Yield farming in two steps
For this yield farming strategy, you must:
- Get Liquidity Pool (LP) tokens.
- Deposit these LP tokens in a farm.
If you know what LP tokens are, feel free to jump to the guides on how to get them and deposit them in a farm. For more detailed information on this yield farming strategy, read this article from top to bottom.
What you need to yield a farm on a decentralized exchange
You need four things to farm on a DEX:
- digital wallet
- cryptocurrency
- LP token
- Decentralized exchange that offers farming rewards
Digital wallet: These wallets, also called crypto wallets or Web3 wallets, contain cryptocurrencies and other digital assets. The best wallets are self-sustaining like the Bitcoin.com wallet. Self-custody means you have full control over the contents of the wallet, while with custodial wallets a third party has ultimate control. Learn more about self-government and what it means here.
cryptocurrency: The wallet must contain cryptocurrency to pay transaction fees. Transaction fees are used to pay for actions that make changes to a blockchain. You will be paid in the local currency of the blockchain. For example, ETH is used to pay transaction fees on the Ethereum blockchain.
LP Token: In order to farm on a DEX, you also need certain cryptoassets that the decentralized exchange requires for farming. These are specific liquidity pool (LP) tokens that you get by first depositing equal amounts of two cryptocurrencies in a specific liquidity pool on the DEX.
Decentralized Exchange Office: It is important to use a reputable DEX platform that has a good number of liquid markets, the protocol has been audited by external security firms, and the farming rewards are attractive and sustainable. In this article, we present such a platform.
What are Liquidity Pool Tokens?
Liquidity pool tokens are an essential part of decentralized exchanges (DEXs). Trading DEXs is made possible by people adding liquidity to trading pairs. Unlike centralized exchanges, anyone can add a cryptoasset trading pair to a DEX or bolster an existing trading pair by providing liquidity. Without sufficient liquidity, it is not possible to have a smoothly functioning exchange, so DEXs incentivize people to add liquidity by passing on a portion of DEX fees to liquidity providers.
Each DEX trading pair has its own liquidity pool. These are called “pools” or sometimes “liquidity pools”. For example, popular trading pair VERSE-WETH on Bitcoin.com’s Verse DEX has a deep liquidity pool that is half VERSE and half WETH (wrapped ETH). Liquidity providers for this and other pools on Verse DEX earn a proportional share of 0.25% of the total volume of assets exchanged by people trading between the assets in the pool. Liquidity provider earnings are displayed as dynamic APY. In the case of Verse DEX, you can find the dynamic APY in the Pools section.
When you deposit cryptocurrencies into a liquidity pool, the smart contract mints and sends you a token, which is a kind of receipt. This token, known as a liquidity pool (LP) token – sometimes referred to as a liquidity provider token – is used to realize pending rewards from your position and withdraw your deposited crypto assets.
In some cases, you can also “farm” or “stake” your LP tokens. This will give you additional rewards. Read on to learn more about how this works.
Introduction to the farms
As discussed above, DEXs encourage people to add liquidity by passing on a portion of DEX fees to liquidity providers. Farms are a way to further incentivize liquidity providers by offering additional rewards. They work like this: Liquidity providers deposit their LP tokens into a farm, which is a collection of smart contracts. While these LP tokens are in the farm, they entitle the holder to earn additional rewards.
What are Farming Rewards and where do they come from?
In most cases, farming rewards are paid in the native token of the DEX and come from the pending supply of that token. The operators of the DEX determine the APY for farming rewards, which LP tokens are eligible for farming rewards, and the time frame in which the farming rewards will be available.
Some DEXs have offered very high APYs for farming, even over 1000%, to attract high liquidity and attention to the DEX. However, such high rewards are usually not sustainable. Since the rewards will eventually be paid out in the DEX’s native token, the value of those tokens will collapse if too many are spent and if too many recipients decide to sell. In addition, very high APYs are likely to attract so-called mercenary liquidity providers. These are participants who sell their farming rewards and immediately withdraw their cash once the farming rewards run dry. This leaves the DEX without liquidity and the token of the DEX without value.
In the case of Bitcoin.com’s Verse DEX, the farming rewards are part of the Verse Ecosystem Incentives program, which aims to spread VERSE widely and encourage community growth in a sustainable and value-added manner. Specifically, 35% of the Verse token supply will be allocated to rewards distributed via yield farming and other mechanisms. Tokens will be made available to the incentive program linearly and in blocks over 7 years, although their distribution will be managed by the Bitcoin.com team. The team has identified an opening APY of 80% for Verse Farms as a reward that can provide a sustained incentive to generate liquidity and build Verse DEX to the point where it offers a premium decentralized trading experience.
How are bonuses calculated and distributed?
Farm rewards are allocated to individual users based on their share of LP tokens deposited in the farm and the time those LP tokens are held in the farm.
The APY is forecast using a model based on payout periods. This forecast typically assumes that 100% of the liquidity providers for the given pool have deposited their LP tokens in the farm for the duration of the distribution period. If not all liquidity providers have deposited their LP tokens in the farm, those that have deposited will receive a higher APY than predicted. If more liquidity is provided in the pool during the distribution period and more LP tokens are deposited in the farm, the APY will temporarily be lower than forecast.
Distribution periods are set by DEX operators and may change over time. In the case of Bitcoin.com’s Verse DEX, the distribution period for Verse Farms is fixed at one-week intervals.
How to Farm Step 1: Get Liquidity Pool (LP) tokens
Injecting liquidity into a DEX is straightforward. For the purposes of farming, you should not only consider the APY for the different pools that DEX offers, but also consider which LP tokens are accepted for farming and what the APY is for the farm. Once you have identified an interesting pool/farm, start depositing the specified crypto assets into the pool. You get LP tokens, which you then deposit in the farm.
Use this guide for step-by-step instructions on how to contribute to pools on Verse DEX.
Here is a video demonstrating the contribution process to the VERSE ETH pool:
How-to-Farm Step 2: Deposit Liquidity Pool (LP) tokens into a farm
Once you have the LP tokens accepted in a farm, you can deposit them in a farm to earn additional rewards.
For example, on Bitcoin.com’s Verse DEX, to earn rewards from the VERSE ETH farm, you first need LP tokens from the VERSE ETH pool (see above). If you provide liquidity in the VERSE-ETH pool, you will receive VERSE-X (VERSE-ETH) LP tokens and these tokens will be deposited in the VERSE-ETH farm.
For step-by-step instructions on how to deposit LP tokens into Verse Farms, use this guide.
Here is a video demonstrating the process:
Is there a hold on deposit in farms?
While some yield farming strategies have lockup periods, verse farms don’t. You can withdraw your LP tokens at any time and be entitled to your share of rewards for the exact length of time your LP tokens were deposited.
How do I claim rewards?
In some cases you need to withdraw your LP tokens to get rewards. Other times, you can leave your LP tokens in the farm and claim rewards whenever you want. Bitcoin.com’s Verse DEX allows you to claim farming rewards without deducting your LP tokens from the farm.
Use this guide for step-by-step instructions on how to claim rewards and withdraw LP tokens.
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