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/0xdc98556Ce24f007A5eF6dC1CE96322d65832A819

To 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.

(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/#/sun
But 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

Just know how to stop when you already made even amall profit. You always win when you have this attitude, and not thise those who always ask for huge profit.

Coindesk interviewed some average Joes and how they made good money on DeFi hype [https://www.coindesk.com/normies-crypto-rich-defi]. Either you become aggressive and get lucky or you stay out of it if you don't want to lose. These high yield programs are high risk and they move fast. The competition is also high since many devs also wants to take a piece of the pie. I do not think it's a place for passive investors right now. Maybe that will be possible in the future when we get rid of projects with faulty codes or copy cats.

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zasad@, thank you for explaining the formula x * y = K using examples. I was planning to read more about that later today so you save me some time.

How not to lose money on farming? It is simple, just don't do it. All this is nothing but a ponzi scheme that will collapse sooner or later and shouldnt be promoted in beginners&help section as it will make some newbs investing into something very risky as this is. This is like advising newbies to invest during presale in ICO.

@ zasad@ This should be in the altcoin section, not here.

That is short but deep meaning mate. I agree, for those who dont want to lose on investment dont play at all especially OP give a perfect example of a scheme most should avoided.

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I am interested to understand yield farming and so far I can grasp all the method on earning. I must say defi is really something new. Yield farming is good but often misled by scam projects.

Ive tried once and guess what, Im earned good but its because the project I chose is also good.

Things would be better if this principle people can follow and apply in life when to stop and not fall for more greed. Majority of them falls for this and in the end, we know what happens and this is reason where they later blame other than themself. Also, one who is not ready to take risk better to stay away than regret later.