Why HODL when you can FARM?
If you have been on the fence about farming (pun intended), that is totally understandable. For many of us who dabble in the DeFi space, farming has been all the rage this summer, and I do mean rage. Apart from sparking controversy on twitter, discord and the like, farming can be complicated, stressful, and costly, but it certainly doesn’t have to be. This guide is meant for those who want to enter low-risk opportunities to learn the tools necessary to make a passive income by putting some of their favorite altcoins to work.
If you are HODLing Bitcoin, you know a little bit about risk and reward. You’ve made gains by speculating into Bitcoin, you feel smart, and you may have gained a little financial confidence in the process. You also know that if you put your money anywhere, e.g., Coinbase, a bank, the stock market, between your boobs, etc., there is a chance you may lose it. The risk of losing that money should coincide with the rewards you gain, which is essentially the idea here.
What is Yield Farming or Liquidity Mining?
Yield farming is kinda like staking. When you stake your token on an exchange, let’s take Tezos (XTZ) for example, you will gain a small return in that same token. If you stake XTZ on Coinbase, you’ll get about 4% Annual Percentage Yield or APY. You don’t even have to click a button other than “Trade”. You can take out your XTZ at anytime. If you stake it (basically, just leave it in your Coinbase account), you get a little drop of XTZ every few weeks as long as it stays in there. Very low risk, very low reward, but still better than most banks these days.
Yield farming, on the other hand, rewards you in native governance tokens and is a little more complex. Those tokens have value. Many times that value is highly volatile. If you know anything about volatility you understand that, in general, volatility is good because it creates opportunities: You can make money. You can lose money. You make make people’s lost money. Native means the token is associated with the DEX itself. Governance means the more tokens you have, the more voting power you’ll have (we’ll get into that more in part 2). In general, here is the jist: You lock up some funds or provide liquidity. They give you a token that you can sell, hodl, trade, use to influence the market (governance), or use to farm somewhere else.
Get Your Hands Dirty
There are basically two types of farming that I will call high risk and low risk. High risk involves using liquidity pool tokens (Part 2 of this article coming soon). Low risk involves using only a single asset.
Tools you’ll need
- Tractor, Hoe, Scary-three-prong thing-that-looks-like-claws. Not really. You will need a wallet on your browser or phone. As this is a low risk guide, I highly recommend Metamask wallet. As always, back up your keys before using it. Metamask is great because virtually every farm syncs up with it nicely.
- Etherscan is where you can track anything you’ve done on the Ethereum network. Get comfortable with this on your own.
- Gas Tracker is a helpful site to optimize the timing of your “moves” in Defi. Do most of your work on low gas days if possible.
- Please use these tools At Your Own Risk.
Let’s start with the one that started it all, Compound. If you go to Compound, you will see something like this:
You see a Supply list and a Borrow list. If you want to farm COMP, which is the native token of Compound, you can start by supplying any of the tokens on that list with the click of a button.
- Connect to your Metamask wallet. If you are comfortable with Coinbase wallet, You can do all this through their dapp explorer. The android app for coinbase wallet works very well and will look different than pictured here.
2. Pick a coin and click on it. I will choose ETH. You will see something like this. Just enter in the amount of ETH you would like to supply and click supply. You won’t be able to do MAX on ETH because remember, for every “move” you make in DeFi you are required to pay gas in Ethereum. You can’t supply all your ETH because you need some left to pay for gas.
3. When I click supply, something like this will pop up. As you can see, gas can be costly. So, if you are going to supply, please calculate whether or not the APY is worth it to you. At the time of this article, the APY for ETH is .28% so unless I am putting up a larger amount (>$500) or unless I am planning on keeping it there for a long time, it may or may not be worth the gas.
4. Once I confirm the transaction, I can click the activity tab in Metamask to watch it complete (if I wanted to). You will either be alerted that the confirmation has completed by Metamask or you will see a green success indicator in Etherscan. Now you are supplying ETH and you are generating .28% of your ETH’s value in COMP token. As you generate those tokens, you can sell them or HODL them or supply them somewhere else. They are yours to keep.
5. You are now a “Farmer”.
What else can I do?
You can also generate comp buy borrowing money. This is very risky and can sometimes be even riskier than LP farming. You will have to set the collateral button to “on” which will be a “move” and thus will require gas. That indicates that you can now borrow from that collateral. You can borrow anything on the borrow list. If you borrow the max and prices dramatically fluctuate, you can become liquidated on your collateral. I never borrow the max. Some sites like Compound have a safe borrow option. Generally, if you are going to do this, you need to look beyond a “newb guide to farming” article.
How does this make me more Bitcoin? Well, I generally take profits in Bitcoin or ETH. Whenever I mine or farm a token, I keep some (in case it moons) and trade some for ETH or BTC especially when ETH and BTC are low so I can get more for my farmed tokens.
You can also take those farmed tokens and supply them somewhere else that accepts them and generate even more yield. An example of this would be to supply COMP token to Cream finance for a pretty delicious yield that I will let you discover on your own.
Where can I do more of this?
If you like this low-risk, supply style, farming, please explore any number of these safe and audited projects:
- Compound — Trusted, low APY in general
- Yearn — YFI token has incredible value, mostly stable coins solid APY
- Aave — Amazing project, has performed well, APY a little low on most coins.
- Cream — Easy to use (not exactly audited, but is a Compound fork, read my article on Cream for more info on security). Has many higher-yield options. They have also added more security since I’ve published that article. Great project IMO.
Hope this guide helps you guys get your hands dirty. Don’t worry, you aren’t a Degen (yet). Stay tuned for part 2 on Liquidity Pool Token Farming.
Originally published at https://www.uptrennd.com.