Hello CAPPIES! Recently I have been pulled into the world of yield farming (its a wild west out there guys) so lets recap some of the lessons that I have come to learnt before we deploy our troops to get us more dough.
Top learning points before you yield farm
1) DO NOT BE CHASING THE HIGH APR
Well, I learnt this the hard way. Do not be fooled by the high APR. There is no such thing as free lunch or love in this way. LOL. The APR are high at the beginning of any new farms which makes sense as they will need to attract liquidity providers. As more liquidity is added into the pools, the APR will drop dramatically in order to ensure the farm is sustainable.
2) WATCH OUT FOR THE FEES
Deposit fees. Transfer fees. Take note of these terms, do not foolishly rotate your farms or harvest your tokens. These fees range typically from 1% — 10% , depending on the farm’s strategy on sustainability. This would mean the farm yields from the first few days would be only be used to cover the fees. It will be wise to simply draw up a table and compare the fees between the farms you are eyeing.
3) WELL, THE NATIVE TOKEN ALWAYS ALMOST DROP TO ZERO
High APR sounds super attractive and makes one go gaga over it. The long list of numbers has us all drooling over the potential returns one might get. The question to ask is — What shape or form are the returns in? Answer: Native Tokens.
What are native tokens you might ask?
EXAMPLE: I create a CAPPY farm, invest in me and i will dispense CAPPY tokens to you which you can use it on any exchange out there to get USDT/BNB or whatever. CAPPY is the native token of the farm.
Basically, we input valuable non-native appreciating tokens into the farms -> the farm gives us a high APR of native depreciating tokens. As people harvest their native token rewards, they naturally will sell these tokens on the exchanges for USDT/BNB/ETH/BTC, which in turn constantly adds selling pressure which drives down the prices of native tokens. And if you are fool like me, you will soon realise the number of native tokens you hold in your hands is increasing multifold by the day, but the total value might be dropping too……
4) IMPERMANENT LOSS — avoid 2 sided farms
A rather complicated concept which is in your interest to learn. The only way to avoid “impermanent loss” risk is when the 2 tokens which you add to the pool either INCREASE or DECREASE at the same rate at time of staking/unstaking. Fair to say, one SHOULD factor in any impermanent loss for any pool pairing. A good online impermanent loss calculator will be this
EXAMPLE: GARUDA-USDC
USDC is a stablecoin, pegged to $1 so there is close to zero price fluctuations
GARUDA is a native farm token, we know the price will be decreasing.
In other words, as time passes — the price difference will be alot, leading to high impermanent loss. So will the farms rewards be able to cover the impermanent loss? 🤔🤔🤔
5) CHECK FOR POTENTIAL RUGPULLS
It's a wild world out there so prepared to get rekt! Creating a sustainable farm yield has its only set of unique challenges and I believe developers out there are trying to find the holy grail. Having said that, there is probably an equal number of people who are into creating scammy projects to earn quick bucks. Things to look out for including reading the project docs, deep dive into the emissions per block, how devs are using the fees, enter the telegram grp chats and have a sense of things; look for “rug safe” farms from the RUG DOCTOR!
Many lessons learned the expensive way definitely, at least for me.. In part 2 of this article series, I will share more useful tips and links to help prepare you for your farm yield journey!!
Note: The defi space is moving at such unprecedented speeds; things are changing very fast. Things written above may no longer be applicable at the time of reading so never stop asking questions cappies!
