farming: what you need to know

Farmers are looking for APYs and are on the lookout for the latest protocols that bring in the most revenue.

The most degenerate farmers only choose farms by this criterion. The higher the APY, the more they go for it, head and fork down…

Others, on the contrary, as soon as they see a high APY declare that it is a scam like with the 80,000% of Wonderland...

In fact, it's not as simple and clear-cut as that.

We will already see the difference between APR and APY to better start this series ofarticle on Yield Farming…

What are the differences between APR and APY?

Already a little vocabulary.

APR: Annual Percentage Rate. The effective rate of interest received after one year.
APY for Annual Percentage Yield, refers to the amount of interest earned on your savings. The APY includes compound interest.

Even though they seem similar at first glance, the two can have very different results over time.

In fact, the APR is calculated as the percentage you will have on your initial deposit exactly after one full year.

For example, if you deposit €1000 with an APR of 5%, you will receive €50 after a year. As the APR rate is based on a year of 365 days, we can even calculate what this would bring us in per year.

If we keep the example, this gives us an APR of 5% (i.e. 5%365)% or 0,013% per day of return. If you like, you can even calculate what you earn per hour, for example.

In fact, calculating APR is very simple.

While for the APY it gets very complicated….

As we told you, the APY includes compound interest.

This means that you have to calculate what you will receive during a given period, then redeposit this amount and then redo the calculation for this new amount. It is then necessary to take into account each time the interest added on the capital acquired.

You should know that depending on the platform, APYs are paid at different frequencies. Some times it's monthly and other times it's weekly etc.

So calculating the APY is somewhat more complex. In any case, it is essential to know the APR to do this.

This gives: APY = [(1 + APR/(100n))^n-1]100
with n representing the number of times the interest was “compounded” (used) in the year.

Things to take into account when you want to farm:

This is perhaps the element that is not emphasized enough. It should not be forgotten that in Yield Farming, most of the time, we receive the token not from the pair that we have deposited but the native token of the protocol.

These tokens have no "utility" for the most part, so they remain fictitious assets volatile as hell as they say. No real utility is nothing more than an expression to say worthless.
If farmers tire of the protocol, they will move to another, making protocols subject to fads. Overnight, a protocol can lose its entire reason for being.

But there is above all another element to take into account:

APR/APY rates are constantly changing:

APR/APY rates are constantly changing. There are several reasons for this variation. Sometimes it even changes by the minute! In fact, it depends on two main factors: the price of the token and the number of participants. In fact, when the value of the native token changes, then the APR/APY also changes.

The APY/APR can drop sharply if the price of the token falls. This is a phenomenon that unfortunately occurs very often. And why would this token fall? This happens frequently because when farmers receive their tokens, they immediately sell them (because they know that they generally don't hold up). So, naturally, the massive sale causes the price of the token to drop.

Likewise, another event may affect the APR/APY price.

This is the number of participants displayed, among other things, by the TVL. The more it increases, the lower the yield will be.

When you deposit your tokens in a farm, the issued reward tokens are shared equally between all liquidity providers. You are always shown the number of "shares" you have. It's like a cake. The more people there are, the smaller the shares. Because everyone gets their share equally. So, the more people there are, the smaller the share of the cake.

So, as the protocol attracts users, the yield inevitably decreases.

Likewise, among the other factors that influence the APY/APR rate, there is also the market cap which can increase the rate.

Final word on farming

That's farming, it's good, but honestly there are few honest resources on the subject. Lots of tutorials from the developers themselves or from YouTubers paid to say good things about it.

As in all things, there are protocols for doing yield farming in a serious and profitable way. On the other side, there is a lot of degenerate farming. This means that to succeed, you have to be as degenerate as possible, otherwise the wolves will shear your hair without scruples.

Never forget that DeFi is actually an experimentation laboratory. 😜 Don’t be the crazy guinea pig. Sometimes low APY protocols are just as interesting (and less stressful).

And if farming is not for you and you still want to earn money, don't hesitate to do staking or lending for example.

Sites like Youhodler offer APYs at 12%, although this is not huge compared to the protocols of of people but at least it’s stable 😉

Open an account now on Youhodler and generate passive interest

Tip: you can generate passive income with Youhodler and use your profits to invest in riskier protocols for example. This allows you to reduce your risks in some way and only spend your profits.

Generate income with Youhodler

Read other articles on Yield Farming:

Difference between the Liquidity mining and Yield Farming
Become farmer on Binance Smart Chain

Note: No financial advice is given in this or any other article on zonebitcoin. This is information of which you are the sole judge and master. Be responsible with your investments and only invest as much as you are willing to lose.

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