- There are different types of yield farming protocols based on utilities and bet tokens.
- David Malka details the variations and due diligence that investors need to make before trying.
- Very high yields, lack of usefulness, or low totals bet are all warning signs.
On August 27, 2021, David Malka, who spent seven years as a stock trader, was playing a musical chairs game. But instead of endangering his seat, it was like endangering his shirt from his back.
He was yield farming, an application of decentralized finance (DeFi) that pays yields in exchange for depositing crypto in a shared pool. In this example, Marca used a very new and dangerous protocol called Frost Finance. So he decided to try it and shoot himself.
Frost Finance offered a ridiculous APR of 37,000% to 47,000% at the time of recording. Was it a Ponzi scheme? No doubt, Marca said. In a typical pongee, the investor pays a juicy “return” from all client deposits and shared pools.
But why did Marca do that? First, he claimed to have earned about $ 14,000 in an hour for the platform’s native cryptocurrency, the tundra. With a 9-minute video, he earned about $ 1,000 within 7 minutes. At that time, one tundra was trading for just under $ 7,000.
Second, he’s a gambler — literally. Marca has played professional poker online for almost seven years, winning tournaments such as the 2016 Seminole Hard Rock Poker Showdown and winning $ 658,000. So when it comes to this high stakes protocol, he took it like gambling.
“You need to buy a full sit coin and deposit it on this harvest farm — it will pay a really high harvest,” Marca said. “And in the end, people will draw all the profits from this harvest farm and sell their sit coins as soon as possible.”
The video shows him entering and exiting the protocol using a tundra paired with a cipher called AVAX wrapped. He threw away his bag every time he noticed high selling pressure. Marca told insiders that he did this for about six hours before he earned money and exchanged for US dollar coins.
When it comes to frost finance, the music is over and all the chairs are gone. The price of the tundra plummeted and burned. By January, it was trading for less than $ 1. As of Monday, it was $ 0.53.
Malka, now CEO of Yieldfarming.com, is an educational platform that teaches users about harvest farming and says there are probably thousands of these types of schemes with zero practicality. They provide very high returns that are not sustainable and generate inflated short-term demand.
“Ultimately, selling pressure will overwhelm buying pressure and music will stop,” Marca said.
For now, Marca is still playing the game. According to screenshots from the account of cryptocurrency tracker Koinly, his cost base (or original value) is around $ 777,800 for harvest farming since October 24, 2021. His profile at DeBank, a DeFi platform tracker, shows an overall value of about $ 2.5 million as of Tuesday, which means he has earned over $ 1.5 million.
Tony Dhanjal, Koinly’s tax officer, viewed both documents and stated that DeBank’s overall value accurately reflects the value of his portfolio. Danjar said in an email to the insider that the numbers above show the best information available to measure the return on his investment.
Most of Marca’s revenue from yield farming came from high-risk protocols. That approach may not be suitable for beginners, especially if token holders are suffering sharp losses in their portfolio. He is also betting assets on various platforms that require regular monitoring. Some of the underlying cryptocurrencies are volatile and have fallen by as much as 90% to date. This also affects the overall value of his interests.
Not all harvest farms are made the same
Yield farming protocols are not all Ponzi schemes or high risk.
Hannes Graah, founder and CEO of Gro, which creates products that combine DeFi with traditional technology, says projects need to provide utilities to be sustainable.Usually these platforms
For protocol lending and decentralized exchange transactions. As a participant, you donate crypto to that liquidity pot.
According to Marca, high-yielding agriculture doesn’t have much usefulness, but broadly speaking, it can be a bank. Traditional finance requires an intermediary, such as a bank or exchange, to provide liquidity and execute transactions. At DeFi, its intermediaries have been replaced by smart contracts, and lenders are decentralized users and are of interest.
Dan Reecer, Chief Growth Officer at Acala, a platform that builds DeFi protocols that include yield farming, says yield farming is an early marketing expense for user acquisition rather than permanent. .. The intent behind the high rewards is that users will stay on the platform after the yield ends.
“It depends on the tokenomics of a particular project, but it’s usually a temporary or fixed-term campaign type,” Reecer said.
Marca agreed with this statement, but explained that this approach is the same as a company that gives points to encourage customers to use credit cards. However, Malka added that cryptocurrencies such as Stablecoin are an integral part of the DeFi protocol, so yields can decline over time, but they are rarely eliminated. ..
