Answering whether or not Yield Farming is a ponzi and exploring the risks involved with yield farming.
Yield farming has been a growing phenomenon in the Decentralized Finance (DeFi) space. Investors in prior years have made tremendously high returns on their investment as a result of yield farming. However, with the recent turbulence in the market, many investors now find themselves unsure about putting the practice to work.
Media outlets and fervent critics of crypto have begun to share their distaste for practices such as yield farming, which they claim are nothing more than a Ponzi scheme. So is yield farming a Ponzi scheme? Like many things in life, the answer is not so black and whit
Is Yield Farming a Ponzi Scheme?
Let’s review the evidence and find out. Currently, there are arguments for both sides of the debate. Although complicated, it would be perhaps best to understand what a Ponzi scheme is and then review what yield farming is and compare.
A Ponzi scheme, according to Investopedia, is a fraudulent investing scam in which high returns are promised for all, but in reality, the scam generates high returns for early investors with the money taken from later investors. BSC News has covered the differences between Ponzi and Pyramid schemes in a previous explainer.
Now let’s review yield farming. Yield farming generates value for investors when they lock up their money in a protocol in exchange for promised annual percentage yields (APY) on their money. Yield farming promises investors coins/tokens, typically ones native to the platform, in exchange for them depositing their funds in a protocol, offering high APYs. The earlier an investor gets in, the cheaper the cost per coin/token and thus the more money they will be able to return from yield farming. The distribution is almost always contingent on the amount of coins/tokens (money) deposited in the pool.
As a result, if the value for the coin/token skyrockets, the earlier investors will benefit much greater and disproportionately to those who invested later.
Where the water becomes muddy is right around here, as the valuation of said token being distributed to yield farmers creates a quandary of how something with no physical backing can have/generate value. The only explanation is that for the coin being distributed to maintain or grow in value, other investors must come in, thus pushing the price up.
Now, why this becomes so complicated is because of something called use-case. Although coins/tokens may not have any physical backing, if they provide frequent value to society, communities or individuals by their way of function, it then becomes valued and understood as what that functionality can offer.
However, as it stands, it would appear that the dynamics of yield farming are related to that of a Ponzi scheme, benefiting the early investors much more then the later ones.
Can You Lose Money in DeFi?
Yes, investors can lose 100% of all of the money they invest. There are many risks that are associated with DeFi. Smart contract bugs, developer oversight, flash loan attacks, rug pulls and scammers just to name a few of the potential risks. Below are some real world examples demonstrating the dangers of DeFi.
Iron Finance’s Titan token experienced a glitch in their smart contract and the price of the token, according to CoinGecko, fell 100%, from an all time high of $64.19 to an all time low of $.000000015.
In an article by Derek Rose for Stockhead, he reports how the anti-scam watchdog group War on Rugs complained bitterly how the Safemoon project was a scam, and then proceeded to scam their own base, leaving many furious and penniless. The irony.
Crypto scammers are also a real threat in the DeFi space, as following Elon Musk’s SNL performance scammers were able to successfully scam millions of dollars, some estimating they stole upwards of $9 million dollars.
It is worthwhile to point out, never share your private key address from your crypto wallet. Online websites with people offering help and support have been known to take private keys and then subsequently steal all the users’ funds.
The most important thing for new investors to do is to only invest what they are willing to afford to lose. Dollar cost averaging, or DCA, is another strategy advised by popular crypto influencers. Again, to reiterate, investors can lose 100% of their money. DeFi investors should only invest what they are willing to lose.
Education is also paramount. Experienced users can better navigate and avoid dangerous pitfalls in DeFi. The more one knows about risk factors, the more they can mitigate their entry into those situations. Continue to stay educated and never share any private information. While yield farming is not fully definable as a Ponzi scheme, there are absolutely risks for joining the trend. By staying on top of every investment and doing preliminary research, however, users can avoid the losses that actual Ponzi schemes would cause.
Source : bsc.news
Founded in 2020, BSCNews is the leading media platform covering decentralized finance (DeFi) on the Binance Smart Chain (BSC). We cover a wide range of blockchain news revolving mainly around the DeFi sector of the crypto markets. BSCNews aims to inform, educate and share information with the global investment community through our website, social media, newsletters, podcasts, research, and live ask me anything (AMA). Our content reaches hundreds of thousands of global investors who are active in the BSC DeFi space.