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What are farming cryptocurrencies? – The Coin Republic: Cryptocurrency, Bitcoin, Ethereum and Blockchain news

Cryptocurrency farming emerged with the advent of DeFi, a financial technology that aims to remove intermediaries in financial transactions. This method of earning interest on crypto assets is similar to how we earn money in our financial institution’s money savings account.

How do our funds help crypto farming?

Crypto farming involves clients lending their cryptocurrency to an exchange in farms or pools to provide liquidity for incentivized trading. Lending the coins to different customers for trading and lending is facilitated by smart contracts running on the blockchain. Buyers are compensated with rewards in the form of transaction prices or interest. These rewards are settled in the form of Annual Percentage Returns (APY). When the fee of these cryptocurrencies increases, the investor gets better returns. Decentralized exchanges can pay out rewards in the form of the same cash farmers deposit, their governance tokens, stablecoins, or any other cryptocurrency.

New decentralized exchanges and tokens often require liquidity to have enough coins in circulation for a thriving marketplace. Farming is a promising way for customers to earn cryptocurrency rewards. It allows buyers to maximize returns on their cryptocurrencies by paying a form of interest on the coins they buy and keep instead of others.

Yield farmers can deposit available cash or offer liquidity pairs on Automatic Market Maker (AMM) platforms such as PancakeSwap, SushiSwap, TangoSwap, BenSwap or UniSwap.

Farmers provide liquidity in a pool by depositing two cash for another pair. One of the coins is typically the local blockchain token or a stablecoin like USDC. PancakeSwap, which runs on the Binance Smart Chain, largely pairs cash with Binance token BNB or stablecoin BUSD.

On UniSwap, which runs on the Ether blockchain, coins are specifically paired with ETH or the stablecoins USDC, USDT, and DAI.

TangoSwap and BenSwap run on the Clever Bitcoin Cash network, so the coins are paired with SBCH or their native tokens, TANGO or EBEN.

How do yield farmers earn passive cryptocurrency?

Yield farmers are rewarded with a portion of the transaction costs that users pay to exchange coins. The amount they acquire is proportional to their share of the pool contribution – the more they invest, the better the return. Buyers can lend their cryptocurrency to the liquidity pool for a few days or a whole year, but they typically pay transaction costs to join or leave the pool.

Apps for specific liquidity pools are particularly competitive and traded frequently, so yield farmers want to invest a lot of time to experience the best yields and switch pools regularly to increase their returns.

Does the method involve risks?

Because the returns can be too high, yield farming can be simultaneously unstable, unstable and more complicated than putting cash in a bank savings account. Logs and earned cryptocurrencies are extremely volatile and can result in carpet moves where developers abandon a task and walk away with users’ funds.

Every other pitfall of yield farming is “fickle loss” in liquidity pools where traders deposit pairs. If one of the coins is a stable coin and the value of the alternative increases, the AMM adjusts the ratio of the two tokens to keep costs constant.

This concerns a discrepancy between the price of the coins compared to the number that was deposited. If the investor deletes their cryptocurrencies from the pool, they face a perpetual loss that may not be protected by the fees received as praise.

If so, they could have made a bigger profit if they hadn’t deposited their coins into the pool now.

Staking might be a much better option

At the same time, “yield farming” and “staking”, as they are often used interchangeably, represent different concepts. They can be any famous defi technique to generate plausible returns on crypto assets. However, they vary on how individuals need to pawn their crypto assets in decentralized protocols or applications.

Permits take a look at some basic characteristics of how staking differs from yield farming. Staking is a form of cryptocurrency mining that secures a blockchain community rather than offering liquidity. The more validators use their money, the more decentralized and convenient a blockchain becomes. When staking, buyers agree to lock up their assets for a set duration. You often need to wager a minimal amount of tokens.

Staking rewards typically come in the form of constant APY rates of around 5%, which is significantly lower than common yield farming payouts. New cryptocurrency investors often find that it is quite difficult to deposit liquidity pairs on DEXs for yield farming.

These investments require ongoing studies so that traders stay upfront at the most competitive prices while avoiding potential scams. While staking brings lower returns, it is far less complicated for traders as they can lock in their price range for longer periods of time.

When weighing yield farming versus staking, you must consider how experienced you are in using dApps, how dangerous you are, and how much time you are willing to spend studying farms and APYs. Yield farming involves moving crypto through exceptional marketplaces. It is by far the defi sector’s biggest boom driver right now, helping it grow from a $500 million market cap to $10 billion in 2020 on its own.

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