This is general beginners guideline of using “swap” yield farming projects on Polygon and Binance Smart Chain (and probably on other protocols the concepts are the same as well). I call them “swap” projects because in my opinion they all have the same concepts as Uniswap on Ethereum, one of the first AMM projects in DeFi land.
I will explain the following basic functionalities of those projects. Not all projects have all these features but this is a list that a project can support.
- Trade
- Farms
- Pools
- Lottery
- NFTs
- Information about tokenomics
- Referral program
- Vaults
When explaining these features I will use several different swap projects to show the steps in examples. At the end of this article there is a list of some projects I invested in, with referral links you can use.
I assume that MetaMask is installed. See also
A small side story about the difference between coins and tokens. These two terms are used interchangeably sometimes, but I think it is good to know the difference.
A coin is the native coin of a blockchain network that is used to pay transaction fees on this network. Examples are $ETH from Ethereum, $BNB from Binance Smart Chain (BSC) and $MATIC from Polygon.
A token is a smart contract implementation on a blockchain. The most famous specifications for such tokens are ERC-20 on Ethereum and BEP-20 on BSC.
Note: A token can also represent a lottery ticket or an asset for example. It is a standard for Fungible Tokens.
More can be read here (ERC-20) and here (BEP20).
A token has a smart contract address and current price.
More will be explained in the tokenomics section.
All these projects require that you connect to your Wallet. Usually more type of wallets are supported. I always use MetaMask. Be sure to connect to the correct network (see 1 below) and account address (see 2 below)!
An account can be compared to a bank account on your bank.
The most used trade is the one from PancakeSwap. A lot of projects use this exchange, but also a lot are using their own. The advantage of using their own is that they can do something with the fees. Some fee is automatically added to a liquidity pool or some fee is used to burn tokens.
There are two parts in the Trade section:
- Exchange
In this part tokens can be bought - Liquidity
In this part liquidity can be added and removed
Exchange
This part is used to swap between tokens. For example you can buy tokens with $USDC (swapping is just another word for buying). In the example below you buy (swap) 1 $CAKE for $15.4456.
Note: In case you cannot select the tokens you want to swap you can also pate the token address
On the top right you can change some settings.
The following settings can be changed:
- Slippage tolerance
Depending on the liquidity the price impact may be high. In the example above the tolerance is set to 25%, meaning that in case the impact is higher than 25%, the transaction is aborted - Deadline: maximum time of the transaction
- Disable Multihops: Only allow direct swapping between tokens (and no alternative swapping route)
Liquidity
In this part liquidity can be added and removed.
You can add/remove liquidity pairs and this means that other persons are able to swap between these pairs.
In the example you can provide liquidity to the CAKE-BNB liquidity pool. You just select CAKE and BNB as input.
Note that the value of both input tokens need to be the same. This is automatically filled in when 1 input is filled. 10 CAKE is worth the same as 0.456535 BNB in $.
The LP tokens you receive can be added to a Farm (see further in this article), for which you will receive interest.
You can stake tokens in a so-called Pool. You receive interest and you can compound these earned tokens. Compounding is just another word for re-investing the earned tokens within the same pool. There are a couple of different Pools:
- Deposit a token and earn interest of the same token
(Example: staking CAKE and earning CAKE) - Deposit a token and earn interest in another token
(Example: staking BTCB and earning CAKE) - Auto-compounding pool
The earned interest is automatically compounded for you
Some advantages of depositing into a single token pool:
- No chance of impermanent loss (this term is explained in the next section)
- You can also stake Stable coins (like USDC, USDT, BUSD) and earn interest in the native token of the project. So always profit, although your are dependent on the price token of course.
- High interest
Harvest lockup and deposit fee
There are also Pools for which you have to pay deposit fee. There can also be a Harvest Lockup, which is the time after which you can harvest or compound again.
APR vs APY
An APR or APY value is shown at the Pool. These are slightly different values.
The APR (Annual Percentage Rate) is the earned interest without compounding. Example: With APR 25% and deposit of 100$, you earn 25$ interest in a year
The APY (Annual Percentage Yield) is the earned interest WITH compounding. Example: With APY 25% and deposit of 100$, you earn 0,25^n * 100$ (n= number of times you compound).
Note that when you are compounding, you also will pay some transaction fee, so the earned interest is somewhat lower.
Whereas the Pools are used for single tokens, the Farms are used to stake token pair LP tokens to earn interest. Those tokens can be bought within the Trade part. A Farm is somewhat more risky than using Pools and the higher the risk the higher the yield. That’s why you see also very high yields with pairs that have two tokens that are very volatile. This is due to the impermanent loss risk. I will not explain this risk in detail because there is already a good explanation here. One thing that you must remember is:
- The higher the yield the higher the chance of impermanent loss
- The higher the volatility of the two tokens the higher the change of impermanent loss
- Try to have always 1 stable coin within the pair to lower the risk of impermanent loss
Some project make a difference between Pools/Farms and Vaults. For example Polycat.Finance on the Polygon network has Vaults. Those vaults auto-compound on single token pools, but they also auto-compound on Farms. So they harvest and create LP tokens and deposits those LP tokens again to the Farm.
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