Unless you’ve been living under a rock for the past couple of months, you will have heard about decentralised finance (DeFi), Automated market makers (AMM) and the plethora of yield farming protocols like Yearn Finance (YFI), SushiSwap and its subsequent forks like Sake and Passionfruit.
Tokens like YFI have exploded from as low as $34 in July to a quite remarkable all-time high of $43,647, which led to tweets from the likes of BitMEX CEO Arthur Hayes, who revealed his price prediction of $100,000 due to the token’s limited fixed supply of 30,000.
In what seems eerily similar to the ICO boom of 2017, more and more yield farming protocols are being launched on a daily basis, but before we dive deep into the projects it’s important to acknowledge the risks associated with yield farming.
Farming tokens is relatively simple, take the recently-launched Sake for example. In order to stake Sake, which is a fork of SushiSwap, on the protocol, users must purchase the token on Uniswap before providing liquidity. They will then receive SAKE-ETH UNI-LP V2 tokens, which can be staked on the platform for a current The annual percentage yield (APY) of 1,117.73%.
— SakeSwap (@SakeSwap) September 14, 2020
This carries a number of key risks, the first of which is impermanent loss. This is where a user who is providing liquidity loses value compared to holding the tokens on their own.
The second risk comes from a technical standpoint as many of these codes remain unaudited. This caused thousands of investors in Yam Finance to feel the burn last month as a rebase bug caused a market-wide sell-off, with its value falling by 99%.
Another point that newcomers should be aware of is that these projects rely on liquidity, if there is a sudden lack of liquidity the price will crash, resulting in potentially huge losses.
Finding the highest annual percentage yield (APY) can be difficult due to the sheer volume of Automated market making (AMM) protocols.
SushiSwap, for example, currently offers between 54% and 419% APY for those staking liquidity tokens on its platform.
This led to FTX CEO Sam Bankman-Fried taking over the project before listing a derivatives contract on his exchange.
1) The Sushi Migration Plan
— SBF (@SBF_Alameda) September 9, 2020
SushiSwap eventually paved the way for subsequent forks like SakeSwap and Passionfruit, both of which use elements of Uniswap and SushiSwap within their own staking pools.
The Sake token is currently trading at $0.1822, while Passionfruit is trading down at $0.05 after being launched just days ago.
Passionfruit, which rewards users in the PSF token, has a circulating supply of just 49,279 at the time of writing, meaning that it’s market cap is miniscule compared to the likes of Sake which is at $7 million.
As stated previously in the article, all of these platforms contain a number of risks and should only be used experimentally.
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Disclaimer: Not financial advice. The author of this article does not own any of the aforementioned tokens.