April 1, 2021
Before anything else, I would like to greet you guys with Happy April fools month 😁 but don't worry, I am not here to fool you. I'm just hoping that this month will gonna be a productive and positive month for all of us.
Anyway, since farming and staking on PancakeSwap, CubFinance, and other DeFi platforms has been the trending lately, I also tried what other users has been doing. I even think that I am already behind from my friends as they are already earning profits from farming and staking on PancakeSwap and CubFinance.
I do staked some CAKE on PancakeSwap but I want to try their farming since @Eirolfeam2 is earning good amount from it. And I don't have CUB yet, so I will use my other crypto for now to farm more CAKE on PancakeSwap.
So the other day, I transferred my TWT and BNB to my Trustwallet to provide funds to Liquidity Pool of PancakeSwap so I can farm more CAKE.
If you want to farm on a DeFi platform, you need to add your assets to their Liquidity Pool. In my case I chose TWT-BNB LP pair with 105.4% APR, since those are the available assets that I have.
Simply navigte to the farms section and you need to enable the LP pair first in order to supply funds to the Liquidity Pool.
Then click "Get TWT-BNB LP" and it will direct you to the adding Liquidity section.
Add the amount of assets you wish to supply. Since I only have 112.26 TWT, I can only supply .255 BNB to the pool.
And once you approved and supplied your assets, go back to the Farm section and stake your LP tokens. I've got 4.90683 LP tokens from 112.114 TWT and .255 BNB I have provided.
Just click Confirm and it's done.
It will start to generate profits once you successfully stake you LP tokens. As you can see from the photo, the output is estimated and if the price changes by more than 0.8%, the transaction will be revert.
At the time of writing, I already generated a profit of 0.023 CAKE and the APR changes to 106.59% and the LP tokens increases to 4.907. This maybe due to the increase of prices of both TWT and BNB.
The downsides in DeFi is that, every transaction and confirmation has fees because the rewards are from those fees. So you should spare some BNB to pay for the fees. And
If you wish to farm or stake on any DeFi Yield Farming platforms, you should also know the things to consider as well as the possible risks in farming and staking on DeFi platforms.
I remember @Ruffa asked me before what is farming, and I told her that we are farming the profit from the crypto we have staked. She also asked me about APR which is the Annual Percentage Rate. But I guess, I gave her a not so accurate answer. I never tried farming or adding Liquidity to the pool before, as I only stake on PancakeSwap and Binance, and this is my first time to do farming.
So let's tackle Yield Farming for you to know things about it as well as the risks.
What is Yield Farming?
Yield Farming involves lending your funds to others using smart contracts. A simple explanation is, it is a way to make more crypto with your crypto.
It is currently the wild west of Decentralized Finance (DeFi) where farmers are competing of who will get the best crops. And for farmers to get high yields, they move their funds around between different lending marketplaces to maximize returns.
Yield farming is also referred as Liquidity mining or locking up your cryptocurrencies and getting rewards. It is also paralleled to staking. However in farming, there is what we called as Liquidity Providers (LP) that supply funds to Liquidity Pool.
What is Liquidity Pool?
The Liquidity Pool is the smart contract that contains funds. Liquidity Providers get rewards for adding funds to the pool and the rewards may came from the fees generated by the underlying DeFi platform or from other source. In some platform, LP can earn multiple tokens that they can then be added to the Liquidity Pool to get more reward.
What is APR/APY?
This was the question of @Ruffa.
The estimated yield farming returns are typically calculated annually using the metrics APR (Annual Percentage Rate) or APY (Annual Percentage Yield).
We commonly see APY in compounding or reinvensting profits to get higher returns. And APR is use in yield farming and staking. But in some cases, they are used interchangeably. Their difference is that, APY is inclusive in compounding interest, wherein the interest paid in previous periods are being added to the current fund, which gives higher returns than APR.
For example:
You lock your 100 BCH for one year (52 weeks period) in a platform with 10% APR. After one year, you will get a return of 110 BCH.
But if you lock your 100 BCH for the same period in a platform with 10% APY, after one year, you will get a return of 110.51 BCH.
That is because the APY is inclusive of interest paid in previous periods.
The calculations of rewards are also based on estimations and projections, so they can fluctuates rapidly. And in some cases, yielding high returns may stop if there are many farmers that jump onto the yield farming marketplaces.
RISKS ON YIELD FARMING
Yield Farming is not simple as you thought, it is also worth noting that yield farming can be risky and if you don't understand what you are doing, you will likely to lose your money. If you have heard the line, "high risk, high reward," then it is the case in yield farming. And in DeFi yield farming, there is no such thing as "free lunch." You should consider the risks once you step onto the farms of DeFi, because there are always financial and technical problems to be aware of.
The risks that you need to be aware of are:
SMART CONTRACT RISK
Many Smart Contracts are developed by small teams with limited budgets, so there is a risk of smart contract bugs. Since yield farming is supplying assets to smart contracts, your funds could be compromised once they are successfully attacked by hackers and bugs.
The best way to mitigate smart contract risk is to check if the project is audited by reputable auditing firms. But in some cases, even the bigger protocols that are audited by reputable auditing firms also being attacked by bugs and hackers.
And in DeFi, and even in other platforms, there is also WEBSITE RISK. Some hackers attacks the website of the DeFi platforms which will compromise the protocol since they it as the backends.
Take PancakeSwap and Cream Finance. The Domain Name Service (DNS) attack last March 15 compromised the protocols' websites which displayed a request for the users to enter their seed phrase, which, if submitted, will compromise their entire account.
PancakeSwap is the most used decentralized exchange on Binance Smart Chain with a total locked value of $5,820,457,775.33 according to CoinMarketCap. And Cream Finance has a total locked value of $252.7M according to Defipulse.
Since the attack was not on the smart contract itself, it is still unclear how many users has been tricked by the hacker as well as the total amount the attack netted.
LIQUIDITY RISK
For those who wish to borrow assets with a collateral, liquidation risk is something that you should take into account. When your collateral is no longer enough to cover your loan, you will suffer from liquidation penalty to your collateral. This can happen if the value of either your collateral drops, or the value of your loan increases.
To reduce the liquidation risk, borrow or supply assets that are less volatile such as WBTC or stablecoin like USDC. You should take note that if both loan and collateral are volatile, the market can move against you.
IMPERMANENT LOSS
Impermanent Loss is something that Liquidity Providers should know. If the prices of the pairs drastically drops, you can actually lose money compared to holding the underlying assets. It is temporary loss due to volatility of the trading pair but you can avoid it if you will hold it longer on the smart contract until the assets make up their losses.
To avoid impermanent loss, you should also choose wisely of what pool to enter. Some farmers choose protocols that uses less volatile assets like stablecoins or wrapped versions of coins such as WBTC which relatively contained price range and there's a smaller risks of Impermanent Loss for Liquidity Providers (LP).
And before locking your funds on any smart contracts, you should also know that DeFi protocols are permissionless and the whole DeFi ecosystem is heavily reliant on each of its building blocks. So if just one of the blocks doesn't work as intended, the whole ecosystem may suffer.
Each platform has its own rules and risks. If you want to get started with yield farming, you must know first how decentralized liquidity protocols work. And you must not only trust the protocol but you should also consider all other things it may be reliant upon.
And before investing on any platforms, you should take risk management to remain control of your investments.
Farm and waiting to earn it