While the cryptocurrency space is no stranger to odd projects or platforms — such as Elon Musk’s favourite DogeCoin — there is a new level of ridiculousness growing. The boom of DeFi has sent forward a hunger for this potentially revolutionary way to do finance in the future, but has also seen greed overtake it.
A number of protocols have popped up in the last few weeks — all named after food products — that have shown little robustness or the ability to push on and do good things for the space, but that have managed to lock in millions of dollars.
It all started with the Yam Protocol, but has expanded to go into the likes of Sushi, spaghetti and Kimchi. All of these protocols have locked up to $500 million in a matter of hours — as was the case in KIMCHI, the DeFi farming token. Yield farming is the main reason behind this, and it is being viewed sceptically because it looks to be a get-rich-quick scheme that profits off the potential of DeFi.
The problem with yield farming
“The hot new term in crypto is “yield farming,” a shorthand for clever strategies where putting crypto temporarily at the disposal of some startup’s application earns its owner more cryptocurrency,” it is explained by Coindesk.
The similarities behind this and ICOs are clear and apparent, and unfortunately, the greed and fervour for this could also spark a potentially catastrophic end to DeFi in a similar manner to how the ICO went.
At the simplest level, a yield farmer might move assets around within Compound, constantly chasing whichever pool is offering the best APY from week to week. This might mean moving into riskier pools from time to time, but a yield farmer can handle risk.
“Farming opens up new price arbs [arbitrage] that can spill over to other protocols whose tokens are in the pool,” said Maya Zehavi, a blockchain consultant.
Flavours of the week
Some of the bigger protocols that have attracted much interest from yield farmers in the past few weeks have been mentioned above. But it is when one looks deeper into them that concerns start to arise.
Now, also in August Investors poured $200 million into a meme coin that was barely 12 hours old, has no public figurehead or any audited code called Spaghetti Money that offers staking pools in several DeFi tokens, including yEarn (YFI), Maker (MKR), and Compound (COMP).
The most recent example of the crazy ride that these protocols can take investors on is HotdogSwap which dumped from $4,000 to $1 in five minutes. HotdogSwap was launched on September 2, and provided a largely illiquid token which surged in price to over $5,000 according to the Uniswap analytics dashboard, Uniswap.info. According to the HotdogSwap dashboard, that token is now worth $0.0332
DeFi traders that flock to these new insanely high yield offering projects drive token prices up initially which also pushes up the yields. Cashing out quickly, as appears to have been the case with Hotdog, nets a big profit for a few while the rest get burnt.
The issue is, there is a feeling that these projects are very likened to Ponzi schemes, or pump and dumps, and this is never something you want associated with a potentially promising ecosystem.