What are DeFi protocol pools and farms?

Source: Adobe/Ink Drop

Olga Ortega, co-founder and CPO of real-time DeFi explorer AnalytEx by HashEx.

Currently, there are many decentralized protocols and their use cases, and not everyone is familiar with DeFi terminology to start working with the protocols right away. This requires a certain level of knowledge – that’s why today we start by determining what a liquidity pool or a farm is.

What is a liquidity pool?

A pair of trading tokens with funds locked from liquidity providers is called a liquidity pool. Liquidity pools are the foundation of DeFi. By placing two tokens in a liquidity pool, investors create an LP token and receive income from all trades made between these two tokens on a protocol. For example, consider SushiSwap.

In the Liquidity menu item, by clicking on the pool option, we can add 2 tokens and create an LP token.

To create an LP token with an ETH/SUSHI pair, you need to have both assets in your wallet.

Once created, you can simply keep your LP token in your wallet and earn income that depends on your share of the liquidity pool of that trading pair.

At the time of writing, the LP token consisting of 1 ETH and 1278.9 SUSHI only represents 2.03% of this liquidity pool.

Additionally, you can place your LP token in a Cultivate to start earning passive income.

What is a Farm?

A smart contract that you can stake in both LP tokens and solo tokens in order to collect revenue in protocol tokens you use is called a farm because all these pools are controlled with a MasterChef Farm smart contract. According to AnalytEx Datamore than 1,000 smart contracts with MasterChef’s signature are created every month, usually called farms for short.

In other words, if you have income in used protocol tokens, whether you put an LP token (a pair of tokens) or a regular token in a smart contract, it all belongs to the MasterChef contract and should be called a Cultivate.

Let’s look at the sushi exchange interface:

We can see different pairs of tokens that form LP tokens, by placing in MasterChef contract of Sushiswap, you will receive a token of this protocol – SUSHI.

For example, if you put your LP token, consisting of FRAX and WETH pairs, into SushiSwap, you will receive a token from this protocol called SUSHI. At the same time, the investor will receive a double rewardfor staking the LP token in SushiSwap Farm (MasterChef) and for providing liquidity in the FRAX/WETH pair.

The same situation is observed on other protocols, for example, Pancake Swap – we can stake the LP token and get CAKE – the token for this protocol.

Where is the misunderstanding?

In the Pools tab (called Syrup pools), which almost all protocols separate from farms, we see a pool where you can bet CAKE in order to receive CAKE, but above we discussed that if you are rewarded with tokens of the protocol you use, you use the MasterChef contract of this farm, whether the LP is in tokens or solo. It would therefore be more correct to place this pool in the Farms tab.

A similar situation that we can see in monkey swap protocol. Here are the BANANA farms. BANANA is the main token of the ApeSwap protocol.

However, in the Pools tab (called Staking pools), there are 2 pools related to the ApeSwap Farm Leader contract.

According for AnalytEx, the master chief contains 123 pools in the ApeSwap protocol.

Apeswap Protocol. Source: AnalytEx

They are all called pools (Farm) because they are all linked to the ApeSwap MasterChef contract.

What are staking/syrup pools?

Staking or syrup pools are the kind where you can stake an ordinary token (usually a protocol token) in a smart contract to earn other tokens. Users pay interest to pledge their tokens on the network to provide security on proof-of-stake blockchains.

For example, on ApeSwap, you can bet BANANA tokens to win various tokens. Staking and syrup pools are 2 names for the same thing on different protocols.

Generally, most of the known protocols do not explain the difference between farm pools and staking/syrup pools and divide farm opportunities according to the criterion of tokens placed in a smart contract. If we are talking about LP tokens, the commonly applied term is “farms”, but if it is a solo token, it is called “pool (staking/syrup)”.

To conclude

From everything we have covered above, it can be concluded that generally if you receive token revenue from the protocol you are using, you are accessing the MasterChef contract of that protocol. Whether you use LP tokens or solo tokens for staking. These pools may be called “Farm Pools” for convenience.

If you use solo tokens and receive a reward in other tokens, you are using third-party smart contracts. They are called “staking” or “syrup” pools.

There are cash pools, farm pools, staking/syrup pools, loan pools (relating to loan protocols).

Understanding the basic terminology and its differences is necessary for the DeFi space to be fully and clearly understood.
Learn more:
– DeFi suffers from too much centralization, what can be done?
– Hackers stole $670 million from DeFi projects in Q2, up 50% from Q2 2021

– DeFi is “designed to avoid that bullshit,” Compound founder says of crypto bailouts
– How Tokenomics might change in the wake of Terra’s collapse

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