Obviously, the concept of NFT farming came to us from the crypto industry and is firmly entrenched as a good way to generate passive income from tokens. If you are new to the field of crypto and are only just beginning to grasp the essence of NFT, you might have wondered about the possible relationship of the term to farming in its traditional sense. Of course, there is no correlation here, and we will be talking about completely different things. If you want to learn even more about NFTs – check out this ultimate guide to them by our CEO, Mykhailo Sitalo!
NFT farming is a new efficient way of profiting, in which both beginners and experienced crypto enthusiasts are interested. People who used to focus exclusively on subjects related to cryptocurrency and digital assets are increasingly interested in NFT. That’s why the topic of farming and NFTs will be very relevant now.
Today we’re going to talk about yield farming and NFTs in more detail, so you’ll have fewer questions. As usual, we will begin with the basics and delve into the meaning of NFT farming.
What’s yield farming?
The most important change in cryptocurrencies over the past two years has been a shift in focus toward decentralized finance – DeFi. Let’s go into more detail here:
- It is a system of decentralized applications that sit on top of blockchain networks (mostly Ethereum) and function autonomously, without the involvement of any governing.
- DeFi projects use open-source software and offer users a full range of financial services and products similar to traditional ones.
- In other words, this is financial services based on smart contracts that work on top of programmable blockchains.
This is where yield farming is widely practiced. Yield farming is an investment strategy where users (liquidity providers) temporarily provide liquidity to DeFi in exchange for its tokens. This is an extremely profitable, albeit risky, strategy, and we will talk a little later about the reasons why.
But how does this yield farming work? In answer to this question, we should mention that farming is the process of accruing tokens as a reward for providing liquidity to a project by placing a certain pair of tokens in a pool. Now there are more complex pools consisting of several pairs.
Liquidity pools are a kind of token storage that provides the process of trading a particular currency pair by receiving liquidity from users, who in return receive remuneration from the project depending on their invested stake.
If we talk about cryptocurrency, DEX is the lever that set orders to buy or sell crypto, where in turn, the pools of liquidity, are some kind of smart contracts of these exchanges. A smart contract distributes a strictly defined amount of tokens to farmers depending on their stake in the investment. So, we figured out how it works with crypto markets, so now it will be much easier to make an analogy with NFT.
Unlike traditional farming, where you need to contribute digital assets to a liquidity pool to get your share and reward, NFT farming uses non-fungible tokens instead. Currently, this can be found mostly in blockchain games, where users can stake different items to get some tokens or the contrary. The steaking portal also allows you to place NFT in storage, from which you can earn rewards.
Before the rise of such farming, unique tokens were considered exclusive digital collectibles that only some NFT holders could buy, store and sell. Today, NFT can be used to earn tokens, providing a new type of digital asset and increasing its liquidity. That’s why NFT farming creates liquidity.
What are the best NFT platforms for farming?
NFT intends to change the gaming environment right after music and art. Gaming platforms based on blockchain use NFT and implement such farming to maximize rewards for gamers and keep them on the hook as long as possible. Among the platforms that actively use NFT farming are Zookeeper, Money, Pulsar Farm, and MOBOX. The same rule applies here as with the selection of NFT marketplaces – pay attention only to reliable and proven options.
To start NFT farming, you need to have a cryptocurrency wallet. Then you need to link your cryptocurrency wallet to certain blockchains. Fund wallet with a token (depending on the chosen platform). After that, you need to pour that token into a pool. Eventually, you can receive rewards depending on the stake in the whole pool.
What is the risk of NFT yield farming?
As with some other methods of passive income, NFT farming has certain risks:
- From time to time DeFi protocols get attacked by hackers. The only advice here is to invest in NFT projects with technically strong teams and with security audits from reputable companies.
- In addition to hackers, money can be lost because of trivial mistakes in smart contracts made by the developers of the project.
- It’s also easy to misjudge the NFT project’s prospects. The idea may not work, and the competition can be too tough.
- By the time the funds are withdrawn, the exchange rate of the tokens to each other can change significantly. When withdrawing money, the investor will receive the same amount, but in a different ratio of tokens.
NFT farming is one of the riskiest trends in the cryptocurrency area and based on the facts listed above, it’s hard to deny that. So, multiple features of NFT farming are currently experimental. It is a completely new type of crypto income, and it remains to be seen whether it will stand the great test of time.