When yield farming appeared in 2020 automated market maker (AMM) protocols like Sushi and Cake mesmerized the crypto community with a novel concept to attract liquidity providers.
Pair two coins together, such as ETH/USDC into a liquidity pool.
To help offset the risk, and likelihood of, impermanent loss two incentives were provided, a portion of the fees from swaps within the pool and the accumulation of the AMMs reward token (i.e. Sushi, Cake).
These two incentives, fees and reward tokens, can create some insane APY as seen below.
Later in this briefing, we'll show our paid subscribers 4 easy ways to stack yields on yields on yields!
Assuming the AMM's reward token's price and desirability grows, the return on investment is incredible.
There's a generation of people no longer content with single-digit yields that can't keep pace with inflation.
They're saying "No!" to pithy returns from savings accounts, brokerage accounts, mutual funds, and insurance products.
They're actively seeking tech that can create new ways to grow wealth through code, opportunity, and the cycles of fear, hope, and greed.
This is how smart DeGens are thinking!
(DeFi Generation... sounds much better than DeGenerate).
The risks? Several.
- Impermanent loss - Impermanent loss is when you provide liquidity to a liquidity pool, and the price of your deposited assets changes compared to when you deposited them. The bigger this change is, the more you are exposed to impermanent loss. In this case, the loss means less dollar value at the time of withdrawal than at the time of deposit.
- One or both of the pooled tokens fall in value due to an assortment of reasons such as hacks, development issues, smart contract issues, the project team implodes, sell pressure, etc. Just like in the stock market, if a public company fails to perform investors react by selling. Crypto is no different.
- The AMM's reward token falls in value for the same reasons as above.
- The entire crypto market goes bearish and all projects experience a decline in value.
These are key and ever present risks inherent with the high rewards of 100%+ APY.
To date, the market cap of yield harvesting through AMMs exceeds $25B.
Once a crypto enthusiast learns the game of yield farming, it's challenging to be content with any APY offering single-digit returns.
As we revealed in The Game of Yields briefing, with more money attracting to these high APY opportunities, the yields are likely to dynamically decrease.
So today's 412% APY can be 56% or less by next week depending on how much money piles into the pools.
The opportunity cost of being late to a solid yield farming project can be steep.
However, constantly chasing the next farm also increases the risks of being scammed by a sketchy project. Due diligence is critical since capital loss is real.
For our paid subscribers, get your calculators, as we'll show how and where double-digit and triple-digit yields are being farmed every hour on the hour.