For anyone familiar with cryptocurrencies or those who've invested in them, the term "yield farming" might be familiar. It's a concept that uses various strategies to generate a yield from cryptocurrencies, i.e., staking, lending, and providing liquidity in decentralized finance (DeFi).
In a way, NFT farming is similar to this concept since it allows anyone to generate passive income using their NFTs. With NFT farming, users stake their assets to earn rewards through tradeable tokens or other digital assets.
The idea is that users can leverage the value of their non-fungible tokens (NFTs) and use them as collateral for yield-generating strategies.
How NFT Farming All Started
The yield farming ecosystem got renewed interest even after the eventual crash of crypto because of the rise of NFTs. The earliest strategy involved buying and holding digital currencies, but it ultimately evolved into more complex strategies, for instance, putting money in liquidity pools.
NFT farming is made possible because of its two indispensable components: NFTs and DeFi protocols.
Decentralized finance acts as the infrastructure upon which NFTs generate passive income. But unlike the speculative value of traditional NFTs, these are more valuable in that they can be used to earn rewards.
How Does NFT Farming Work?
NFT farming allows users to stake their non-fungible tokens and use them as collateral to generate rewards in cryptocurrency or other digital assets. Here's how the process works in the most basic explanation possible:
· You'll need to find a platform or protocol that supports NFT farming.
· You transfer your NFTs onto the platform and stake them as collateral for yield-generating strategies.
· Lastly, you choose which strategy best suits your needs. The ones that make the most sense are the ones with the highest rewards.
Creating Liquidity and Utility
For a first-timer, the way to comprehend NFT farming is by understanding the liquidity it can provide. But what is liquidity in the first place? Well, liquidity measures how easily an asset can be converted into cash.
NFTs aren't liquid assets since they can't be exchanged for fiat currency. NFT farming offers users the opportunity to convert their "illiquid" assets into liquidity by creating new tokens with utility.
This will allow them to tap into the DeFi market and get rewards. Rewards can be in various forms, such as crypto tokens, interest payments, or airdrops.
Meanwhile, a stake token, such as an NFT token, bridges the gap between liquidity and utility. Staking tokens provide users with collateral to generate rewards in return for supplying liquidity.
This means that investors are able to stake their NFTs and receive incremental passive income from them.
Whether for rewards or staking their NFT, the idea behind NFT farming is to generate value from NFTs. And by doing so, users can gain access to a wide array of DeFi products and services previously unavailable.
Interoperability Breeds Opportunity
The biggest advantage of NFT farming is the interoperability it provides. Users can use existing protocols to stake their NFTs and generate rewards or move them between different platforms and blockchains.
This is possible because NFTs exist in multiple platforms, i.e., Ethereum, NEO, Binance, etc.
As such, users can move their NFTs from one platform to another and still enjoy the same perks and security.
This means that users are never locked in a single blockchain or platform and can use the assets they own for multiple purposes, including yield farming.
Interoperability allows users to create a personalized portfolio to suit their needs. It allows users to choose the best yield-generating strategy that suits them.
They can decide which platform they want to use and which strategies they want to engage in.
Traditional versus Gamified NFT Farming
The idea of NFT farming is to create and engage in activities via DeFi services that hopefully result in a profitable outcome. To achieve this, users can opt for a traditional or gamified farming strategy, depending on what's convenient and feasible for them.
Traditional farming is more straightforward and involves the user engaging in activities such as staking, lending, and liquidity pooling to generate rewards.
This is a suitable approach for those who want to focus on building their passive income without too much effort. In most scenarios, rewards are distributed fairly and in a predictable manner.
What happens is that users are pitted against each other in a race to maximize their rewards. In contrast, gamified NFT farming enables users to achieve higher returns by engaging in more complex activities.
This can be achieved by leveraging different strategies such as arbitrage trading, market making, or taking positions on margin.
By gamifying the process of yield farming, users are looking at possibly higher returns than traditional farming offers them. However, it is worth noting that this approach may be more complicated and require some expertise.
Be reminded that utility should always be present, not just liquidity when it comes to NFT farming. The reason is that generating value means nothing if you can't use that generated value in any meaningful way.
The Risks Associated with NFT Farming
Like most (if not all) investments in digital assets, there are risks associated with yield farming. There are no guarantees, to begin with, plus the danger of losing everything due to the volatile nature of the market.
Yield farming, including NFT farming, is not a get-rich-quick scheme. It takes time, patience, and research for users to make informed decisions about their investments.
Another potential risk has to do with liquidity. When the market is volatile, the liquidity of NFTs is likely to be diminished without warning. The same goes when there's high demand for a specific asset. In cases like these, it could be difficult to get out of a situation with minimal losses. But it can be avoided if you learn how to take caution.
But don't mistake this for a warning to stay away from NFT farming. Rather, it's advised to proceed cautiously and do the research before taking action. A little bit of preparation goes a long way in NFT farming.