Crypto farming: how to start and what you need to know before starting
With the emergence of digital assets and the growth of the decentralized finance (DeFi) market, users have gained access to new ways to earn income, including crypto farming.
What is crypto farming?
The term "crypto farming" comes from Yield Farming and refers the providing liquidity to other users in the DeFi market. The "farmers" themselves are called liquidity providers (LPs).
Crypto farming is a type of passive income from digital assets that are delegated to earn interest. Crypto farming includes:
- Liquidity mining;
- Some types of staking, such as liquid staking and restaking;
- Farming (receiving tokens of other projects as part of promo campaigns).
Note: Although in some sense the mechanics of staking are similar to crypto farming, it is not considered a method of generating income. This is because staking involves locking assets for a set period, and the tokens themselves are not transferred to anyone; they remain in the user's wallet. In addition, staking is not related to the liquidity of decentralized platforms; rather, it is a security mechanism of blockchain networks themselves.
How does crypto farming work?
Crypto farming happens by transferring a digital asset for interest in the form of a loan to other users or by adding assets to a pool through decentralized platforms to provide liquidity.
In exchange for a share contributed to the liquidity pool of the DeFi protocol, the user receives LP tokens, also known as liquidity tokens. With these tokens, the user can withdraw their liquidity from the pool to recover their digital assets. LP tokens can also be traded on decentralized exchanges, just like regular crypto assets.
While the user owns LP tokens that determine his share in a particular liquidity pool, he receives income in the form of interest from crypto farming. The revenue is accrued from trading fees, interest on lending, and allocated tokens of a particular crypto project.
Where and how to farm crypto?
To start crypto farming, you need to acquire tokens on a specific network, such as Ethereum, BNB Smart Chain, Solana, or TRON.
Crypto farming is conducted on specialized decentralized platforms. Such platforms include, for example, DEX exchanges and lending platforms.
Examples of the most liquid decentralized protocols in the DeFi market:
- Aave (lending, multichain);
- Lido (liquid staking, multichain);
- Pendle (Yield protocol, multichain);
- Uniswap (DEX, multichain);
- Jupiter (DEX in the Solana ecosystem);
- PancakeSwap (DEX, multichain);
- Raydium (DEX in the Solana ecosystem).
The complete list of decentralized platforms for crypto farming in various categories can be found using special aggregators such as DeFi Llama.
After the user chooses a platform, they must select a suitable liquidity pool and deposit digital assets into it. Once crypto farming begins, the user will receive regular income in the form of interest.
As a rule, income from crypto farming is accrued daily or once every few hours, depending on the laws of a particular decentralized platform. However, you should consider that the income must be "claimed" — withdrawn to the wallet — which will incur additional network fees.
Advantages and risks of crypto farming
Simplicity and partial passivity are the main advantages of crypto farming, as they allow users to earn income from digital assets, even for beginners. However, despite the simplicity, crypto farming requires the user to have basic knowledge and skills of working with digital assets, such as:
- Creating and managing crypto wallets;
- Performing simple and complex transactions;
- Secure storage and working with a seed phrase or private keys;
- Understanding the concept of impermanent losses.
Note: not all crypto farming cases are simple. For example, on some decentralized platforms such as Uniswap and PancakeSwap, you need to manage price ranges (range orders), which will affect income and will require some experience and strategy development.
Another advantage of farming is decentralization. Digital assets are not locked in liquidity pools on DEX exchanges or credit protocols and are available for withdrawal at any time.
Crypto farming is available to all users of decentralized platforms and does not require identity verification, unlike centralized exchanges, which must comply with regulatory requirements such as KYC/AML.
One of the key risks of crypto farming is impermanent loss, which arises from sharp price fluctuations in the assets in the liquidity pool.
While the position is open, the loss is "paper" and not fixed (impermanent). As soon as the user withdraws funds from the pool, this loss becomes absolute and final.
That is, during a strong market correction, the final value of the position can decrease significantly, and crypto farming stops compensating for the price drawdown.
Another key risk of crypto farming is related to smart contracts*. Since platforms are decentralized, if they or their liquidity pools are hacked, attackers can withdraw funds without hindrance, resulting in losses for investors.
* Smart contract — program code that executes predefined parameters of transactions when performing bilateral operations in the blockchain, for example, swap (exchange) or lending.
Large platforms often pay compensation to affected users, but this does not always happen. To reduce the risks of losses from hacker attacks, you should study security audit reports. This can be done using services such as CertiK Skynet.
Also, crypto farming is only partially passive because it requires the user to monitor their positions and the general market situation, which can change quickly. In addition, you should consider that the yield from crypto farming is dynamic and depends on the size of the liquidity pool and the protocol team's decisions. Over time, the yield from agriculture can both increase significantly and decrease.