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How yield farming platforms attracted millions of dollars into their governance tokens.
An Introduction to Yield Farming
Yield farming was the ignition to the blazing fire of this past 2020 summer altcoin craze. With people trying to find something to fill the void of emptiness they experienced from being trapped at home, many people in the Defi space chose virtual farming. Yield farming platforms sent altcoin prices to the stratosphere, many coins being valued 100x at their all-time high compared to initial ICO prices.
What is Yield Farming?
To get started, we need to introduce the concept of a liquidity pool in Defi and how they function as the backbone for any decentralized exchange. In short, a liquidity pool is a token pair (2 tokens) supplied to an exchange in order to enable platform users to swap tokens when needed. These pools are considered liquid because they allow for the seamless transaction of any kind of token.
Let’s say that I wanted to supply liquidity onto a decentralized exchange. In order to do so, I have to partake in one of the liquidity pools provided by the platform. I would deposit equal value amounts of two separate tokens. As a reward for taking part in these pools, I would be paid out interest for being a token pair supplier. These interest rewards are paid out in governance tokens.
By being a token supplier, I am partaking in the infamous action of yield farming and joining the fellow Defi degens.
Rewards in Yield Farming
The highest yields (interest rates) come from token pairs in which one of the tokens is the governance token — and these yields are absolutely insane. During the farming craze, it was common to see yields upwards of 1000% on governance pools. It was actually less common to see governance pools to have yields less than 1000% on launch. The other pools would have yields ranging anywhere from 30% — 1000%.
These crazy payouts are what attracted so many investors.
Risks of Yield Farming
When something seems too good to be true, it usually is. Yield farming comes with extraordinary amounts of risk that only the Defi community is capable of enduring.
Impermanent Loss
In order to participate in these pools, you need to own the 2 pool tokens. If one of the token prices goes up, you are losing out on that potential gain because you sold some of that token to purchase a different token in order to participate in the liquidity pool. This can get pretty complicated, so you should view impermanent loss as missed gains from selling tokens.
Deceiving Yields
Yields are calculated based on the number of liquidity providers in the pool. That means the less LP (liquidity providers) there are, the higher the yields were. That meant as more and more people were entering these pools, the yields decreased dramatically alongside.
Yielding Trash
You are getting paid out in governance tokens, which are worth as much as people are willing to pay for. Governance tokens held value only if the protocol was accepted by the community and continually used (deemed useful). A majority of the new yield farming platforms failed. What ended up happening was as soon as people could cash out on their yields, they did.
This would be even worse for those who took part in governance pools since it required them to purchase the trash tokens to yield even more trash tokens.
First Up on the Menu: Sushi!
Introducing the infamous anonymous chef who started the craze of food token yield farming: Nomi Chef! To this day, the identity of the Chef is still unknown. People have speculated, but no one can confirm.
Nomi Chef started Sushi Swap on Aug 27, 2020, and with it the SUSHI token. The platform quickly caught the attention of the crypto community. In just 5 days, the price of SUSHI reached an all-time high of $8.84 and quadrupled from its initial $2.59 price on Sep 1, 2020. The price began spiraling downwards to $4.58 in the next 3 days. On Sep 5, 2020, SUSHI plummeted to $1.93 when anonymous Nomi Chef dumped $27 million worth of his dev share SUSHI, claiming he wanted to “stop caring about price and focus on the technicality of the migration”. Nomi Chef additionally claimed that he cared for the community and insisted this was not an exit scam.
Obviously, the community was not pleased.
The following day of Nomi Chef’s dump, he appointed a new head chef, SBF Alameda, a reputable member of the crypto community. This restored some confidence in the Sushi Swap project and the price of SUSHI rose 64%. Afterward, SUSHI would still hold a downwards trajectory despite the positive news.
On Sep 11, Nomi Chef publicly recognized his mistakes and announced that he returned a fractional $14 million out of the $27 million he netted back into the SUSHI treasury. SUSHI price rose 12% as a result. We haven’t heard from Nomi Chef since.
1 month later, Sushi Swap is, unfortunately, having a tough time. The initial broken trust was beyond repair. The price of SUSHI is down a whopping 95.5% from its all-time highs and is now only valued at a couple of cents.
The Craze of Food Tokens To Follow
You would think the Defi community learned their lesson. On the contrary, they were looking for the next hyped token. They needed more. Everyone knew the risks, but it didn’t matter. This time, they were prepared — if you got in early and got out fast enough, you could make a boatload of money.
There was demand, and it spawned a frenzy of food tokens. Burgers, Pickles, and Yams were amongst the fan favorites. Most of these food tokens followed a similar price pattern: it would increase dramatically on initial hype as people entered, followed by a sharp drop when the early investors sold, and finally either sideways or downwards trajectory as news died down. Some yield projects are performing better than others, but time will tell if the community will continue platform usage.
Takeaways
Being First Matters: Many users would use the new platform on the initial launch. However, as soon as the community either got bored or wanted to cash out, they took their tokens back to the first and most used platform.
Risk: If you don’t feel comfortable losing the money you invested, don’t invest.
Research: Make sure you do your own research on a project before throwing money into it, especially if it’s a food token. Some factors to consider,
- What the project is looking to achieve
- Founding team credentials
- Percentage of tokens owned by the developer teams
- Lockup period for development share
- Investors in the project
- Amount of time the project took to get off the ground (a project that was created in under a week is probably not a good sign)
Side Note — I am happy to say that the yield farming craze has died down after multiple scams, rug pulls, and wrecked Defi users.
