Cryptocurrency farming – an investment or a scam

What is cryptocurrency mining? And is it possible to make money on it?

Let’s start with the numbers: from 10% to 1000% per annum can be earned on cryptocurrency mining.

What is mining and where did this name come from?

Farming is one of the strategies for investing in cryptocurrencies. You lend out your coins to get interest on them. This way, you can earn from 10% to 1000% per annum. However, the risks of losing money are also high.

Farming or profitable farming appeared in June 2020. Then the decentralized finance platform Compound started distributing its COMP token to users.

The name itself has an interesting origin. Initially, the term “farming” came from an Internet meme, where an old video about haymaking was played in the context of cryptocurrencies. Workers in the fields sow some coins, and after a while, they collect a profitable harvest of others.

Farming vs Staking

At first glance, farming may seem similar to classic staking, but there are serious differences between them. With a conventional coin hold, you always have the money on your wallet, and the reward, which is calculated in advance, is systematically paid by the blockchain. The risks of losing are practically zero, but you won’t be able to earn big X’s either (usually no more than 10% per annum).

When working with DeFi protocols, a third party is involved in the transaction – platforms and people who borrow from you at a fixed or floating rate. Depending on the complexity and sophistication of the scheme, you can increase your capital many times over. 50% per annum is not uncommon, and sometimes there are offers of 150%.

How to start making money? And what is a liquidity pool?

A liquidity pool is a cryptocurrency repository where a trader can quickly exchange one currency for another. For example, to earn more or expand your portfolio and thus reduce the risks of losing money due to crypto price fluctuations.

To get into the pool, you have to put two coins for the same amount of money. Let’s assume that 1 DAI costs $1, and 1 ETH costs $100. For each coin to be worth $10 thousand, you need to put 10 thousand DAI and 100 ETH. So, you will put $20 thousand worth of crypto into the pool.

When the coins are debited from your wallet, you will receive a special token. It will show how much of your coins are in the liquidity pool. If this is a new pool and there are no other participants, your share is calculated using the formula:

Share in the new liquidity pool = number of DAI coins * number of ETH coins

A fun fact: Farming is similar to getting interest from a bank account – you are technically lending money to the bank. The only difference is that farming is more risky, unstable, and complicated than a bank deposit.

Let’s analyze all the advantages and disadvantages of pharming

The most important advantage is the investment app. You can install it on your computer or smartphone and track the movement of funds in real time. Interfaces are intuitive, and most services offer a convenient guide to their capabilities. To start staking, an investor just needs to buy cryptocurrency and load it into a pool that is engaged in farming in DeFi. The entry point is very low, so almost any user can try farming.

But there are many disadvantages to farming…

1. High risks. They really exist, and they scare many investors. Nevertheless, the pharming technique is still considered quite profitable. However, not all experts agree with this.
2. Gas prices. No, not for ordinary gas. Gas is the coin you pay for transactions on the Ethereum network. And it is certainly not free. You may find yourself in a situation where you have to pay more for gas than you potentially receive after investing cryptocurrency in the pool.
3. The benefits are often short-term. The market is unstable, and you cannot predict exactly what the rate of Polkadot or Cardano will be tomorrow. Accordingly, the profitability is extremely unstable, and the benefits are short-term. There are few profitable strategies, and new and cool ways of investing in staking work only at first.

What is included in the list of the most popular types of pharming?

• Complex crypto farming

This is an increase in the value of investments by adding additional amounts (usually interest received by the investor) to them. This increases the user’s profit – you reinvest the profit, thereby increasing the amount on which the interest is accrued. The same mechanism works for regular deposits.

• Crypto farming with borrowed funds

You borrow money and send it to a particular pool. If you get a return, you pay back the loan. Everything works the same way as when you get a regular loan. This method of farming can also be called “leveraged staking”. Leverage means an increase in your funds at the expense of borrowed funds. Leverage 5x – an increase of 5 times, 10x – 10 times. You can calculate the profitability on a special calculator. However, we must not forget about the risks: if you lose money, you will still have to repay the loan.

So, to start forming a cryptocurrency, explore the options for investing in farms, look through the lists of these farms, and choose the services that interest you. Once you are confident in the security of the chosen pool, connect your wallet to it. It is better to use MetaMask or Coinbase Wallet. Buy the currency you want to generate and transfer it to the farm. Instructions for the operation can be found on the farm’s portal. Be sure to choose a way to get profitability so as not to be held hostage by the farm’s coins that have fallen in value or liquidity that is “stuck” on this farm.

P.S. Is cryptocurrency farming legal?

Farming is legal in most countries where cryptocurrencies and operations with them are not prohibited. However, it is extremely important to remember that crypto assets used in farming are not insured (unlike bank deposits: in the US, deposits up to $250 thousand will be insured in any case). Smart contracts and farming protocols themselves may contain errors that fraudsters will definitely notice. The protocols themselves can also be fraudulent, and if they are not, the creator of the program or a large pool investor can become a fraudster. If you are ready to take such risks, you can start farming today. But make sure that crypto transactions are not prohibited in your country of residence.