Crypto farming has been on the lips of many people for the past 3 years, especially since the launch of various DeFi alternatives on the Binance Chain and Ethereum ecosystems. In this opportunity, we will review what Crypto Farming is and what its benefits can be.
What is Crypto Farming?
Crypto Farming is a process where cryptocurrency holders lock up their tokens for rewards. It allows you to earn a fixed or variable interest by putting your crypto in a DeFi market, where liquidity is being provided.
In other words, yield farming consists of lending cryptocurrencies through smart contracts on a network in exchange for interest.
Let’s think about the traditional fixed term where we put our money at the disposal of the bank, who blocks it for a set time. At the end of the term, the bank returns the capital plus interest. The bank itself uses that money as liquidity for its operations. The fundamental premise of Crypto Farming is based on this mechanism.
Crypto Farming Terminology
These are some of the most used terms in Crypto Farming, so it is very important to know and identify them.
- Farm, set of alternatives for farming.
- Farming is the activity of lending or blocking our funds, providing liquidity.
- Farmer, is an investor or trader.
- Farming is farming.
- Yield is the profit we get from farming.
- APY is Annual Percentage Yield, which means annual percentage yield, taking into account the reinvestment of funds, that is, by compound interest.
- APR is Annual Percentage Rate. As its name indicates, it is the percentage rate without taking into account compound interest.
How profitable is crypto farming?
This will depend on several factors, mainly:
- The cryptocurrency.
- The platform.
- User Participation.
The more changes a user makes to their wallet, the better the performance. Let us remember that the interest can be variable, so periodically changing the platform or crypto is an interesting option to generate more yield.
If I had to tell you how much you would earn in very general terms and taking an average of everything, I would say that:
- With a Conservative profile: between 5 to 10% APY.
- With an Intermediate profile: between 10 and 20% APY.
- With an Active profile: more than 20% APY.
There are cases where you can earn up to 100%. However, these investments can be riskier/volatile and can change trends quickly.
In normal cases, a couple of solid projects can give you between 10% and 15% APY. This decision will give the user safe returns and lower risks.
Pros and Cons of crypto farming
Let’s review what advantages crypto farming has and what is bad about the system itself.
- Anyone can enter, without major restrictions. This is due to the decentralization principle that drives crypto farming.
- You can choose between many alternatives.
- Interest rates far exceed any traditional financial institution.
- At the system level, it provides liquidity to cryptocurrencies.
- It does not require much effort on the part of the investor.
- Risks on the part of the cryptocurrencies themselves. Let’s remember that the funds are blocked so we cannot operate with those cryptos and if they suffer any problem, we will not be able to do anything.
- The platforms that offer the services are not as secure as the investor would like, so they may suffer security breaches from cyber attackers.