Glossary
Understanding Token and Yield Farming in Cryptocurrency - Overview and Examples
Token Farming — What is Token Farming?
Token farming, also known as or mining, allows participants to earn passive income through cryptocurrency investments. This process is part of DeFi and typically involves staking or lending cryptocurrencies within a liquidity pool that supports lending, borrowing, and trading. In return, users receive rewards in the form of additional tokens.
Farming tokens can be a lucrative way to earn passive income, but it also involves risks. The value of the tokens can fluctuate significantly, and the rewards may not always be as high as expected. Token farming requires active engagement, as users need to hold and sometimes lock a certain amount of tokens in these pools. The most common risks associated with token farming are high inflation, impermanent loss, and smart contract vulnerabilities.
Token Farming — Key Concepts
- Passive Income: Token farming allows users to earn passive income by providing liquidity to DeFi platforms.
- Token Requirements: Token farming requires owning and locking tokens. The more tokens you hold, the higher the rewards.
- Higher Risks and Rewards: Token farming involves higher risks than traditional investments, as the value of the tokens can fluctuate significantly.
- Yield Farming or Liquidity Mining: Token farming is also known as yield farming or liquidity mining.
Token Farming Participation
Participants in token farming need to hold and sometimes lock a certain amount of tokens in these pools. The returns from token farming are usually proportional to the amount of tokens one contributes; more tokens can lead to higher rewards. It’s common for platforms to require users to lock their tokens for a certain period, while others allow users to withdraw them anytime.
Social Token Farming
Social token farming is a new trend in the DeFi space that allows users to earn rewards by participating in social activities. Users can earn tokens by sharing content, participating in discussions, or referring friends to the platform. Social token farming aims to increase user engagement and reward users for their contributions.
Farming Risks
Token farmers must carefully evaluate the risks associated with each farming opportunity. Some farms may issue excessive tokens, leading to inflation and a subsequent decrease in token value. Be cautious of farms that offer high returns, as these tokens will likely suffer from high inflation and massive sell-offs. Users should also be aware of the risks associated with smart contracts, as bugs in the code can cause funds to be lost.
Inflated Annual Percentage Yield (APY) or Annual Percentage Rate (APR)
Some farms may offer high APY or APR, but these returns may not be realistic. Higher yields result in more tokens being issued. If the token has no utility, the value will decrease, and the APY will be diluted. Early participants may benefit from high APY, but later participants will suffer from the dilution.
Impermanent Loss
Impermanent loss occurs when owning tokens in a liquidity pool, which results in a loss compared to holding the tokens. This loss is not permanent and can be mitigated by the pool’s fees. However, if the token value decreases, the loss will be permanent. Token farmers should be aware of this risk when providing liquidity to pools. This is a common issue on Automated Market Makers (AMMs) trading platforms. During periods of high volatility, impermanent loss can be significant. Token farmers should consider the risks before providing liquidity to pools.
Security Risks
Smart contracts are susceptible to bugs and vulnerabilities. Ensure that the smart contracts are audited by reputable firms before participating in token farming. Problems in the code can lead to funds being lost or stolen. Only use platforms that have been audited and have a good reputation, such as Uniswap, Flamingo or Linkd Finance.
Token Farming Benefits
When properly applied, token farming can significantly benefit both the token holders and the projects. It enhances project engagement by increasing token liquidity and usage. The rewards for token farmers are not limited to transaction fees from the liquidity pools but also include the newly farmed tokens, adding an attractive layer to the investment.
In some cases, such as social token farming, an initial investment is not required. Users can earn tokens by participating in social activities, such as sharing content or referring friends. This model increases user engagement and rewards users for their contributions.
The origin of the farmed tokens may vary. In some cases, new project tokens are minted to reward users.
Farming Tokens on Neo
Each network offers token farming opportunities, usually built inside existing DeFi platforms. Users can farm tokens on Neo in Flamingo, ForTheWin, and Linkd, offering different rewards and opportunities.
Farming Flamingo Tokens on Neo
Flamingo is a DeFi platform on the Neo Blockchain that offers various services, including token farming. Users can farm FLM tokens by providing liquidity to the pools. The platform offers various pools, each with different rewards and risks.
Farming ‘FTW NEP17’ Tokens on Neo
ForTheWin works similarly to Flamingo, offering users the opportunity to farm tokens by staking liquidity pool tokens. The FTW platform also offers other services, such as NFTs and utility services.
Farming Linkd Reward Coins on Neo
If you are a Neo Blockchain user, you can use your NEO tokens to farm LRC by depositing Neo or BNeo tokens into the Neo Community Pool. Once the funds are deposited, users will receive LNeo and start generating LRC tokens. Greater GAS contributions will generate higher LRC rewards.
Linkd Reward Coin Generation
Linkd Reward Coins are generated over time, based on the GAS generated by the LNeo deposited in the pool. The dApp takes advantage of BNeo, a wrapped token on Neo. The network will generate and distribute GAS rewards over time, sending these rewards to BNeo tokens, which are then converted to LRC.
Users can choose how much they want to generate in LRC or GAS. Currently, the system generates 100 LRC per GAS. The current supply of LRC can be found on the token page.
Token farming is a great way to earn passive income on your crypto investments. It compensates users for offering liquidity to services. When properly applied, token farming can significantly benefit both the token holders and the projects, enhancing engagement by increasing token liquidity and usage.
