ZoneBitcoin EditorialWhen a new person comes to DeFi, the first thing that may surprise them is the incredible rates of DeFi.
At first glance, we can say that it is fake, and that we are dealing with casino currency. This is completely understandable when we think of the 0,5% of the Livret A.
So, it’s time to ask where these HUGE APY rates are coming from?
Is it too good to be true? It’s time to clear up the point about APYs…
What is DeFi?
To fully understand DeFi, you must also understand the context and the framework in which you are. Decentralized finance.
It is in fact, as the name suggests, decentralized finance (as we know it) which operates on blockchain technology. So far it's not very clear, but let's move on to concrete examples.
Here is a summary of the financial services that can be found on DeFi:
👉Loan/Borrowing: This is clearly the simplest service to understand. You can borrow and lend your cryptos on the challenge, and therefore without going through intermediaries. It is precisely the fact that there is no intermediary which explains (in part) why the rates are higher. A traditional bank has a lot of costs (employees, contracts, lawyers, insurance, premises, etc.). On the Defi, smart contracts are automatically implemented, which naturally reduces costs.
Thus, people who lend their cryptos then receive interest (like a banker who lends money) and grow their capital. The person who borrows must post collateral to be able to borrow a given amount. He hopes by borrowing that his deposited collateral will be worth more than if he had not sold it at time t.
🤑 There are centralized and decentralized platforms elsewhere. In what we call Cefi, there are equivalents with sites like Youhodler ou Nexus for example to generate interest on these cryptos, easily and passively.
👉 Staking: It is the act of depositing assets for a specific period of time. Protocols use this system a lot because it limits the sale of assets. Don't forget that this type of staking is different from staking as a Proof of stake consensus mechanism, eh).
👉 Liquidity provider : There, we will deposit assets (via a pair of assets in a 50:50 ratio) in a pool in a AMM (automated market maker). We receive fees from the transactions and also usually a reward token. Often that of the DEX. By depositing assets, liquidity providers receive an LP token. C They can make them work elsewhere in other protocols, for example and do loops with compound interest.
👉 Yield Farming: This is when people seek the best possible returns (APY) by combining and multiplying stocks (all those we have just seen among others).
Finally, yield farming is a way of optimally combining the returns that can be made on DeFi.
Very high APYs on tokens…Where does that come from?
Now we know where it comes from, ok and how it works. We still need to know how it is that the rates are high?
Likewise, when we talk about APY, we are actually talking about APR including compound interest. Some protocols even have APYs with a frequency of one week. This means that each week, we add interest to the principal to apply the APR rate. So it goes very quickly.
As APY rates attract more and more people, and more and more degenerate people, then protocols of this type appear every day.
These are copy-pasted protocols that make no sense whatsoever in attracting degenerates….Seriously, don’t look any further.
Indecent APYs: Is it a blessing or a curse, in the end?
It is important to understand that the real downside here is not the APYs (although…) but above all the rewards tokens.
Rewards tokens are generally very volatile with low liquidity to boot. You have to promise very large APYs to expect people to deposit their assets. So you always have to hit harder. To compensate for any drop in tokens received…
But, things are going crazy...
In general, although there is no rule, the higher the APY, the riskier the pool and the newer it is. The newer it is, the higher the APYs will be.
And a good farmer will start to resell massively when the project starts to be too well-known…And he will move on to other protocols…A race for yield that makes DeFi unviable in the long term according to Vitalik Buterin who has always been very critical of Yield Farming. He has never hidden it, like many “brains” in the field…
And when a Twitter user asks him what he means by "settle down" he replies:
He adds: Seriously, the sheer volume of coins that have to be printed non-stop to pay the liquidity providers in these 50-100%/year yield farms makes it look like the major national central banks are all run by Ron Paul .
Note: Ron Paul is a Republican member of Texas claiming to be of the Austrian school and being against the inflationary monetary policies of the Fed...
Final word on returns on DeFi
It then depends on everyone’s tastes. Some prefer high APYs on risky pools and others like us prefer low APYs on quality tokens…
It's up to you to see what profile you have and the type of investment you want to make.
But if some farmers take themselves seriously and give the impression that they are doing financial management, we have to be realistic: it looks more like a casino game than anything else... Developing strategies, however convoluted, to curb losses and betting tokens created for the occasion... It's very "casino".
This is a fact for many protocols currently….
Don't be fooled.
Above all, there are transaction fees (on Ethereum, it's crazy), impermanent losses, etc. It takes a lot of time to get it right, not to mention the risks inherent in DeFi…
Sometimes it is better to choose farms that are less crazy in terms of yield but more reliable than new protocols with high yield rates but risky...
Anyway, you are free eh :)
Good luck!
Watch the video on this issue from Yield farming:
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Disclaimer : This article is provided for informational purposes only. This is not financial, legal, tax or investment advice. Always do your own research before investing.
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