There are two main methods of composting: Aerobic and anaerobic. Both involve the microrganic rotting of organic material such as leaves, food, or faeces in a moist environment. Anaerobic composting can incorporate microrganisms that give off an unpleasant odour. For this reason aerobic composting is favoured by some people.
Compost bins need the holes to provide oxygen, to help prevent the compost from molding or rotting in an anaerobic way.
Alternatively, anaerobic compost bins can be used that have tight fitting lids so odours cannot escape.
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