In this article, I will discuss the How to Farm Governance Tokens Without Heavy Fees.
Farmers that operate on networks such as Binance Smart Chain, Polygon, and Arbitrum can lower their transaction costs and maximize profit.
I will discuss the use of efficient DeFi platforms and liquidity pools with low fees as some of the farming profit maximization strategies.
What is Governance Tokens?
Governance tokens give their owners power to vote within an ecosystem or organization which is decentralized. Holders can participate in important activities within the organization including upgrading protocols, changing fees, and setting the future course of the project.
Governance tokens are different from traditional cryptocurrencies in the sense that their value is not monetary and instead attached to the token’s ownership and decision making capabilities.
Tokens are usually earned by farming, staking or through airdrops. Notable governance tokens are UNI for Uniswap, AAVE for Aave, and COMP for Compound who the users to actively participate in defining the future of DeFi – Decentralized Finance ecosystems.
How to Farm Governance Tokens Without Heavy Fees
Example: Farming Governance tokens in Polygon (Layer 2)
Let’s say you want to earn governance tokens on the Aave platform. You can use Polygon, a layer two network, which is more affordable than using Ethereum’s mainnet because transaction fees are much higher.
Steps:
Setup Your Wallet
In order to start, you should connect your wallet (MetaMask, Trust Wallet, Coinbase Wallet or whichever you choose) to the polygon network through adding required RPC Information.
Bridge Funds to Polygon
Use the Polygon Official Bridge to move funds such as USDC and MATIC. This can be moved from Ethereum Network to the Polygon network. There will be a one time gas fee to make the transaction but after that it will be significantly more affordable.
Deposit Tokens into Aave
Once you are on the Polygon network, deposit your tokens such as DAI or USDC into the Aave platform to earn interest. Also, you may earn governance tokens too.
Claim Rewards
From time to time, you can claim your governance tokens such as AAVE or MATIC as rewards. While on polygon, the transaction costs will be very low.
Reinvest/Stake Tokens
To earn more rewards, you can re-invest your governance tokens as well as stake them if the platform offers staking rewards.
Other Place Where Farm Governance Tokens Without Heavy Fees
PancakeSwap
PancakeSwap is well-known in the DeFi community for its low fee governance token farming on the Binance Smart Chain and is among the most popular platforms.
Farming is much more affordable on BSC than on Ethereum because the cost is so much lower.
Users can benefit from reduced costs because PancakeSwap has flexible staking options and high-yield farming pools. Small scale and frequent farmers also benefit from the low costs and quick transaction speeds.
SushiSwap
SushiSwap is a decentralized exchange that enables farming of governance tokens and incurs lower fees while operating on Layer 2 networks like Arbitrum and Polygon.
Gas fees on these networks are significantly lower than on Ethereum, making farming more economical.
Along with enabling farming on cheaper networks, SushiSwap’s cross-chain compatibility allows users to access cheaper networks for farming. Combined with lower fees, its multi-chain support makes it easier for users to earn governance tokens at a reduced cost.
Key Challenges: Heavy Fees in Token Farming
High Gas Fees on Layer 1 Networks
Blockchains such as Ethereum have exorbitant gas fees on farming during times of network congestion.
Various transactions (staking, harvesting, claiming) can increase costs and diminish profits.
Platform-Specific Farming Fees
Some DeFi platforms impose extra fees for staking and passive reward withdrawals.
Over time, these fees can become very costly and greatly reduce farming profits.
Profitability Erosion
Farming ceases to be profitable when fees surpass token rewards.
Frequent transactions and farming captures on a smaller scale are at major risk of losing due to the fees incurred.
Risks and Considerations
Flaws in Smart Contracts
Farming DeFi protocols can have token loss due to exploitable flaws.
Losses That Are Not Permanent
Liquidity providers may incur losses due to significant price changes in tokens.
Liability Of Insufficient Capital
Farming on relatively obscure platforms may result in insufficient liquidity in the market for the position to be closed.
Fraudulent Projects and Delisting of Tokens
Some low fee farming projects may be fraudulent, resulting in total loss of assets.
Powerful Network Congestion
Even low fee platforms have a problem of increased gas fees during network congestion.
Value Of Tokens Being Governed
The value of the rewards of governance tokens may be affected greatly as there price is highly unstable.
Risks Having No Power
The level of control some platforms have is higher than what is desired which makes them less transparent and more dangerous.
Pros & Cons
| Pros | Cons |
|---|---|
| Lower Costs: Reduced fees maximize farming profits. | Smart Contract Risks: Vulnerabilities may lead to token loss. |
| Higher Profit Margins: Less spent on fees means more net rewards. | Impermanent Loss: Value fluctuations can reduce overall gains. |
| Accessibility for Small Investors: Low fees make farming viable for smaller portfolios. | Low Liquidity Risks: Lesser-known platforms may have exit difficulties. |
| Faster ROI: Reduced fee costs accelerate return on investment. | Potential Scams: Some low-fee platforms may be fraudulent or insecure. |
| More Frequent Compounding: Low fees allow more frequent reinvestment. | Volatility Impact: Governance tokens may experience large price swings. |
Conclusion
To wrap things up, Farming governance tokens at minimal costs is an economical method to earn rewards while engaging in DeFi protocols.
Despite the appealing opportunity, this strategy carries the risks of dealing with smart contract breaches, impermanent losses and possible scams.
To minimize the risks, it is pivotal to select esteemed platforms, evaluate liquidity, and keep track of token volatility. In the absence of fraud, low-cost farming can prove to be a smart and lucrative DeFi investment, so long as these risks are properly managed.
