According to the survey published by CoinGecko earlier this week, DeFi yield farmers are high-risk takers. Yet, some are clueless about the minimal understanding of the risks for their investment.
Other takes from the survey are,
- HODL is the main reason to participate in yield farming.
- While 49% of farmers would not invest in an unaudited contract, 26% would still do it.
- 79% of farmers are aware of the risks. However, 40% of them don’t know how to read smart contracts.
Decentralize Finance (DeFi) in the cryptocurrency scene is getting bigger and garnering a lot of attention. Yield farming, also known as liquidity mining is the main buzz for the past few months.
What is yield farming?
Before going any further, let’s understand the foundation of yield farming. Yield farming is about earning interest or capital gain from a farmer’s investment through different DeFi services. The services can be lending, liquidity pool, incentive schemes, and more.
For example, imagine an investor as an individual bank that uses decentralized platforms to engage in earning interest. Yes, all the due diligence and risk management are on the investor alone.
The risks on the field
As the DeFi momentum accelerates, new projects popped out every day. While some projects are real, others are rug-pull schemes, and some are memes.
Not to mention the creativity in project names, from vegetables to food, which can be attractive and hilarious. The risks can be in different forms too.
One of the apparent risks in yield farming is the rug-pull schemes or exit scams riding the DeFi craze. Early investors lost more than a hundred thousand to millions of dollars from such scams. One of them would be the Yfdexf.finance exit scam with the loss of around $20M investors fund.
In a more technical risk would be in the smart contract itself. Take the YAM Finance, for example, a 48 hours DeFi run with the loss of around $750,000 and $500M worth of token locked forever. Its native token, YAM, skyrocketed to $160, then crashed to $0.80 in few hours.
The reason for this tragedy is the unaudited smart contract. While the developers were upfront about the risks of the situation, the hype was unstoppable and attracted some prominent people in the industry. The protocol was up and running when they found the flaws and bugs in the contract.
Yield farmers are exposed to liquidity issues as well. This form of risk likely to happen when the value of funds in the market exceeded the circulating coin supply. In a simpler term, it is like a bank doesn’t have enough cash to be distributed.
Referring back to the survey, these are risks that an average yield farmer has to take. Moreover, the optimal initial capital for yield farming should be around $1,000. The survey showed that 52% of farmers’ initial capital below $1,000. That is quite a considerable amount to be spent for some for sure.
Is it the appetite or the yield?
While the survey showed that the farmers are aware of the risks and believe it is manageable, is it the real motive? Or it’s just a FOMO moment?
As the old saying goes, you reap what you sow. It fits the farming season well.