Marca began harvest farming in the spring of 2020 to achieve market-neutral yields. This is a strategy aimed at mitigating portfolio risk by generating market-independent returns. For traditional stocks, this could be the equivalent of a bond. In cryptocurrencies, this approach works best with stablecoins such as USD coins and tethers, as it is fixed at the value of the US dollar. About 30% of his bet assets are in the Stablecoin protocol, he said.
Graa said depositing stablecoin with a lending protocol is probably the most conservative farming method. He added that the risk is very limited because he is not betting on the price fluctuations of a particular crypto asset.
But that doesn’t mean that investors aren’t at risk. Graah pointed out that even within stablecoin, there is a wide spectrum. On the one hand, coins are backed by dollars and can be audited on a regular basis. On the other hand, they are only supported by algorithms.
Marca pointed out that Stablecoin, which is not fully backed by the dollar, faces the risk of unpegging. That is, its value can be less than $ 1.
“Every time you issue a USDC, you put $ 1 in your bank account. If you sell a lot at USDC and it drops to $ 0.97, you can literally take the money out of your bank account and buy back the USDC. $ 1. This is an example of temporary depegging. ” “But higher risk stablecoins like USDT [Tether], Not backed up on a one-to-one basis. Therefore, if it drops to $ 0.75, you cannot actually withdraw the dollar from your bank account and buy it back up to $ 1. ”
On Saturday, Terra’s UST lifted the peg when it plunged to $ 0.90 in response to high selling pressure. As of Friday, it hadn’t recovered.
Another risk Marca has pointed out is rag pull. He explained that this is when the protocol developer steals your money by pulling a large amount of crypto from the pot and sending it to your wallet.
Finally, Marca said there is a risk of exploits and hacks due to vulnerabilities in smart contracts. Marca pointed out the hacking of Wormhole, the bridge connecting the Ethereum and Solana blockchains earlier this year. The hacker left for $ 320 million.
Reecer emphasizes the increasing number of anonymous or “unlocked” teams behind DeFi projects as a danger signal, obscuring whether teams and developers have the right experience. bottom.
Yield Things to consider before farming
There is no way to guarantee safety, but Marca says investors need to do three things before trying out the yield farming protocol.
First, familiarize yourself with a metric called the locked total value, or the total of all bet crypto assets in the protocol that is earning the yield. He recommends using a website called DefiLlama, a TVL aggregator that tracks the dollar value of coins bet on various protocols.
Marca generally states that TVLs above $ 1 billion are very safe, and after conducting an investigation, it shows that huge amounts of money have been deposited in the protocol. As an example, according to Defi Llama, he pointed out the Curve, which was betting about $ 16.4 billion as of Monday.
He added that $ 100 million to $ 1 billion in TVL is medium risk and high risk if the protocol falls below $ 100 million in bet funds. For example, the tundra TVL was only $ 40 million.
Then link the browser wallet, such as MetaMask, needed to connect to these DeFi protocols to the hardware wallet instead of a centralized exchange.
Third, go to the protocol website and read its documentation. Marca said he was specifically looking for whether the project was being audited. In other words, a security company has identified a vulnerability in smart contracts on the platform. Ideally, you’ll want to see multiple audits, Marca said.
“If they’re audited and click on the audit to actually read it and see that there aren’t any important items, it’s generally a good indicator that the protocol is fairly secure,” says Marca. I did.
He added that if you want to dig deeper, check who the auditors are and how many other notable protocols they have audited. He said there are about 10 respected companies including CertiK, Trail of Bits, Quantstamp, Paladin and OpenZeppelin.
Overall, Marca’s greatest secret is to start small. Set up your MetaMask wallet and hardware wallet and deposit just $ 100. Move this amount to a yield farming platform such as Avee or Curve and wait a few days to make a profit and withdraw your profits and principal. Do this a few times before raising your position.
Reecer added that if the yield is too high and you think it’s not true, don’t take the risk.
A widely emphasized issue of how the structure of harvested agriculture is set up is known as permanent loss. This is when the value of the token is lower at the time of withdrawal than at the time of deposit.This happens when traders use it
Asset price and arbitrage cryptography. If you are part of a protocol that provides liquidity to an exchange, the losses due to price differences will result from yield farm pots. Depending on when the farmers withdraw their assets, they can suffer losses.
Marca said the losses are insignificant in most yield farming positions, as yields are usually higher than losses. He recommends using a free permanent loss calculator to determine the possible margins for each protocol.