Pool 2 farms reward an asset that is included in the pool. For example,
- AVAX-PNG rewards PNG
- AVAX-PEFI rewards PEFI
In contrast, Pool 1 farms do not contain the reward asset. For example, AVAX-LINK rewards PEFI.
Pool 2 farms are designed to generate liquidity for the reward token, which usually compensate early farmers with very high returns by using a very high emission rate.
Early in these systems, there are two competing forces generating volatility. On one hand, there is buying pressure from farmers who want attractive returns. On the other hand, early farmers place selling pressure on the reward token. More volatility may lead to loss due to the underlying assets losing value.
This increased risk explains the very high returns often associated with Pool 2 farms.
Not necessarily. Established Pool 2 farms may have a risk profile more similar to Pool 1 farms. This shift depends most on the token emission rate and volatility.