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Where there are resources, there are predators. The more resources there are, the more predators of all sizes there are. Crypto is a surge of new resources, and when a new crypto segment explodes, the predators are quick to rush in for the prey. DeFi, decentralized finance, is no exception.
The ultimate benefit of DeFi is “yield farming”, where crypto owners deposit assets on a new platform and spend extremely generously on the new one’s tokens for their trust and potentially the income from the “repledged” assets they have deposited received project.
Uniswap, the king of DeFi exchanges, recently gave away its $1,700 worth of tokens to anyone who used the site before a certain date, and operates a program that will generate millions worth of tokens over the next four years distributed to liquidity providers of specific pools years. Having recently received these tokens for practically nothing, I love the idea. What’s not to love about $1,700 in free cash?
This is also a tool for funding new projects and a way to attract the most expensive asset: user attention.
But like all tools, it can be used for evil purposes. Where there is a great tool, a criminal will look for ways to abuse it.
For example, most DeFi projects are open source, which allows people to examine them to uncover bugs, questionable processes, or anything else that might raise suspicion if open to inspection. This openness means anyone can develop and redesign a version of a successful project.
This is great on the one hand and terrible on the other. This is great because talented developers can leverage these open-source projects to build the next generation of DeFi utilities or beautify existing ones. This is terrible because scammers can do the same thing to run rip offs.
This helped stop the ICO (Initial Coin Offering) wave. The scammers flocked in and started a series of “me-too” projects, which involved tricking investors and then disappearing. In the field of yield farming DeFi, this process is already in full swing.
But how to distinguish a real project from a scam? Here’s a checklist.
1) Does the project exist? Can you use it? If it’s a yes, that’s a tick, if the project is a promise for tomorrow, that’s a cross.
2) Does the project bring something innovative? If so, that’s another catch, and a big one at that.
3) Are the people anonymous or real? If it’s real it’s a tick, if it’s anonymous it’s a cross.
4) Has the team ever done anything? Yes, a tick, no, a cross
A cross doesn’t mean you don’t interfere, you can weight your ticks and crosses.
The next one, however, is a big red flag. A no! nope Not. Newt.
The way certain yield farming works is that an investor stakes coin pairs of liquidity on Uniswap, for example USDc and Ether, on the site and in the new project gets coins at a high price, maybe 30% of annual percentage return ( APY). Then there is a pool on Uniswap for the project’s coin, let’s call it Cowpat token. You can exchange Cowpat for Ether and other tokens. Cowpat/USDc, Cowpat/Tether, etc.
The pools on the Cowpat site will include a Cowpat/ETH liquidity pool yield farm paying gargantuan interest rates of say 3,000%. This looks like a scam and it is, but the scam isn’t in the payout, it’s elsewhere, it’s in a pool called FERT/ETH, another liquidity pool on Uniswap.
What the scammer does is throw away FERT, the fertilizer token that is entirely theirs.
They looked at the Cowpat/Ether farm and thought: does the guy behind Cowpat have tens of millions of Cowpat tokens and is he going to throw them into the Uniswap liquidity pool and let it drain, leaving the “pawns” to end up with the huge bag of worthless Cowpat -Keep tokens? Oh no, there are no coins for the “team” so that can’t happen. Hooray it’s safe, let’s start farming the 3,000% APR.
Incorrect.
What happens is that cow patty is issued to the guy behind this deception in the FERT/ETH pool and the cow patty he earns is sold in your cow patty/ETH pool, siphoning ether and ultimately siphoning it from your ether. Now you could buy and deposit fertilizer tokens on Uniswap, but that just means the scammer got your ether without even trying because the FERT token is also worthless. Its only value is that massive amounts of cowpats are spent to siphon your ETH from the cowpat/Ether swap pool.
Obviously every unlocked token owned by the owner is vulnerable to this maneuver, as seen in the Sushiswap fiasco, but the next generation of scammers are using this mechanism to trick newbies, and there are sure to be plenty of them.
So if you see a project with a farm and an obscure token pair in the mix, you can be pretty sure someone is running a quick project. It may not be illegal, but it’s definitely going to feel like it’s meant to be when you’ve had cow pats for a long time and are out of ether.
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Clem Chambers is CEO of private investor website ADVFN.com and author of 101 Ways to Pick Stock Market Winners and Trading Cryptocurrencies: A Beginner’s Guide.
Chambers was named Journalist of the Year in the Business Market Commentary category at the 2018 State Street UK Institutional Press Awards.
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I am the founder and former CEO of stock and investment website ADVFN and General Partner of Ylem Capital ([email protected]). I am a prolific financial writer. I’ve written a stocks column for Wired – which described me as a “market maven” – and am a regular columnist for numerous financial publications around the world. I have written for publications such as Working Money, Active Trader, SFO and Technical Analysis of Stocks and Commodities in the US and have written for pretty much every UK newspaper. In 2018, I was awarded Journalist of the Year in the Business Market Commentary category at the State Street UK Institutional Press Awards. Over the past few years, I’ve blossomed into a financial thriller writer and the best-selling investment guide book, 101 Ways To Pick Stock Market Winners. Find me here on US Amazon. You may also have seen me on CNBC, CNN, SKY, Business News Network, the ` and Al Jazeera giving my perspective on the markets.
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