In a Decentralized Finance (DeFi) crypto exchange, they usually offer these two services as its core, Stake and Liquidity Pool. If you are not familiar with the terms, you can read more about them here.
After you understand the basics, let us head deeper into the topics.
You can read more about Yield Farming here.
There are two ways to do yield farming, is by Staking and Liquidity Pool. For the sake of example, let’s take PancakeSwap as an example.
PancakeSwap is currently the ever-growing decentralized exchange (DEX) in the Binance Smart Chain (BSC) ecosystem. According to DappRadar, at the time of writing, the TVL for PancakeSwap is $6.93B. It is a popular DEX for BSC users.
PancakeSwap offers staking services for users, available under the Pool service. Users can stake PancakeSwap’s native token, CAKE, and earn either, more CAKE or earn different cryptocurrencies in a limited time.
Staking is most likely the safest way for a beginner to start using DeFi services. Moreover, PancakeSwap has this helpful ROI calculation table to calculate returns per $1000 investment. However, the rate can change, and the figures shown in the table are not guaranteed investment returns. It is undeniably a convenient feature to have.
In staking, there are two main risks a user has to take into consideration. First is the price movement of the staked cryptocurrency. For example, if you started by buying $1000 worth of CAKE at $15, you will receive around 66.66 CAKEs. If the price dropped to $10, you still have your 66.66 CAKEs. However, your initial fund of $1000 has decreased to $666.60
The second risk is to use unknown and unreputable DEX services. While PancakeSwap is a highly reputable DEX with high TVL, it is not the case for other DEX. By using unreputable DEX, users are exposing themselves to exploits and scams. It would result in the loss of your fund totally and unrecoverable.
PancakeSwap offers Liquidity Pool services for its users. Users can choose different cryptocurrency pairs by exploring the Farm menu. By providing liquidity, users will receive earnings from staking plus a small share in trading fees.
In exchange, PancakeSwap will be able to provide liquidity for users to trade the said cryptocurrency pair. Compared to single asset staking mentioned previously, liquidity pools posed higher risks, and users should do thorough research.
For example, users bought a pair of cryptocurrencies for $1000. The liquidity pair is CAKE-BNB. After the transaction is complete, users have 10 CAKE and 10 BNB. If the market is bullish and the price for the two tokens increased, users will enjoy the increase in initial funds and tokens. For example, the $1000 grows to $2000, and the token increased to 12 CAKE and 12 BNB.
There are times when the market moves the price of the pair differently. One with a higher price and the other opposite. Users will find their cryptocurrency pair became 9 CAKE and 11 BNB. It is because the liquidity pool will always try to match the value between the pair. If the market turns downside, and one of the pairs loses value more than the other, users will receive more of the losing tokens. However, the total value decreased and leaving users in a hard-to-accept loss.
While the idea of living based on yield farming is not impossible, the cryptocurrency market is a highly volatile investment. However, if compared to some products offered by the bank, we can understand why more people are eyeing DeFi products.
So, have you tried staking or liquidity pool?