Lucky for you, this article is precisely about explaining how DeFi helps you make money in your sleep, so that rent payments don’t take up 50% of your total income each month. If you haven’t already read my previous article, make sure to go do that! This article will delve into the “how” farming works, but if you want a step by step tutorial (complete with pictures!) on how to get started farming on Apeswap, come back here after reading through this article
Liquidity Provider (LP) tokens
First, we need to discuss what an Automated Market Maker (AMM) like Apeswap does. In the stock markets today, in order for you to sell 1 stock of Microsoft at $20, you’d have to wait around till there was someone willing to buy 1 stock of Microsoft for $20. Two things to note here:
- This delay isn’t ideal since you might have needed that $20 desperately at that moment in time.
- You’d pay a fee to the company
Enter Apeswap. Think of Apeswap as an automated robot that is going to always be willing to trade one crypto for another with you, and will do it instantly. This is made possible by the hundreds and thousands of liquidity providers (LP’s) that contribute to a “pool” of assets that sit in Apeswap, ready for anyone who wants to make a trade. This solves issue 1 above.
So what’s in it for the LP’s who provide their crypto to Apeswap’s pool? In a traditional bank or the stock market, a single company provides the services and the fee that you pay goes directly to them. Unless you had hundreds of millions of dollars, it’s impossible to do what they do. Apeswap changes this by making YOU part of the “company”.
When you provide liquidity to Apeswap, you’re given combination specific LP tokens as a “receipt” which proves how much you’ve contributed to the pool. Provide BNB and BANANA — You get BNB-BANANA LP tokens, provide BUSD and ETH — you get BUSD-ETH LP tokens.
These LP tokens can be exchanged anytime you wish from Apeswap to redeem the crypto you’ve just put in, minus the risk of impermanent loss.
With these LP tokens, you are now part of the “company”. Anytime someone makes a trade on Apeswap, a 0.3% fee is taken as payment for the service. 0.25% is split amongst all the LP that have contributed to the pool, so those traders are indirectly paying YOU the fee.
Now, anyone could provide liquidity in any combination to Apeswap, ready to be used in case a trader wanted to trade that specific combination of cryptos. But there will inevitably be more popular combinations depending on the state of the market — BNB-BANANA for example, is a popular one.
For Apeswap to be popular, it needs to ensure that it has a large pool of popular crypto combinations that’s ready to be traded. It would be pointless if 95% of the traders wanted to trade BNB-BANANA, but 80% of all the liquidity provided by the LP’s were in the BNB-SAFEMOON combination.
For this reason, the concept of farms were invented. Remember those LP tokens that act as a “receipt” when you provide liquidity? Apeswap incentivizes people to provide liquidity in specific combinations by allowing them to use their LP tokens in farms.
Instead of just sitting in your crypto wallet, these LP tokens can now be placed into a “farm” in Apeswap, which will then generate additional income. Different farms will have varying degrees of APR, and the more popular combinations that Apeswap wants to encourage will have the highest APR.
The BNB-BANANA farm for example is offering 0.8% daily to anyone who provides liquidity in that combination. That’s $8 every single day with an initial investment of $1000, which can then be compounded back into the farm.
Now go check how much interest your bank is paying you daily for keeping $1000 in a savings account.
So what does this all mean? It means that by providing liquidity for popular combinations, you’re now receiving 2 different streams of income.
- A portion of the 0.25% fee that traders are paying when using Apeswap
- The Apeswap farm incentive for providing a popular liquidity combination
It’s a big and new scary world out there, with loads to learn and plenty to read up on. But its also a way for us regular joes to make a little extra money instead of living paycheck to paycheck.
We’re not done with farming just yet! There’s already quite a bit to take in so take some time to process the above, maybe check out Apeswap and familiarize yourself with the farm combinations. Once you’re ready, part 2 of DeFi Yield Farming will be waiting.