Yield farming, also known as liquidity mining, is a staple of DeFi and, essentially, a way to earn rewards by providing liquidity to decentralized protocols.
In this article, we cover how Yield Farming works, its pros and cons, and where you can find yield farms that accept Sceptre Staked Flare (sFLR).
How does Yield Farming work?
As mentioned, in yield farming you provide liquidity to a decentralized protocol. Central to the concept of Yield Farming are Liquidity Pools, pools of cryptocurrency held in smart contracts that provide the necessary liquidity for decentralized exchanges (DEXs) to function. By contributing to a liquidity pool, you're providing liquidity, i.e. helping the DEX facilitate trades. In return, you receive a share of the trading fees generated. Additionally, you might also earn rewards in the form of governance tokens or other cryptocurrencies. These serve as incentives to participate in the protocol.
What makes Yield Farming so appealing?
The main appeal of Yield Farming is the higher yields it often offers compared to other staking options. It’s also a popular method for liquid staking token holders to earn rewards while their main tokens are staked elsewhere. Finally, we should also mention that many users like the control yield farming gives them over their funds without relying on intermediaries, something aligned with the core principle of decentralization.
What are the risks of Yield Farming?
Yield farming offers great rewards, but comes with some risks. One such risk every staker should keep in mind is impermanent loss. It occurs when the price of the assets in a liquidity pool changes significantly compared to when they were deposited. To maintain a balanced ratio of the two assets in a liquidity pool, automated market makers (AMMs) constantly rebalance the pool based on trading activity. If the price of one asset increases dramatically compared to the other, the protocol will sell some of the appreciating asset to buy more of the depreciating one.
When you withdraw your liquidity, you'll receive your share of the pool's assets. However, due to the rebalancing, you might end up with fewer of the appreciating asset and more of the depreciating one compared to if you had simply held the assets outside the pool. This discrepancy is called impermanent loss. The more volatile the assets, the higher the potential for impermanent loss.
Impermanent loss is temporary and only becomes a realized loss when liquidity is withdrawn.
Can sFLR be used in Yield Farming?
Ēnosys currently offers a series of token pairs in its farming pools including a few with Sceptre Staked Flare (sFLR), the token you receive in your wallet for staking Flare (FLR) or Wrapped Flare (wFLR) on Sceptre. The current reward available for staking sFLR on Ēnosys’ farming pools is Apsis, Ēnosys’ primary Governance and rewards token.
Yield farming offers the potential for high returns, but it also carries significant risks. It's essential to understand these before diving in.
We will keep updating this article as more Yield Farming opportunities for sFLR appear.