Yield Farming Can Be Risky: Ask This Guy Who Lost $5000 Overnight

by
Himadri Saha
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They say crypto’s biggest appeal lies in how fast one can acquire ‘Lambos,’ fly ‘to the moon’ and get their ‘numbers to go up.’ The Lambo aspect is still relevant as folks are making insane money day in and day out. The other two, not so much.

Although traders still bet on prices of Bitcoin, Ethereum (ETH), and other crypto assets, cryptocurrency trading or investing is not the set method for generating humongous wealth presently. DeFi’s yield farming has taken the centre stage in the quest to mint ‘millions in a jiffy.’ But as good as it sounds, gaping holes in the farming landscape itself can gobble up yields in a matter of just a few moments.

That’s precisely what happened with this DeFi yield farmer who set out to ride the farming hype and score a fortune. Unfortunately, he ended up losing a good $5000 to the latest craze that is sending Ethereum gas prices right into the stratosphere.

For the sake of the story, let’s give a name to this farmer – DIVA (DeFied but In Vain)

DeFi Farm: Kimbap, Mission: Maximizing Yields

Staking USDC-ETH UNI-V2 LP Token In Kimbap

It so happens that DIVA is a cautious investor, but decided to give yield farming a shot after hearing about it from a friend. DIVA chose KIMBAP as the playing field for his yield farming debut.

The farming simulator came across as ‘safe’ as DIVA ‘reads codes and the codes read clean.’ DIVA compared KIMBAP’s smart contract to another safe counterpart, and nothing seemed ‘fishy.’ Also, DIVA thought that it’s safe to move forward as a lot of people had invested in the farm, and it’s not hacked.

DIVA found out that with KIMBAP, one can:

Deposit Uniswap’s liquidity provider tokens and be rewarded $KIMBAP as they continue to hold the liquidity token within the kimbap’s masterchef contract.

After diligently scouring the internet about yield farming and the requisites for getting started, our DIVA decided to deposit USDC-ETH token pairs in the Uniswap liquidity pools to receive LP tokens. What followed next is an immediate move to stake them in KIMBAP for profits.

Right after DIVA staked the USDC-ETH UNI-V2 LP token in the Kimbap farm, the associated kimbap balance started smiling. With passing time, the smile became wider and wider (read investment rose in value).

The Desire To Achieve ‘1000+% APY’

DIVA entirely bought DeFi’s passive earning promise and was not at all happy with ‘just 300% APY’:

In a world where 1000+% yields is the norm, I feel like losing out with just 300% APY. If I can achieve 1000+% APY, I will be able to make the same amount of money work 3 times as hard! To do that, I simply have to buy some of those native tokens off the exchange to stake it in the “bonus pools”.

And for the annual percentage yield to go up 3.33X, DIVA decided to ‘buy some Kimbap(s)…pair it with ETH, and stake it back in the pool’. This would help amass kimbap(s) faster, which in turn could be sold off to recover the initially invested capital.

DIVA lost no time in swiftly buying more KIMBAP tokens, pairing them with a few more ETH, depositing the token pairs in Uniswap, and staking the resulting liquidity token in the ‘yield elongating pool.’

When The Hunter Becomes The Hunted

While DIVA was dreaming about ‘Lambos’ deep in sleep, KIMBAP tokens were busy responding to gravity positively through the night. When our DeFi yield farmer woke up in the morning, prices had fallen more than 100X.

That’s when DIVA realized that rules were different for this game than originally expected. On quickly coming to terms with the fact of the farm getting ransacked, DIVA came to the conclusion that farmers eating up yields of other farmers results in yield farms report inflated APY numbers (to the tune of 1000% and more).

If you don’t know where are the yields, you are the yield.

Yield farmers get themselves farmed, and the hunter becomes the hunted.

‘Degens’ Rule The Roost in Yield Farming

Staking liquidity tokens on a DeFi yield farm results in the receipt of ‘native farm tokens’ that have absolutely no value at all. Ideally, every native token should be worth $0.00 but then why do these farm tokens have surged valuations on exchanges? DIVA says:

The reason is greed. When farmers refuse to believe that the (future) price of the native token is worth exactly $0.00 and think that they can farm faster than others by providing liquidity for the native token to stablecoin pairs becomes the yield. These farmers provide the gateway for other farmers to sell what will be worth $0.00 in the future for a price above that now.

DIVA, with an air of enlightenment, points out that it is inappropriate to allocate liquidity to native farm tokens, as they will eventually have no value. But the state os DeFi yield farming is that newbie farmers don’t realize this and inadvertently become the yield for other yield farmers.

This gives ‘degenerate (degen) farmers’ free access to take the newcomers for a ride and drop them straight into the depths of hell.

It took a $5000 premium for DIVA to understand the actual rules of the yield farming game, but every aspiring yield farmer need not go through the above harrowing experience.

Here are some tips to keep in mind, and not ‘become the yield’:

1. Never buy a native token. The price will always return to zero in the long run.
2. Never buy into a new type of farm. New farms tend to be forks of previous ‘successful’ farms.
3. Always check the permissions of the smart contract controller. Even previously safe farms might be dangerous when permissions are misconfigured.