How Do You Farm Cryptocurrency?
You can farm cryptocurrency by providing liquidity, lending, borrowing, or staking your crypto assets. Click the link to learn more.
Published May 30, 2022.
Crypto farming can generate good profits for investors who have a risk appetite. You will primarily invest in startups and early-stage crypto projects that have the potential of yielding sizable profits, ranging between 1-1000% APY.
However, yield farming is a risky investment. You are faced with the risk of impermanent loss. The value of your pegged assets might gain or drop anytime and impact your profits. Besides, you can be a rug pull victim when developers disown their projects and disappear with investor funds. Again, DeFi protocols are vulnerable to bugs, which bad actors can exploit.
Generally, if you can bear the above risks and have a good stake, crypto farming will benefit you greatly.
What to Consider Before Farming Cryptocurrency
Here are five risks of yield farming you should consider before farming crypto:
Volatility is the degree to which asset prices fluctuate. The value of your assets may decline or increase while they are held in yield farms.
As mentioned earlier, yield farmers mostly invest in early-stage projects with little founder information or legitimacy. Crypto fraud and fund misuse accounted for the biggest percentage of the $1.9 billion in cryptocurrency crimes in 2020, according to CipherTrace.
3. Rug Pulls
Since yield farming is a new concept practiced on decentralized protocols, some developers initiate projects, abandon them, and disappear with investor funds without a trace. Therefore, DYOR before investing your hard-earned money in any farm.
4. Smart Contract Bugs
Yield farming leverages smart contracts that may be susceptible to bugs and hacking, exposing your assets to further risks.
5. Impermanent Loss
The price of your crypto holdings can rise or decline during the lock-up period. These profits and losses become permanent after the lock-up period. When the losses exceed the yield, you may realize you could have been better off had you kept your funds available for exchange.
How to Farm Cryptocurrency
Here, you lend your digital assets to borrowers via a smart contract and generate a yield from the loan’s interest.
As a yield farmer, you can hold one asset as collateral to secure a loan. Afterward, you can use the loan to generate yield. You retain your first holding, which may gain value with time while farming yields on the borrowed tokens.
You can deposit cryptocurrencies to proof-of-stake (PoS) blockchains and earn staking rewards. Besides, you can still stake the rewards you earn to generate more profits.