It is not a secret that the crypto DeFi scene has allowed investors to earn a high rate yield return compared to any conventional financial institution can offer.
However, high returns come with high risks as well. Let’s take a look at the risks to consider before diving deeper into yield farming.
If you are not familiar what is yield farming, you can read more about it here.
No one can resist farming in a liquidity pool that gives out more than 1000% APY. Anyone can earn more with low capital by having such a high APY. Moreover, in a bull market, an investor can appreciate a tremendous growth in capital plus a high yield return, that simple!
While it is all good in a growing market, most investors tend to forget that the cryptocurrency market is considered a highly volatile market. Yesterday, the market grew up to 20%, and the next day, it can tank to 60%. Once that happened, investors lose more than half of their capital in a blink of an eye.
The Rug-Pull Scheme
The growth of the cryptocurrency industry is undoubtedly expanding rapidly, day by day. New DeFi protocols introduced daily in different blockchain that keeps on attracting more people to invest in it.
It also attracts ill-intention players that have the capabilities to build their protocols and attract millions of dollars of investors’ capital. Some of the funds are stolen forever with no chance of recovering from the perpetrator.
Technical & Execution Errors
Most DeFi protocols are decentralized, and it is run by the blockchain smart contracts autonomously. While it is a common practice to get a protocol audited, some technical errors are unavoidable. What’s worst is that some developers don’t go through the audit process or ignore the flaws pointed out by the community.
By having such critical errors, investors’ funds will be locked permanently and lost forever. It is easy to avoid such mistakes by using common sense. However, excitement and greed can get the better out of it.
Believe it or not, some cryptocurrencies are exposed to market manipulation. Moreover, it is most likely due to exploits in some DeFi protocols. Imagine a situation where there is somebody holds a high volume of a particular cryptocurrency and immediately dumped it into the market.
The price of that particular cryptocurrency plunged deep, resulted in the loss of capital for investors. Based on reports, such market manipulation can happen in few minutes without investors having the time to respond.
Always remember that yields with a high return will always have high risks lurking behind them. Always take the highest precautions in investing with any DeFi protocols.
With all the risks, would you still consider yield farming?