Article Snippet: "The volatile nature of the Crypto market can wipe out even the largest liquidity pools if the market takes a sudden nose-dive."
(^image by CoinCodeCap)
IJCH - Inside JaiChai's Head (Meaning: My Warped, Personal Opinions and Musings)
From the Author:
Salutations.
I am JaiChai.
And if I haven't had the pleasure of meeting you before, I'm delighted to make your acquaintance now.
I invite you to interact with everyone, learn and have as much fun as possible!
For my returning online friends, "It's always great to see you again!"
Musings of the Morning: Defi Yield Farming (Wonder how many people know...?)
In the beginning…
"Let there be COMP governance token."
Isn't it funny how a token that was meant for stuff like voting and couldn't be bought on an exchange led the way to our current DeFi yield farming madness?
The FOMO into this or that "Name-Your-Food" Swap platform is understandable. The yields can be insane!
For example, as of a couple weeks ago, PancakeSwap was providing the highest APY among its competitors:
PancakeSwap DAI-BNB (APY 13731.33% yearly).
PancakeSwap YFII-BNB (APY 1290.59% yearly).
PancakeSwap BCH-BNB (APY 563.36% yearly), and
PancakeSwap XTZ-BNB (547.60% yearly)...
But I doubt that many of their investors know the slightest things about what Crypto Yield Farming really is and its inherent risks.
The volatile nature of the Crypto market can wipe out even the largest liquidity pools if the market takes a sudden nose-dive.
Look at what happened to HotDogSwap.
It used to be so simple.
You add your stablecoin to the LP ("liquidity pool'' or in some cases, "liquidity providers"; meaning, the users within the pool) and you earn profits from its trading in the form of trading fees and sometimes, their native token commensurate to your stake in the LP and its success.
Now, it's so complicated that your investment goes through layers of LP into LP trading and staking before you know if you made money and when you have access to it.
The more complex the LP's modus operandi, the more it is open to hacks. That's because it has more territory (attack surface) for BlackHatters to play with.
Since DeFi is based on smart contracts, the security of your investment is left to the smart contract developer's skill at programming.
I remember when Yam went from "0" to $57 million TVL in just two days, then crashed back to zero when the founder announced that he "found" flaws in the smart contract code.
A subsequent audit revealed A LOT more security and performance vulnerabilities.
Yupper. That probably looked like Swiss cheese to any Black or White Hatter. Lol!
Just like the Altcoin boom and ICO craze, unscrupulous and lazy developers are plagiarizing code.
With even the most cursory examination, you can see that many DeFi smart contracts for Yield Farming, Staking, Lending, etc. are merely copy and paste code from earlier "successful-so-far" projects with minor additions or modifications (e.g.,"Hey, we can put our name here and raise the APY here and…").
That means that the developer of your DeFi smart contract might not even know the nooks and crannies of all the lines of code he copied!
The last thing I want to discuss is APY.
The formula for calculating APY is:
APY= (1 + r/n )n – 1
Where r = period rate, and n = number of compounding periods.
How many people think a Yield Farming Project's APY is only a prediction?
My guess is that it's "probably not that many".
Most take the advertised APY as gospel and go about their business in ignorant bliss.
The expected returns are not guaranteed! (Read that at least three more times.)
Any severe fluctuations (volatility) in cryptocurrencies' prices affect yearly returns.
And that can happen at any moment.
The DeFi space is still very nascent and experiencing a lot of growing pains like APY estimations pulled out of thin air, smart contract hacks and multiple rug pulls.
Be aware and stay safe, my friends.
May you and yours be well and love life today.
In lak'ech, JaiChai.
"Really Appreciate You Stopping By. Truly hope to see you again!"
And if you liked my post, Tip, Upvote, Comment and Follow.
This is YOUR TORUM INVITATION!
About the Author:
Believing that school was too boring, he dropped out of High School early; only to earn an AA, BS and MBA in less than 4 years much later in life – while working full-time as a Navy/Marine Corps Medic.
In spite of a fear of heights and deep water, he performed high altitude, free-fall parachute jumps and hazardous diving ops in deep, open ocean water.
After 24 years of active duty, he retired in Asia.
Since then, he's been a full-time, single papa and actively pursuing his varied passions (Writing, Disruptive Technology, Computer Science and Cryptocurrency - plus more hobbies too boring or bizarre for most folk).
He lives on an island paradise with his girlfriend, teenage daughter and two dogs.
(image source)
(JaiChai 3-30-2021. Simultaneous multi-site submissions posted. All rights reserved.)
