The Economics of Farming Seasonal Tokens
Farming plays two important roles in the Seasonal Tokens economy: It ensures that there’s enough liquidity in the market for traders to be able to complete their trades, and it also provides seasonal demand for the tokens that complements the seasonal supply from mining.
It costs a miner today 60% more to mine a Winter token than a Spring token, and a Winter token is 60% more valuable to a farmer than a Spring token is. This keeps the price of Winter above the price of Spring on the market, which makes it possible for investors to gain more tokens in total by trading Winter for Spring.
By the end of this year, that will change. Spring will be the most expensive token to mine and the most valuable for farming. The increase in the cost of production from mining will happen because the rate of production will be cut in half. This mechanism of controlling the supply was introduced by bitcoin and most proof-of-work coins use it.
The system of controlling the relative demand for the tokens through the use of farming is new and unique to Seasonal Tokens. Let’s look at how it works.
Providing Liquidity
For traders to be able to trade tokens for other tokens and for ethereum on Uniswap, there needs to be a stockpile of tokens and a stockpile of ethereum available, so that traders can take from one stockpile and add to the other. The people who provide the tokens and ethereum to make these trades possible are called liquidity providers.
The price of a token is set by the number of tokens and ETH in the Uniswap trading pair. If there are 20,000 Spring tokens and 1 ETH in the trading pair, then 20,000 Spring has the same value as 1 ETH.
When traders buy tokens, they add ETH to the trading pair and take tokens. That changes the quantities, and changes the price.
Liquidity providers are taking a risk: They’re effectively offering to buy and sell tokens at the current price. That means that they risk losing out if the tokens rise in price a lot. If you provide liquidity, and traders buy your tokens, you end up with more ETH and fewer tokens. If traders sell tokens, then the price falls and liquidity providers end up with more tokens and less ETH.
To compensate the liquidity providers for taking this risk, there needs to be a financial incentive. Uniswap provides an incentive by allowing liquidity providers to collect fees of 1% on every trade. That might not be enough, because large price moves and infrequent trading can mean that liquidity providers make a loss.
Farming
Yield farming provides a better incentive for liquidity providers. By distributing a fraction of all the newly-mined tokens to liquidity providers, people can be paid directly to provide liquidity.
The Seasonal Tokens farm is a smart contract running on the ethereum blockchain, like the tokens. Liquidity providers can transfer their Uniswap liquidity positions to the farm. The farm then locks the liquidity in place for 30 days, so that traders can have confidence that the liquidity in the market won’t all disappear in a panic. In return, the farmers receive 9% of all the tokens mined by the mining pool.
Farming provides a constant and economically significant incentive for investors and miners to provide liquidity. A farmer can reasonably expect to make a net profit even if the price changes a lot, because there’s a continual inflow of farm income.
How the Seasonal Tokens Farm Creates Seasonal Demand
Farming creates a demand for tokens: You can get a regular income, but you need to buy or mine the tokens to get it. That’s true of all yield farms, but the Seasonal Tokens farm is unique because it has four different tokens, and so it can control the relative demand for the four tokens.
Every farmer receives all four tokens for farming. If you provide Spring tokens and ETH to Uniswap, then you get Spring, Summer, Autumn and Winter tokens from the farm.
The farm distributes 9% of all tokens mined by the pool to the farmers, but Winter farmers get 60% more tokens than Spring farmers do.
The farm income is distributed to Spring, Summer, Autumn and Winter farmers in the ratio 5:6:7:8. So Spring farmers get 5/(5+6+7+8)=19% of all the incoming tokens. Summer farmers get 23%, Autumn farmers get 27% and Winter farmers get 31%.
Winter farmers get more tokens from farming than Spring farmers do, but because they get more, there will be more people farming Winter than farming Spring. That means that the payouts to Winter farmers are divided among more people, so each person’s share of the Winter farm income will be smaller.
When the total amount of money invested by Winter farmers is exactly 60% more than the amount invested by Spring farmers, then farming Winter and farming Spring will be equally profitable. Winter will produce 60% more farm income in total, but it will be paid out to farmers who have invested 60% more. So the number of tokens that you get for investing a dollar in Winter farming will be the same as what you get for investing a dollar in Spring farming.
That has the consequence that the total amounts invested in Spring, Summer, Autumn and Winter farming will tend to have a ratio close to 5:6:7:8. If the ratio is significantly different from this, then it’s profitable to switch from farming one token to farming another. Farmers who are seeking to maximize their farm income will redistribute their liquidity over time to keep the ratio close to this.
This will change in October, 2022, when Spring tokens will become the most valuable for farming. The payout ratio will change to 10:6:7:8. Spring farmers will get 32% of the farm income instead of the current 19%. Spring farmers will get 67% more tokens than Summer farmers. Farmers will reallocate their liquidity from other tokens to Spring to reap the greater rewards. Spring tokens will be in demand.
What’s the Best Seasonal Token to Farm?
The way to know which token will give you the most farm income per dollar invested is to look at the total amount invested already in each trading pair. This is easy to do by looking at the total amount of ETH in each pair, which can be seen on the farming page. The total value of the tokens in a trading pair is equal to the amount of ETH. If there are 20,000 Spring tokens and 1 ETH in the Spring/ETH pair, then those 20,000 tokens are worth 1 ETH, so the total amount invested there is worth 2 ETH.
Today, when ratio of the amounts invested in the four trading pairs is equal to 5:6:7:8, the farm pays out the same amount per dollar invested in each pair. If you find that there are 5, 6, 7 and 7 ETH in the Spring, Summer, Autumn and Winter pairs, then Winter is the most profitable to farm. If it’s 4, 6, 7 and 8 ETH, then Spring is the most profitable.
When the prices are close to their natural ratio of 5:6:7:8, and the amounts invested have the same ratio, the number of tokens of each type in the farm will be similar. For example, if there are 100,000 Spring tokens and 1 ETH in the Spring/ETH trading pair, then we can expect there to be around 100,000 Winter tokens and 1.6 ETH in the Winter/ETH pair. This makes it clear that Winter tokens are worth 60% more for farming than Spring tokens. Each Winter token in the farm brings in 60% more farm income than each Spring token does.
Seasonal Supply and Seasonal Demand
Farmers, miners and traders can all profit from Seasonal Tokens, but the tokens were designed primarily to serve the interests of investors. They’re designed to be a good investment. What makes them a good investment is that investors can increase the total number of tokens they own with every trade, never risking a loss measured in tokens. They’re becoming harder to obtain over time, and can be expected to retain their value.
To make this work, the relative supply and demand from mining and farming have been designed so that which token is the most expensive will keep rotating. For both miners and farmers today, one Winter token is worth 1.6 Spring tokens. By the end of the year, Spring tokens will be the most expensive to produce and the most valuable for farming of the four. Later, it will be Summer.
This means that investors will have many occasions to trade tokens for more tokens. Winter tokens today can traded for more Spring tokens. Those Spring tokens can be traded for more tokens of another type next year. Investors can be certain that the value of their investment measured in tokens will increase with every trade.
