complete aggregators on farmer pools in several ecosystems is the VFAT service.Tool. Despite the ascetic design, it provides the most relevant list of Defi services for each network.
And when connecting to the Web3-patch, the service allows you to find out the TVL of each pool, its current profitability, as well as manage investments: add and derive liquidity, receive awards.
If the web interface of your pool is not available for some reason, the service allows you to urgently withdraw funds from it using a button Emergency Withdraw.
So, in front of the future farmer-dozens of ecosystems, hundreds of Defi-survisions and thousands of pharmaceutical pools. How to make an optimal choice with such a variety?
You will have to take into account three main types of risks that directly affect the final yield of the pharmacy:
- fall in the value of assets in the pool;
- the fall in the cost of tokens in which the award is issued;
- the occurrence of unstable losses.
The risks of falling the course are inherent in any cryptocurrency assets, even stablecoin. As for the depreciation of token, which serves to pay remuneration, these risks are much smaller for Governance-Tokens of large AMM-dex with large trade turnover and hundreds of thousands of users. Practice shows that the quotes of this type of assets are at least not lagging behind the whole cryptorrhny. This is one of the most important reasons why for profitable farming it is worth choosing the largest AMM-dex in this ecosystem.
It is not difficult to choose leaders according to their TVL, for example, on the Defi Llama service or for trade volumes on Coingeco.
What are inconsistent losses (IMPERMANENT LOSS or IL) we have already told in detail in our educational cards. Briefly, this is an undertaken profit due to a change in relative prices in a pair of assets. For example, if the coin A has been inhalers in the bullet of the coin b, then IL will be 5.7%, and with a five -fold change in price, https://gagarin.news/ IL will reach 25% compared to the storage of the same pair of assets in the wallet.
Since IL significantly reduce the final yield of farming, investors have to look for opportunities to minimize the influence of this factor. There are four ways here, and all of them relate to the choice of a suitable pool.
Stablecoin pools. Most Defi services offer stabilcoin pools, for example, USD-USDC, DAI-USDT, BUSD-USDC and others. Since their courses fluctuate in a very narrow range, the risks of il are minimal here. The back of low risks are low profitability indicators for the sector-in the range of 5-20%.
Bullets of wrapped assets. Contain two wrapped versions of one asset, such as WBTC-IBBTC, which are protected from IL. However, they are rare and are extremely low-usually not more than 1-2%.
Bullets of filtered assets. If the assets in the bullet are valued and cheaper synchronously, then the risks of il are reduced. As practice shows, a strong positive correlation at large time intervals (weeks and months) is observed between the native network of the network and the token of the largest AMM-dex in this ecosystem. The same pair, as a rule, has the largest TVL and trade turnover:
- for the BSC network, this is a pair of BNB-Cake;
- for Polygon-Matic-Quick;
- for fantom-ftm-boo;
- For Avalanche-Avax-Joe.
A positive correlation is also shown by native coins of the network with ether: for example, pairs of BNB-Th, Matic-Th, FTM-Th, AVAX -TH. However, on the annual graphics for each of these pairs, it is easy to notice the periods of multiple growth of alternative ecosystems, which corresponds to the periods of IL increase.
Solopharging pools. So that farmers have fewer reasons to display awards, a number of AMM-dex offers pools where you can accumulate a Governance-Token to this exchange and receive a reward for this.
For example, in Syrup Pools on Pancakeswap, the largest decentralized exchange on the BSC network, you can invest CAKE and receive tokens of other projects with a profitability of 40-60% per annum. Such pools are deprived of the risks of IL, however, the probability of falling the cost of Governance-Token itself remains.
There is another important point when choosing a pool. Seeing attractive profitability, it is worth carefully considering the conditions. Often you can see deposit fee – a commission when input liquidity, which may be in a wide range – from 0.1% to 20%.
By placing assets in such pools, you immediately find yourself at a loss. It will be covered with pharmacy income only after a few days or weeks, depending on the ratio of the commission and profitability.
The key to a decrease in most risks of profitable farming is wide diversification: not only on different pools, but also on different platforms and ecosystems.
Defi services on the Ethereum network are still leading on TVL. But from the point of view of an ordinary investor, they are becoming less and less accessible due to high commissions. Any interaction with liquidity bullets here costs at least $ 70-90. Therefore, we will leave pharmacing on the Ethereum network to large investors and turn to alternative ecosystems, where transactions are cheaper.
The first thing that a novice farmer is required is a web3-compatible wallet, for example, Metamask, Math Wallet or Trust Wallet as an application on a smartphone or browser expansion on a PC. Earlier we published detailed instructions for using Uniswap and other AMM-dex. It should be studied for beginners in the cryptosphere before starting to master the pharmacy.
Connecting Metamask to Binance Smart Chain, Polygon, Fantom and other EVM compatible blockchains is the easiest to use the Chainlist service.
Adding new blockchains to Metamask takes place in four actions:
- By clicking on the Connect Wallet button, connect your Web3 wallet to the site;
- Find the desired blockchain in the list;
- Press the button Add to Metamask;
- Confirm the parameters of the network connection in the wallet window.
