I`ve been in the Defi for a while and I`ve invested in most of the top farms out there from Ethereum and Bsc very early and I`ve seen many people investing and losing money which is very strange for me because if you farm right you almost can`t lose money unless they rug the LP tokens or you get dumped on and take huge IL (impermanent loss). Below is a small guide I wrote and I hope will make you a better farmer
The concept of a farm in simple terms is: You deposit your funds in the form of an LP pair (liquidity provider) and in exchange for that you receive a reward in the form of another token + a part of the fees from each transaction that happens in your pair.
For an easy understanding, I will take the PancakeSwap as an example. You deposit 10.000$ worth of BNB and BUSD, you always must add 50–50%, so half your funds will be in BNB and half will stay in BUSD.
Now here is where most people get it wrong and I saw this in RAKE farm where people staked RAKE/BNB LP for the huge reward and many lost a lot of money. How could it be possible? Well, is called Impermanent Loss and is something I see a lot of people not understanding.
Impermanent loss happens when you provide liquidity to a liquidity pool, and the price of your deposited assets changes compared to when you deposited them. To understand IL ( impermanent loss) you must understand how LP pools work.
Your 10.000$ worth of bnb/busd will move with the market, when BNB increases in price your lp pool sells some of the BNB for BUSD so you lose BNB. When BNB dumps in price the lp pool auto balances and buys BNB for some of your BUSD so you have more Bnb and less BUSD. If any of the tokens from your lp pair goes to 0 you are rekt.
In a farm with high inflation like RAKE, when you deposit RAKE/BNB everything is fine while RAKE is pumping or holding its price because you take the huge APR% but when RAKE dumps hard your bnb is sold for more rake which can dump even harder vs $ so you end up taking a huge impermanent loss.
So two elements you must understand well: “Impermanent Loss” and “ how does an AMM work ?” (pancakeswap, sushiswap, uniswap are automated market makers, 2 links below for more in depth read:
https://academy.binance.com/en/articles/what-is-an-automated-market-maker-amm
https://academy.binance.com/en/articles/impermanent-loss-explained
Another key feature to understand is INFLATION. Every farm has some form of inflation, they print tokens to give to the liquidity providers so you must check their docs and see how much they are printing per day and make some calculations about how sustainable it is. The higher the inflation the more people need to buy that token so the price keeps rising.
Below I`ll write some of the strategies I use maybe is easier to understand this way:
Let`s say I found a new good farm with a legit team, audit, and everything is looking Ok like goosedefi and I believe this can last for a while so I decide to invest there. I read the tokenomics and see 1egg/block (28,800 blocks per day in bsc) and I say this is a nice project with some burn mechanism in the form of a 4% deposit fee.
I check the APR of the pairs and see most of them offer 1%+ per day so I can get back my deposit fee in 3–4days if Egg price stays at the level I enter. I checked the EGG price ( their native printed token) and saw it was in the range of 10$-140$ and now the price is 120$. I don’t buy the egg to pair it in the EGG/BNB pool for 7% apr per day, I go instead and deposit CAKE/BNB LP because I was holding that pair and USDT/BUSD pair and I farm free eggs. From the EGGs I farmed for free with the SAFE pairs I sell half for bnb and the other half of egg I pair it and provide liquidity into the main pair for the highest APR.
Notice the difference? I bought 0 eggs so if the price of egg drops I`ll lose only profits from the Cake/Bnb and Usdt/Busd pools. You keep doing this until your main pair is where you wanted to be and you can start taking some profits. You need that 4% back as soon as possible in case the price drops.
I always recommend people not to go directly into the main pair because it usually dumps in price because of inflation. The higher the inflation the faster they will drop in price. Remember the ROI Games from Tron, 1–2% per day could go 30–60 days but when things escalated and some ROI games offered 5–10% /day they were a 1–3 days story most of
the time.
There are exceptions like pancakeswap and sushiswap and some big farms which had inflation and their token increased in value because they had a great roadmap,team, binance backing them up or a lot more features in place like IFO, Burns, Buybacks with burns and huge communities to back them up.
For the small farms (clones) that I get into very early if price of token is very close to listing, I go 20% into that pair buying the token and pair it with some bnb, and 80% of what I intended to invest I deposit in the “safe” pairs like usdt/busd or bnb/busd if you plan to keep bnb for long term. I sell all rewards until my profits equal the 20% I invested into the
risky pair so in the event it goes to 0 I roied at least.
In the recent period because the market is dumping I moved into busd/usdt and farmed with this pair which has 0 impermanent loss risk because it is made of 2 stablecoins. I farm with it in a few “safe” farms and just sell their token for profits which I reinvest in more busd/usdt so I grow my pair and I farm even better.
I see no risk here unless the projects rugs the lp tokens like popcorn did, I always try to dyor as much as possible before I invest in any farm/dapp and check the code, read the audit and ask around others smarter than me.
It took me almost 2 hours to write this mini guide and I hope it helps you become a better farmer.
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