Farming explained - what is it and how does it work?
Product

Last Updated: September 23, 2022

Farming explained - what is it and how does it work?

Yield farming is a method of generating extra cryptocurrency with your existing assets. Money is being lent to other people through smart contracts. Let’s take a deeper look at what is farming, how it works, and what risks are involved. 

Introduction

Yield farming is one of the fresh concepts of investments. Using permissionless liquidity protocols, it's a new way to profit from cryptocurrency holdings. Thus, yield farming may alter the way in which investors will HODL in the future.

What is yield farming and how does it work?

Yield farming is a method of generating rewards from crypto assets. It implies locking up cryptocurrency and receiving rewards. 

Farming usually works with users referred to as liquidity providers (LP) who add funds to liquidity pools.

A liquidity pool is a smart contract with funds. This pool powers a marketplace where users can lend, borrow, or exchange tokens. These platforms charge fees, which are then distributed to liquidity providers in exchange for the service.

What is the risk of yield farming?

There are risks associated with every investment, and yield farming is no exception. Farming can be beneficial in the beginning, but it takes careful strategic planning to remain profitable. 

If you don’t strategize,  you're more likely to run into the following dangers:

  • Collaters could be liquidated, and in order to avoid that, add more collateral from the actual asset you intend to borrow.
  • You can lose your assets due to smart contract bugs, so carefully check the validity of smart contracts.
  • Your tokens could lose value, so DYOR.

Conclusion

Yield farming can be a very profitable way to earn money passively if you have a smart strategy. However, if you don’t manage the risks, there is a  possibility to lose your money, like with every other investment. DYOR and invest smart!

Bitlocus will introduce fixed-term farming at the end of September, so get ready to put your idle assets to work for you in return for great rewards!