Yield Farming Explainer
What is yield farming?
o Yield farming is a way to earn more $Tendie with your $Tendie. Yield farming rewards liquidity providers for forming LP tokens.
What are LP tokens?
o LP tokens are tokens that provide liquidity to AMM.
o LP tokens contain two tokens forming a “pair” that has a 1:1 dollar value.
How do LP tokens work?
o When someone makes an order in an AMM, the AMM uses LP tokens to “source” the token that is being bought and give it to the person buying the token and in return the AMM takes the token that is being used to purchase the other token and distributes this back to the LP tokens.
§ Bob goes to an AMM and buys 1 Tendie for 1 BNB, with the sum of all LP pairs for tendie-bnb currently having 5 Tendies and 5 BNB in them. The AMM would take 1 tendie from the sum of all LP pairs in the AMM to give it to Bob, in return the AMM would take the 1 BNB and distribute it to the LP’s. After Bob’s transaction the sum of all LP pairs for tendie-bnb would be 4 tendie and 6 bnb.
How are Yields for Farms determined?
o There are 4 factors that affect APR/APY:
1. Emission rate
2. Total amount of TVL in the farm (more TVL = less APR/APY to go around)
3. TENDIE price (higher price = higher APR/APY)
4. Multiplier (higher multiplier = higher APR/APY)
Where do rewards come from and how do they affect the protocol?
o Yield farming rewards are minted by our smart contracts. The emission rate determines the amount of rewards available to farmers.
o High yields can cause unwanted inflation, hence balancing Yields and Inflation is key to ensuring price of token being farmed ($Tendie) won’t collapse. In tendieswap’s case yields won’t be the highest across the chain but we do this to ensure the price of $Tendie remains on a stable upwards trajectory.
What are the risks associated with Yield Farming?
o Impermanent Loss:
§ In order to farm you will need to form LP tokens, where you’ll need to pair your tokens 1:1 (dollar value wise). When forming LP tokens you are susceptible to impermanent loss.. This however sounds much scarier than it is. In the event that one of the two tokens in your LP pair drops in value the LP tokens act as a hedge against the price drop because it always has to keep a 1:1 ratio.
§ When asset prices go up, Impermanent Loss can also happen. This is due to the fact that the LP needs to maintain a 1:1 ratio so if one asset appreciates while the other declines in value (relative to the value of the asset appreciating) the LP will “sell” some of the appreciating asset and “buy” more of the asset that is losing value against the asset that is appreciating. Again this is due to the fact that the LP is aiming to maintain a 1:1 value. If the value of one of the two assets in the LP pair increases, the LP token would still go up in price; however, there will be an opportunity cost as the “gains” from holding the token “naked” would be higher than those possible by the LP pair. Yield farming aims to make this opportunity cost 0, since you will be rewarded for making these LP pairs.