They say crypto’s greatest appeal lies in how quickly one can acquire “Lambos,” fly “to the moon,” and “boost their numbers.” The Lambo aspect is still relevant as people are making insane money day in and day out. The other two rather not.
Although traders are still betting on the prices of Bitcoin, Ethereum (ETH) and other crypto assets, trading or investing in cryptocurrencies is not currently the set way to generate vast wealth. DeFi’s yield farming is at the heart of its quest to “mint millions on the fly.” But as good as it sounds, gaping holes in the agricultural landscape itself can swallow up yields in a matter of moments.
That’s exactly what happened to this DeFi yield farmer who set out to ride the farming hype and make a fortune. Unfortunately, he ended up losing a good $5000 in the latest craze that is sending Ethereum gas prices straight into the stratosphere.
For the sake of the story, let’s give this pawn a name – DIVA (DeFied but In Vain)
DeFi Farm: Kimbap, Mission: Maximize Yields
Staking USDC-ETH UNI-V2 LP tokens in Kimbap
It happens that DIVA is a cautious investor but decided to give yield farming a try after hearing about it from a friend. DIVA chose KIMBAP as the playing field for its yield farming debut.
The farming simulator appeared “safe” as DIVA “reads codes and reads the codes cleanly”. DIVA compared KIMBAP’s smart contract to another secure counterpart, and nothing seemed “fishy”. Also, DIVA thought it’s safe to move forward since many people had invested in the farm and it wasn’t hacked.
DIVA found that with KIMBAP you can:
Deposit Uniswap’s liquidity provider tokens and you’ll be rewarded with $KIMBAP for continuing to hold the liquidity tokens within Kimbap’s Masterchef contract.
After diligently scouring the web about yield farming and the requirements to get started, our DIVA decided to deposit USDC-ETH token pairs in the Uniswap liquidity pools to get LP tokens. What followed next was an immediate move to profitably invest them in KIMBAP.
Immediately after DIVA placed the USDC-ETH UNI-V2 LP token in the Kimbap farm, the associated Kimbap balance began to smile. Over time, the smile got bigger and bigger (the investment increased in value).
The desire to achieve ‘1000+% APY’
DIVA fully bought DeFi’s passive earnings proposition and was not at all happy with “only 300% APY”:
In a world where returns in excess of 1000% are the norm, I feel like I’m losing with just 300% APY. If I can hit 1000+% APY, I can make the same amount of money work 3 times as hard! To do this, I simply need to buy some of these native tokens from the exchange to invest in the “bonus pools”.
And for annual percentage returns to grow by 3.33x, DIVA decided to “buy some Kimbap(s)…combine with ETH and put them back in the pool.” This would help accrue Kimbap(s) faster, which in turn could be sold to recover the capital initially invested.
DIVA wasted no time in quickly buying more KIMBAP tokens, pairing them with some more ETH, depositing the token pairs with Uniswap, and placing the resulting liquidity token in the “yield extension pool”.
When the hunter becomes the hunted
While DIVA dreamed of “Lambos” deep in her sleep, KIMBAP tokens were busy responding positively to gravity throughout the night. When our DeFi yield farmer woke up in the morning, prices had fallen more than 100x.
That’s when DIVA realized that the rules for this game were different than originally expected. Quickly coming to terms with the fact that the farm was being ransacked, DIVA concluded that farmers eating up other farmers’ crops are causing farms to report inflated APY numbers (1000%+) .
If you don’t know where the returns are, the returns are you.
Yield farmers can be cultivated and the hunter becomes the hunted.
‘Degens’ rule the quarter in yield farming
Staking liquidity tokens on a DeFi yield farm results in obtaining “native farm tokens” that have absolutely no value. Ideally, each native token should be worth $0.00, but then why do these farm tokens have high valuations on exchanges? DIVA says:
The reason is greed. If farmers refuse to believe that the (future) price of the native token is worth exactly $0.00 and think they can land faster than others by providing liquidity to the native token for stablecoin pairs, they will to yield. These farmers provide a gateway for other farmers to sell what will be worth $0.00 in the future at a higher price than it is now.
DIVA, with a touch of enlightenment, points out that it is inappropriate to allocate liquidity to native farm tokens as they will ultimately have no value. But the state of DeFi yield farming is that newcomers don’t realize this and inadvertently become the yield for other yield farmers.
This gives “degenerate peasants” free access to poke fun at the newcomers and throw them straight into the depths of Hell.
DIVA needed a $5000 bounty to understand the actual rules of the yield farming game, but every aspiring yield farmer doesn’t need to go through the harrowing experience above.
Here are some tips to keep in mind and not “get a haul”:
- Never buy a native token. The price will always go back to zero in the long run.
- Never buy into a new type of farm. New farms are usually offshoots of previous “successful” farms.
- Always check the permissions of the smart contract controller. Even previously secure farms can be dangerous if permissions are misconfigured.
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