The wallet should have funds that are planned to be invested in the pool, as well as a certain number of native coins of this network to pay for transaction commissions.
Now, step by step, we will show how to put assets in pharmacing on the example of Pancakeswap. Of the dozens of available pools, we will choose the most popular-CAKE-BNB, which promises profitability of about 45% per annum and having a TVL more than $ 529 million.
First you need to approve the smart contract of this pool by pressing the button Enable. This action requires gas payment.
After confirming the transaction, the Stake LP button will appear.
We go to the Trade-Liquidity tab and click on the “Add Liquidity” button/Add Liquidity.
In the form that opens, select a couple of assets and position size. In this case, the number of tokens is automatically set so that they are in the proportion of 1: 1 at their current cost.
In our case, 0.0282613 BNB and 1 CAKE will be exchanged for 0.163229 of the so-called “liquidity supplier tokens” or lp tokens.
Please note that the ratio of assets 1 BNB = 35.38 Cake is indicated. With any deviation from this level due to exchange fluctuations of both assets, unstable losses will begin to grow.
If you want this LP token to be visible in the Metamask wallet, you can press the button Add Sake-VP To Metamask.
Until you put LP tokens in the pool, they can be seen in the wallet through the block of the blocks for this network (in our case, via BSCSCAN).
It is these LP tokens that are placed in the staying in the appropriate pool.
The operation requires confirmation in the wallet and payment of the commission.
The figure below shows a pool with your funds after confirming the transaction. The amount of LP tokens is shown (it will remain unchanged) and its current value, which depends on the exchange rates of BNB and CAKE.
To replenish this pool of LP tokens, you need to press “+”, and in order to partially or completely remove LP tokens, you should choose “-”. Each operation will have to be confirmed in the wallet by paying the corresponding transaction commission.
Near the current profitability there is an icon of an online calculator. With it, it is easy to calculate the final income for your investment for a certain temporary interval, including taking into account the regular reinvestment of awards.
To obtain awards, press the button Harvest and confirm the operation in the wallet. After confirming the transaction, the cake trimmed tokens will enter your wallet. Also, an automatic request for accumulated awards occurs at each replenishment or removal of LP tokens.
If the profitability in this pool does not suit you anymore, you can remove liquidity at any time. In this case, all actions are performed in the reverse order.
At first, using the “-” button, LP tokens are removed from stakeing in the bullet.
This operation requires confirmation in the wallet and payment of the commission.
Then, in the Trade-Liquidity section, you need to select the LP-Token that is to be burned.
This requires once approve this lp-token by clicking Enable and confirming in the wallet.
Then press the button Remove and confirm the transaction in the wallet.
After that, LP tokens are burned with the release of CAKE and BNB coins.
Please note that we invested assets in the pool at the rate of 1 BNB = 35.38 Cake, and seized at the rate of 1 BNB = 35.5063 CAKE. Due to the influence of IL, CAKE tokens became a little larger, and BNB was a little less.
Faring mechanics on other AMM-dex in the BSC network and other EVM-compatible networks is similar. Only the design of the sites and the location of the buttons differ only.
For example, on the well-known AMM-dex Sushiswap buttons for liquidity are located directly on the panel of the corresponding pool. Awards here are issued in Sushi tokens.
And here is what FTM-Boo Pharmacy FTM-BOO on SPOOKYSWAP looks like the largest AMM-dex on Fantom. Here, the remuneration is calculated in BOO tokens.
How to dispose of pharmaceutical income?
Depending on the regulations of a particular Defi service, pharmacid awards can be accrued with each block or at another frequency. That is, you can request them even several times a day. However, in practice, the limiting factor is the size of transaction commissions: it is hardly reasonable to spend $ 0.5- $ 0.6 (typical commission on the BSC network) to receive a reward of $ 1-2 2.
There are several tactics on how to dispose of income from farming:
- regular conclusion;
- reinvestment in the same pool;
- reinvestment in other pools of the same Defi service;
- Reinvesting in solopharding pools
- Reinvesting in the pools of other Defi services.
There are bullets with automatic reinvesting (autocompounding), which with a certain frequency, for example, once a day, themselves and without gas costs add all the accumulated rewards to the pool. Thus, rewards begin to pay for a complex percentage, which significantly increases the profitability on the horizon in several months.
The light did not agree on the pharmacy
Although the profitable farm remains one of the most profitable and popular strategies for passive earnings on crypto actures, it is important to remember other tools:
- POS Critical Steering;
- Cryptocurrency deposits on centralized crypto -rhms (Binance, Kucoin, Gate.Io and others.);
- providing liquidity to decentralized lending protocols (AAVE, Compound, etc.);
- Providing liquidity to centralized landing services (Nexo Finance, Celsius Network and others).
Each of these directions has its own ranges of profitability, advantages and risk sets. Therefore, the most correct approach for the private investor is the diversification of investments.
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