Farming: what is it?

We could compare farming to the activity of operating a farm. In the domain of cryptocurrencyfarming refers to the generation of passive income from crypto-assets that one is ready to immobilize on a platform.

It was from the summer of 2020 that this subject gained momentum because it appeared that this activity could provide a level of return very much higher than the investments known until then. The apps of farming such as Pancakeswap, Sushiswap, Raydium, Yearn or Quickswap usually rely on one of these four blockchains :

• Ethereum;
• Binance SmartChain;
• Polygon;
• Solana.

The first farming site to be talked about was Sushiswap. Its major drawback was that it is based on the Ethereum blockchain and the transaction fees (fees) linked to this currency can be very high: it is not uncommon to pay the equivalent of tens of euros for a transaction.

Pancakeswap appeared in the aftermath, and it is based on the Binance Smart Chain in which the fees are much lower than on Ethereum (a few tens of cents for a transaction). This major reduction in fees contributed greatly to the success of Pancakeswap.

Now, Polygon and Solana offer to practice farming with fees even more reduced than on the Binance Smart Chain, in the order of a few cents or fractions of cents.

The question generally asked by those to whom we speak about farming is the following: but where can such interests come from? How is it possible that the farming platform can pay its participants so much? Explanations follow.

Farming is DeFi

First, farming is an application of Challenge (decentralized finance) and applications of this type are generally not tied to a particular company, they are based on a smart contract which defines its operation. Advantage for users: applications of this type do not require identification to be able to use them. They usually use a wallet (wallet) of DeFi such as Metamask, Trustwallet or XDefi.

However, a exchange (marketplace) decentralized as found in DeFi has no equity. By comparison, a exchange classic, such as Coinbase or Kraken, must always have a reserve of BTC (Bitcoin), ETH (Ethereum), ADA (Cardano), etc. If Coinbase or Kraken runs out of ETH, it must buy some to fill its reserve and meet demand.

A DeFi application such as the Uniswap exchange works a bit like a common pot: it is fed by its users and only by them.

How does farming work?

Imagine that a trader comes to a platform such as Pancakeswap with the objective of buying BNB that he intends to pay in USDT. He can only do this if Pancakeswap already has a good amount of BNB. Farming therefore assumes that an individual (the farmer or farmer) willingly loaned cash to a cryptocurrency exchange. These loans are made in the form of pairs: BNB and USDT, BNB and CAKE, etc.

the farmer lends these currency pairs to Pancakeswap, or another platform, so that each part represents the same value when it is created. For example, if 1 BNB is worth 415 USDT, the pair should be composed as follows: 1 BNB – 415 USDT, 2 BNB – 830 USDT, 10 BNB – 4150 USDT…

Thus, the platform can provide the trader with the BNB he wants to buy and he charges this trader a fee in the process. The platform then rewards the farmer (the one who lends this cash) by paying him a percentage of these fees (for example, 0.17% on Pancakeswap).

Moreover, if many traders come to buy BNB, the price of this currency will rise, and the commissions will be higher in the long term.

In addition, one of the strengths of farming platforms is generally to regularly reinvest accumulated interest, and this factor can greatly increase earnings over the long term. We talk about compound interest.

These various factors (there are others more complex to simply detail) lead farming to offer much higher returns than traditional savings solutions. Of course, the operation is not without risk and a farming operation does not always work as expected.

Real opportunity or mirror to the larks?

The fact remains that farming does not have a good reputation. Some exchanges emerged in the wake of Pancakeswap offer superiorly high yields, bordering on the surreal. These platforms tend to attract zealous traders who are adept at selling and buying at the right time to extract maximum profits.

You should know that the most impressive gains concern very young currencies on which you must therefore agree to take serious risks, and therefore to lose, if necessary, most of your bet. Because, the earnings of such farming platforms are paid in the currency in question. However, it happens that a young currency climbs spectacularly following a cleverly orchestrated buzz on Twitter or Discord, then relapse vertically, in the same day. Investors who sold when the currency was at its highest, however, had time to pocket their profits.

It is generally not recommended for those new to cryptocurrency to venture into such operations. One of the variants of farming called yield optimizers makes it possible to achieve interesting capital gains, if not so spectacular.