Today, the cryptocurrency market is becoming more and more popular and has the participation of a large number of users, especially for the flourishing decentralized financial applications, many new concepts have been born and developed strongly. In particular, the forms of generating profits by providing liquidity to Defi protocols. In which Farming is a form of making money based on your available assets. Let’s find out the details with Unich Analysis in the article below!

What is Farming?

Farming or Yield Farming is a term in the cryptocurrency market, representing the action of users generating profits from their cryptocurrency assets, specifically participating in providing liquidity for Defi applications. The nature of Farming is that users provide their liquidity into the liquidity pools of DeFi protocols. These Liquidity pools allow users to perform token trading activities, and borrow or lend cryptocurrencies. Farming is quite similar to depositing savings in a bank to receive interest, and the bank will use our money to lend to other entities such as individuals and businesses, and receive the difference. 

How Farming works

On Defi platforms, providing liquidity means that users must lend or stake assets to earn profits. The amount of money that users receive can be from a percentage of transaction fees, interest from lenders, or from governance tokens.

In Farming, the main user will lend the cryptocurrency he owns to others. Then, this cryptocurrency will be bought back and owned by the house. The house will pay an amount equivalent to the default rate when the main user stakes or lends.

Key terms in Farming

Some basic terms commonly used in Farming:

Annual Percentage Yield 

Annual Percentage Yield (APY) is the annual income interest rate. Simply put, APY is the actual annual interest rate that you receive, including the effects of compound interest when investing.

By providing Liquidity calculated annually, users will receive a portion of the income as APY, not including other related costs in it. In addition, this rate can be changed depending on each time during the investment process.

Unlike simple interest, compound interest will be based on periodic time and the amount will be immediately transferred directly to the account balance. At each stage, the account balance will accumulate more and more, so the interest paid on the balance will also be higher.

Total Value Lock

Total Value Lock (TVL) is the total value of assets locked on DeFi smart contracts. This is where the number of existing assets of Farming participants in the Pool is being held in a specific protocol.

In fact, TVL is not a debt balance but the total basic supply secured by a specific application or by DeFi. Therefore, this value is calculated by three different components: USD, Ethereum, and Bitcoin.

In addition, TVL is also a value that represents the size of the Pool as well as the level of competition in the market. The higher the value, the more attractive the market is and attracts users.

Formula for calculating TVL value: TVL = Total Token Locked x Current Price.

In which:

• Total Token Locked: Is the total number of locked Tokens.
• Current Price: Is the market value of locked Tokens.

Note when participating in farming coins

• When deciding to participate in Launchpool, you must carefully consider your profits and assets because there may be price risks due to market fluctuations.
• In Launch Pool, you will not be limited in the number of tokens you deposit and the number of tokens distributed will be limited. Therefore, the number of tokens you receive when participating in this platform will not be as you expect. The more tokens you deposit, the more you will receive and the percentage will change.
• In addition to receiving free tokens when Farming coins into Pools, users can also receive additional savings interest rates.
• When depositing more tokens into the above programs on Launchpool, users need to carefully consider and weigh their financial conditions.

Opportunities and risks when farming in crypto

Farming coins can bring investors opportunities, but it also has certain risks. Here are some of the opportunities and risks when investing in Farming coins.

Opportunities

• A new form of earning money for cryptocurrency investors around the world. Create investment opportunities for DeFi and support this platform to be traded with high liquidity. 
• Profitable players can quickly increase their profits by relying on the liquidity of the DeFi platform. Through the interest rates of loans as well as tokens from their lending companies.
• Help players better understand DeFi, and grasp future improvements and updates on DeFi.
• In addition, credit markets operating on Ethereum also offer new strategies for owners. In order to gain attractive profits from players’ cryptocurrencies. 

Risks

• The cryptocurrency market has not been approved by the laws of many countries. Therefore, making money based on the origin and assets of virtual currency will have great risks. In the event that the cryptocurrency exchange is shut down, the player’s mining activities will be lost. 
• DeFi applications are open source, and vulnerable to attacks and risks when participating in this platform. In particular, with new, unproven tokens, there is a high risk of losing value. Some coins that players are depositing for Farming are only a few years old at most. They may lose value after that, which will cause the entire system to break down.
• Depositing money to perform Farming activities means that players will immediately lose access to liquidity until they are withdrawn.
• Some projects will use a token release schedule, at which point you will not access your token rewards. The time can last for several weeks, months, or even years.

Some popular farming platforms

• Binance Launch Pool: This is a platform that is trusted and chosen by many people. This platform allows users to use their tokens to create new free tokens in just 30 days.
• Compound: On this platform, when you Farm coins using decentralized lending, you will receive compound interest.
• UniSwap: This is an application that supports the exchange of additional token pairs quickly. Users must stake on both liquidity sides at a ratio of 1:1. You will be paid a percentage of the transaction fees.
• Sushi Swap: This platform provides a lending market, launchpad, leverage, and DApps.
• Pancake Swap: Used to swap additional BEP20 tokens. Farm coins on this platform mainly through lotteries, team battles, gambling, and NFT collection.

Some frequently asked questions

Who can participate in farming coins?

Any user can farm coins and receive rewards in the form of tokens. 

What is the minimum balance for farming coins? 

At present, depending on the project, you can participate in farming coins.

What is the average farming coin time of the project?

The average coin farming time of the project is 30 days and this time may vary depending on the regulations of each project.

Summary 

Although farming is a good form of profit, there are still many risks and challenges in the security system as well as anti-dumping. Those risks took place during the strongest boom of DeFi, so users should consider and learn carefully when participating in Farming. Above is the knowledge about farming that Unich Analysis has compiled and sent to you. Thank you for your attention.