Yield farming, How Not to Get REKT!
Investing in DeFi can be all great and fun till you hit a shipwreck. And there goes thousands of dollars down the drain. The DeFi space as it is today, though witnessing mainstream adoption, is still highly volatile. You don’t wanna be that “rekt” trader. That’s why you gotta be close friends with caution, if you know what we mean.
Yield farming is that new kid on the block in DeFi, with huge passive income opportunities. Truth be told, you could make some huge amount of money through yield farming but you could also lose it all in a heartbeat. You just gotta make sure you’re not the latter.
What is Yield farming?
Yield farming is a DeFi protocol where crypto holders lock their cryptocurrencies in liquidity protocols and earn rewards. In other words, yield farming involves lending cryptocurrencies to DeFi protocols in order to earn rewards. It relies on liquidity providers (LP) to add funds to liquidity pools (a smart contract that holds funds) by locking their digital assets in the pool. These LPs then get rewarded, via fees and tokens generated on the DeFi platform, over time for providing liquidity to the pool.
Don’t wanna be rekt? Here are some pitfalls to note:
APYs can be unstable
Whatever comes with high rewards defo comes with high risks. Various farms or pools promise high annual percentage yields which obviously are more attractive to traders. However, don’t lose your head, these APYs can be very unstable and you could potentially lose all you’ve invested in the pool. APYs are generally dependent on prices of assets staked in the pool and the liquidity of the pool. Those two factors are indeed variables and are subject to fluctuations at any point in time hence affecting your investments. So stay alert, and ask yourself some crucial questions like: what could happen if these variables change? How much could I potentially lose in case of any fluctuations? Caution is the word here.
Smart contract risks
Yes, smart contracts have been highly instrumental to the growth of DeFi today, yet there are still some risks worthy of note. Yield farming typically involves you staking or supplying your crypto assets to a pool based on smart contracts (e.g. on Ethereum blockchain). Here’s what you need to know, smart contracts can be subject to attacks and hacks. You could lose all of your funds if the contract gets attacked (See example here). To reduce this risk, ensure you stake in only audited pools from reputable firms, not just a random name out there. Do your own research and be sure to avoid unaudited pools.
Fees, Fees and Fees!
You really don’t want to end up spending more than you earn. What’s the point in investing anyways if you keep losing more money? There are various fees associated with yield farming and you gotta stay up to date with them or lose out. Gas fees are stuff you just can’t overlook. Ethereum blockchain is known for high gas fees and considering many of these DeFi platforms operate on Ethereum, you must do proper research about the fees for various pools before staking your assets. There are also transaction fees associated with switching pools, stay abreast of these before making your final decision to stake your assets in a pool.
Yield farming is great but if you don’t wanna be rekt, you gotta tread cautiously.
