Pool2 Farming

PancakeSwap's original Pool2 model featured SYRUP pools, where users staked CAKE-BNB LP tokens to earn other project tokens. This was a classic example of a protocol using its native token pair to bootstrap liquidity while distributing launchpad tokens to its most committed users.

• Asset Pair: CAKE/BNB
• Reward Tokens: Various partner project tokens
• Evolution: Largely succeeded by fixed-term staking (veCAKE) and Farms.

A key rationale for Pool2 farming is to compensate LPs for impermanent loss risk. Providing liquidity for a volatile native token pair (e.g., SUSHI/ETH) carries high IL risk. The substantial reward token emissions act as a premium, aiming to offset potential losses and make providing liquidity net-positive.

• Core Function: Risk premium for volatile pair liquidity.
• Trade-off: High rewards vs. high exposure to the native token.

Pool2 farming carries significant risks, primarily reward token hyperinflation. If emissions are too high, they can lead to constant sell pressure on the reward token. This creates a cycle where farmers sell rewards immediately, depressing the token price and potentially making the farm unsustainable.

• Common Outcome: High APY decay over time.
• Protocol Mitigation: Often uses vesting schedules or lock-ups for rewards.

In Pool2, you provide liquidity for a pair like ETH/PROTOCOL-TOKEN. The value of the protocol token is often highly volatile and correlated with the success of the farm itself. This creates a scenario where impermanent loss is not just possible but highly probable and severe. If the token price surges, you end up with less of it; if it crashes, you're left holding a depreciating asset. The farming rewards must significantly outperform this loss to be profitable.

Pool2 farms are often deployed on newer, unaudited, or experimental protocols to attract early liquidity. This exposes you to multiple layers of risk:

• Smart contract bugs or exploits in the liquidity pool or reward distributor.
• Admin key risks, where developers can potentially alter reward rates or withdraw funds.
• Protocol failure risk, where the underlying project fails, rendering the farmed tokens worthless. Always verify audit reports and the track record of the deploying team.

Pool2 rewards are typically paid in the protocol's native token, which is often inflationary. High emission rates can lead to massive sell pressure from farmers, creating a downward spiral on the token price. This is known as farm-and-dump dynamics. Key questions to assess:

• What is the token's emission schedule and circulating supply?
• Is there a vesting schedule for team/VC tokens that could flood the market?
• Does the token have real utility and demand sinks beyond being a farming reward?

Exiting a Pool2 position can be challenging. You must:

1. Unstake your LP tokens from the farm.
2. Remove liquidity from the decentralized exchange (DEX) pool.
3. Sell the farmed rewards. Each step incurs gas fees and slippage. If the token has low liquidity on the DEX, your exit could significantly impact its price, eroding profits. During market stress or a "bank run" on the farm, these issues are exacerbated, potentially trapping capital.

Some Pool2 farms use oracles to calculate rewards or determine prices. These can be vulnerable to manipulation via flash loans or other MEV (Maximal Extractable Value) strategies. An attacker could artificially inflate the price of the pool's tokens to drain rewards or skew the distribution. Furthermore, regular users are often subject to sandwich attacks when entering or exiting pools, where bots front-run and back-run their transactions for profit.

Pool2 farming generates multiple taxable events in many jurisdictions:

• Reward tokens are typically treated as income at the fair market value when received.
• Trading LP tokens or selling farmed tokens triggers capital gains/losses.
• Impermanent loss may have complex accounting implications. The anonymous, cross-border nature of DeFi does not exempt users from local tax laws, and the high volume of small transactions can create significant reporting complexity.

A smart contract that holds pairs of tokens (e.g., ETH/USDC) to enable decentralized trading. Users who deposit assets become Liquidity Providers (LPs) and receive LP tokens representing their share of the pool. These tokens are the foundational asset staked in Pool2 farms.

• Purpose: Provides the liquidity for Automated Market Makers (AMMs) like Uniswap.
• Risk: LPs are exposed to impermanent loss if the price ratio of the paired assets changes.

A receipt token minted when a user deposits assets into a liquidity pool. It is a fungible ERC-20 token that proves ownership of a share of the pool's reserves. This token is the primary input asset for Pool2 farming.

• Function: Redeemable for the underlying token pair at any time.
• Key Role: In Pool2, the farm's native token is often paired with a base asset (like ETH) to create the LP token that is then staked.

The broader practice of locking or staking crypto assets in a DeFi protocol to generate returns, typically in the form of additional tokens. Pool2 farming is a specialized subset of yield farming.

• Mechanism: Incentivizes users to provide liquidity or capital to a protocol.
• Rewards: Often involve the protocol's governance token.
• Strategies: Include single-asset staking, lending, and LP staking (like Pool2).

A financial risk specific to providing liquidity in AMM pools. It occurs when the price of your deposited assets changes compared to when you deposited them, resulting in a lower dollar value than simply holding the assets. This loss is 'impermanent' until the LP position is closed.

• Impact on Pool2: Farmers earn yield but may still incur a net loss if impermanent loss outweighs rewards.
• Calculation: More pronounced with high volatility between the paired assets.

A decentralized exchange (DEX) protocol that uses algorithmic money robots and liquidity pools to price assets and execute trades, eliminating the need for traditional order books. Pool2 farms are built on top of AMMs.

• Examples: Uniswap (v2/v3), SushiSwap, PancakeSwap.
• Core Function: Uses a constant product formula (x * y = k) to determine prices.
• Relation: Supplies the LP tokens that fuel Pool2 farming strategies.

The economic model governing a cryptocurrency, including its supply, distribution, and inflation rate. In Pool2 farming, the rewards are dictated by the farmed token's emission schedule.

• Critical Factor: High, unsustainable emissions can lead to rapid token depreciation.
• Dilution: Farmers may be earning more tokens that are decreasing in value.
• Analysis: Successful Pool2 strategies require evaluating the long-term viability of the reward token's economics.