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Yield farming in the cryptoverse refers to the performance of a particular action for a platform or entity that justifies paying out an Annual Percentage Yield (APY). Often, this effort entails adding liquidity to a network, and then staking liquidity provider (LP) tokens, or adding liquidity to a market for borrowing and lending. Projects incentivize this behavior when it enables them to function more efficiently.
Take a look at our farms:
APY can be a misleading measure in crypto. First of, you need to understand that it is only an estimate and by no means a guaranteed return on investment. The accuracy of this estimate depends on the factors the individual project takes into account. Often, this only takes compounding into account (increased rewards due to reinvesting). More people staking in a farm, decreasing rewards, depreciation of the underlying assets and fees like transaction fees reduce the effective APY and are often not taken into account.
Why should you care? If a projects' rewards are not stable, the shown APY can be 1000% today but 1% tomorrow. In this case, the A (annual) in APY is meaningless.
What you should understand:
- When more people stake in a farm, the rewards are split between more people and therefore decrease. Freshly released farms, therefore show very high APY. This will decrease very swiftly after the first people stake their tokens.
- Research where rewards come from and how they are distributed. There are different ways how projects provide and distribute staking rewards. This is the core factor to estimate how the APY will change over time i.e. how stable the APY is. Usually there is some form of reward pool from which a percentage is continuously distributed to stakers. The questions you need to answer are:
Over time, a reward pool might dry up and rewards might reduce. This is the case for our PAD Farms, where the rewards pool will never fully dry up but the rewards will slowly decrease over the years (after 10 years they will be so low, that you can consider it as dried-up). This is not the case for our DPLP Farms, which have a continuous inflow of new rewards due to staking and unstaking fees.
- Where do the funds in the reward pool come from?
- Is the reward pool only decreasing or is there some inflow?
- How much of the reward pool is distributed per day (drip)?
- Is the drip changing over time?
- If the underlying assets depreciate (their value decreases), your APY on your investment will also decrease. While the amount of tokens you get as reward stays the same, the total reward you get is worth less, thereby reducing your return on investment. While this is a rather obvious fact about how markets work, you should be careful with any Inflationary Token. Inflationary tokens will continuously increase the supply which in turn reduces the value and therefore also the APY.
- Fees like transaction fees can eat your rewards. For example, you earned $1 in rewards and want to reinvest to profit from compounding, you will need to pay the respective chain transaction fees. Given you are on BSC, this might cost you around $0.30. This effectively eats 30% of your $1 rewards and even more in lost future rewards. So it might be worth to wait until the fees only make up an acceptable share of your rewards. For example if you wait until you earned $10 before reinvesting, the BSC transaction fees will only make up 3%. But note, that you lose compounding rewards for not yet reinvested funds.
Locking LP tokens for fixed periods is a common way to secure liquidity. See also Vesting. For liquidity providers staking their LP tokens, locking is a significant risk. There are many reasons why you might want to withdraw your funds e.g. market conditions or personal needs. Locking your tokens for a fixed period takes this ability from you. All farms on the TOAD.Network do not have any vesting. You are in full control and are free to withdraw your funds when ever you like.