High Asset

Yield Farming Promises High Returns but Poses Heavy Risks to Assets

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 • Mark Cuban, the owner of the NBA team, Dallas Mavericks said that yield farming is not very different from buying high-dividend paying stocks. 

 • The yield farming sector is an unregulated space, hence scammers can easily steal their assets. 

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 • According to CipherTrace in the first quarter of 2021, DeFi frauds scammed $83.4 million out of the investors.

Yield farming is clearly the new DeFi boom. In yield farming, investors generally lend their crypto assets in exchange for high returns. When we talk about returns, we mean double-digit interest rates. And since yield farming is associated with high stakes, investors risk all their holdings. 

Moreover, the yield farming sector is an unregulated space, hence scammers can easily steal their assets or even worse, diminish their wealth by sudden waves of volatility. However, this hasn’t stopped people from not pouring their wealth in yield farming. According to several industry analysts and data providers, investors put tens of billions of dollars into high returns. 

Investors Allow Computer Programs Handle Their Funds and Collect Interest

Mark Cuban, the owner of the NBA team, Dallas Mavericks said that yield farming is not very different from buying high-dividend paying stocks or high-yield unsecured debt or bonds. Since they pose greater risk, they ought to pay more and offer higher returns than other companies. But shortly after, even Cuban suffered from ills of yield farming after he lost money to Titan, a digital currency which crashed to zero. Investors do not put their money in banks instead they let computer programs handle their assets while lending them and collecting interest for them. 

For instance, if an investor wants to earn interest on the Tether stablecoin, they could simply connect their digital wallets to Aave, a crypto lending platform. 

How DeFi Liquidators Promise Double-digit Returns? 

Aave is a DeFi liquidity provider. According to the CEO, Stani Kulechov what sets it apart from other DeFi protocols is the intricacy and innovations that have been put in the project and its features. Aave has features like ‘Flash Loans’ which allows them to borrow without any collateral. 

Moreover, AAVE holders can stake their tokens as Safety Module and earn Safety Incentives, wherein they receive rewards for securing the network. Kulechov said that their biggest milestone was handing over the keys to the DeFi community for the protocol’s governance. Some DeFi protocols promise return rates of 30% to 50%. 

However, most often the returns are given back in the form of tokens that are associated with the DeFi protocol. If the token crashes, the returns diminish. 

As per the analytics firm, CipherTrace in the first quarter of 2021, DeFi frauds scammed $83.4 million out of the investors. Ryan Watkins, a senior research analyst at the crypto-data firm Messari describes yield farming as the virtual equivalent of handing your money to a stranger and expecting them to give you your money back. 

Marco Di Maggio, a Harvard Business School professor says that only a crypto market crash can cool down the ongoing crypto-lending agitation. 

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