What is profitable farm (Farming of income)?
Yield Farming Farming or Farming is the process of making additional profit (usually in the form of managing tokens) users of Defi Terraform execs Protokolov for providing loans or receiving loans, as well as for providing liquidity to decentralized exchanges (DEX).
The first successful project in the field of pharmination is the Synthetix decentralized derivatives platform, but the boom of revenue farming began after starting the control token of the Compound (Compulp) protocol (Comp. With the help of its distribution, the project attracted many liquidity providers, and the price of token increased significantly. Almost immediately the example of Compound was followed by other projects.
How to earn on profitable farm?
Earnings on interest through a loan of funds
Both receiving and providing a loan involve the placement of the participant funds in the liquidity bullet either as a collateral or as a deposit. The farmer is recorded in the project that issues loans and transfers funds to another user who draws up an application for a loan on the condition of the subsequent payment of interest. The farmer’s income is bonus tokens obtained along with a loan percentage.
Liquidity pool -This is a smart contract on decentralized exchanges (DEX) based on automated marketing technology (AMM). During the auction, the ratio of tokens in the pool changes, as well as the price of tokens. For example, the user purchases 100 ETH using the ETH/USDT pool. The USDT volume in the bullet increases, and the volume of ETH is reduced. At the same time, the price of ETH is growing.
A participant providing liquidity receives two types of coins: profitable LP tokens, which serve as a share and confirmation that liquidity was provided with a pool and “burn” in the blockchain with liquidity; and bonus tokens DEX or Defi Protokols, which serve as a reward for activity.
The pool may stimulate participants to provide more liquidity for a specific asset due to an increased reward in bonus tokens. The revenue commission of the pool is distributed in proportion to the funds that participants place.
Farmers sell bonus tokens on the stock exchange in exchange for basic liquidity, which is again delivered to a certain pool, and bonus tokens are again accrued to the participants. Such manipulations are performed as long as they remain profitable, blocking the trade commissions and commission fees of the Ethereum network.
How to calculate profit from profitable farming?
Profit from profitable farming is calculated in the form of annual interest, as in a bank, says Streamity founder Vladislav Kuznetsov.
The most common metrics are an annual interest rate (APR) and annual interest rate (APY). The difference between them, according to Kuznetsov, is that APR does not take into account the accrual of complex interest. In this case, the accrual of complex interest means direct reinvestment of income in order to get more profit.
What are the risks associated with profitable farming?
Among the main risks associated with the pharmacy, the founder of Streamity, Vladislav Kuznetsov, calls errors and vulnerabilities in smart contracts, fraud, falling token against the backdrop of high percentage of profitability or economic insolvency of the project as a whole.
- Smart contracts. In the Defi sector, many protocols develop small teams with a limited budget, which increases the risk of bugs and vulnerabilities in the code.
- High commissions in Ethereum, which can do the operations related to pharmaceutical.
- Removal of funds from liquidity bullets. Any user of the Defi platform can withdraw his liquidity from the market, with the exception of those scenarios when it is blocked through a third side mechanism. In addition, in most cases, developers dispose of large volumes of basic assets and can easily carry out the dumps of these tokens in the market.
- AMM work on the basis of constant functions to determine the cost of tokens in liquidity pools. Due to changes in prices in foreign markets, the quotes in AMM can diverge with them, arbitrators use this. When displaying, liquidity suppliers can get less tokens due to the risk of inconsistent losses.
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