Cryptocurrency farming – what is it

Cryptocurrency farming – what is it

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Cryptocurrency farming is one of the investment strategies. This is an effective way to make money for investors and traders of different levels, and even beginners. We will tell you in simple terms what cryptocurrency farming is, how to make money on it.

What is cryptocurrency farming?

When you deposit your cryptocurrency in a liquidity pool, rent out a trading platform, and are rewarded in the form of interest or transaction fees, this is called farming. In simple words, cryptocurrency farming is an investment type of income that can be compared to a bank deposit, but it is risky and unstable. This method is profitable, and the amount of profit depends on the invested funds, some investors earn 10% per annum, while others earn 1000%.

How does cryptocurrency farming work?

Cryptocurrency farming projects have become one of the most popular among all the options for passive income on the crypt today. Investors earn for storing their tokens in the liquidity pool. The classic pool consists of a pair of tokens, but there are more complex pools that include several pairs today.

A liquidity pool is virtual currency storage where exchange users can exchange one coin for another. The exchange is used to diversify the investment portfolio and reduce the risk of losses from exchange rate fluctuations, as well as for additional earnings. Liquidity determines the ease and speed of selling an asset. A liquidity provider is an asset owner who receives interest for providing crypto. The supplier facilitates the trading of the asset on the exchange.

You need to place a pair of coins in the pool for the same amount to become one of the liquidity providers. For example, coin X is worth $1 and coin Y is worth $10. You need to deposit 1,000 coins X and 100 coins Y to send a pair of cryptocurrencies worth $1,000 each to the pool. Thus, you will deposit a cryptocurrency pair worth $2,000 in the pool.

After writing off the crypt from your wallet, you receive a special token – it displays the provider’s share in the liquidity pool. The more participants in the pool are, the lower the share of each of them is. The share of the rest increases when one of the participants takes an asset from the pool. And every time the share changes, the participants receive a new token representing their percentage in the pool, and the old token is burned.

Benefits and risks

The more crypto the liquidity provider sent to the pool, i.e. blocked, the more income he can receive. The advantage of farming lies in its simplicity – blocking a coin and placing it in the liquidity pool takes a minimum of time, the operations are quite simple and understandable even for beginners. This is a highly profitable way of passive income that does not require time and effort from the investor. Farming is ideal for so-called holders who make money on investments. The main risk of farming is the volatility of the crypt and a sharp drop in the exchange rate, from which no coin is immune. You can add a stablecoin (cryptocurrency backed by fiat currency) to the pair to reduce risks.

Another risk for farmers is scammers hacking marketplaces and stealing assets. You should choose the most reliable and secure trading platforms to reduce the risk of fraud. As a rule, large and popular platforms with large trading volumes have the best security system.

Farming versus staking

Some people confuse farming with staking, another passive way to make money. Staking is not used to ensure the liquidity of the coin, but to ensure the health and safety of the blockchain. Stakers also block a certain amount of crypto for a fixed period or indefinitely, for which they receive a reward in the form of interest. Staking, unlike farming, offers investors lower interest, the profitability of this method of passive income is lower.

You can learn more about what is staking and farming in cryptocurrency, learn how to earn effectively and with low risks by investing in cryptocurrencies, you can take the Crypto Crew course. Join one of the best crypto communities in Ukraine to know everything about cryptocurrency!