Yield farming "is the process of earning a return on capital by putting it to productive useis the process of earning a return on capital by putting it to productive use."(1)
The project token
https://pickle.finance/ has grown 10 times, and after 4 days the price has dropped 10 times
1st level There are projects, for example
https://sun.io where you just stake TRON coins and get a reward for it.
This is one way of distributing coins and raising the demand for a coin that needs to be put into the staking pool.
2nd level This is already liquidity pharming.
First, you create a pool, the pool credits you with liquidity tokens (LP tokens) as a reward, and they participate in staking.
Let's go back to pickles.
We are offered 4400% per annum on LP tokens of the PICKLE-ETH pool
https://uniswap.info/pair/0xdc98556Ce24f007A5eF6dC1CE96322d65832A819To get LP tokens, we need to deposit equal amounts in PICKLE and ETH into the pool
For example Let's say you had 2 ETH (let's take the ETH price at $ 300 for the convenience of calculation and the PICKLE price at $ 60).
You need to buy 10 PICKLE for $ 600.
Now we have 2 ETH and 10 PICKLE (for which you paid $ 600)= 1200$The pool always works according to the formula x * y = K. That is,
2ETH * 10 PICKLE = 20 . 20 is a constant, unchanging number, and the rest of the values will change.
The PICKLE rate dropped to $ 30, respectively, PICKLE will be added to the pool and ETH will be taken away, the number of PICKLE in the pool will double and the number of ETH will decrease.
As a result, we will get a new ratio of your funds
1ETH * 20 PICKLE = 20 Now we have 1 ETH and 20 PICKLE = 900$That is, if you disband the pool now, you will lose 1 ETH, but you will have LP tokens left.
Here you need to carry out a mathematical calculation and see what will be more profitable. If you manage to get a profit on the farming of LP tokens, then you won, if not, then you suffer losses
In practice, the ratio does not change along a straight line, but along the curve in the figure below, so the ratios will be slightly different.
Automated Market Makers are exchanges that don’t have an order book. The price is determined by the ratio of assets in the exchange. The exchange relies on the formula below:
x * y = k
x = first asset (Ether)
y = second asset (some Token)
k = constant that must always stay the same
Here’s a little pictures the demonstrates how this looks practically:
The black line drawn is x * y
The gradient at any point of the curve indicates the price between ETH/Token. At the middle you have the real price, the further you move away the more slippage you experience.
To move up the upper left of the curve, you’ll need to have lots of ETH in the pool and not many tokens. Tokens are very expensive at this point (lots of ETH required to purchase a small amount of tokens).
To move down the bottom right of the curve, you’ll need to have lots of tokens in the pool and not much ETH. Tokens are very cheap at this point (lots of tokens required can be purchased with a small amount of ETH).
I’ll be writing a much more detailed post on DeFi Weekly about AMMs and a run down of who is doing what, but for now this should be enough to understand the attack that went down.
(2)
How to get profit?If we consider the issue theoretically, then you need to calculate the moment when you need to disband the pool in order to sell everything and get a profit. The most correct decision would be to be the first to invest in the pool.
But you won't succeed because it doesn't work that way.
The creators of the project have a big head start, they will deposit huge funds first, raise the price of tokens on the exchange that will be farmed.
You can see that the most profitable pools consist of pairs: Shitcoin/ETH, Shitcoin/stablecoin.. etc.
To get a profit of 3000-5000% per year, you need to buy shitcoins on the exchange, this will raise their price.
Good advertising and PR in social networks will attract new hamsters to this project. The price of a token which is farmed will fall.
At this stage, the developers of the project will sell their tokens and leave the project, and the hamsters will be left with useless tokens, the price of which can drop 10-100 times.
Thus, attracted users will lose at least 50% of their investments.
Farming and investing in creating liquidity on pools is a very risky business. Here, as a rule, the project creators get a profit.
I had TRX, so I put them in the TRX pool at
https://sun.io/#/sunBut you shouldn't buy TRX to do this. The profit is very small, the risk of falling prices for TRX and SUN is higher!
Sources:(1)
https://cryptobriefing.com/yield-farming-defi-beginners-guide-earning-interest-crypto/(2)
https://defiweekly.substack.com/p/special-edition-imbtc-uniswap-and
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