Crypto ‘Yield Farmers’ Chases High Returns, But Risks Losing Everything


One of the hottest trends in cryptocurrency is financial activity that dates back to biblical times: lending money to earn interest.

Instead of just waiting for their bitcoin, ethers, or other digital coins to rise in value, cryptocurrency investors are now actively seeking returns by lending their crypto holdings or pursuing other strategies to earn a return. Such “yield farming” can generate double-digit interest rates, far higher than those that can be obtained with dollars.

It is a high stakes business. Investors run the risk of having their digital wealth stolen by crooks or wiped out by sudden bouts of volatility. Space is also largely unregulated. Yield producers are not protected by the Federal Deposit Insurance Corp., which indemnifies depositors in the event of bank failure.

Yet the promise of disproportionate returns in a low-yielding environment has helped garner the attention of the general public. In the past year, professional and hobbyist investors have invested tens of billions of dollars in yield farming, according to industry analysts and data providers.

“Yield farming is not much different from buying high dividend stocks or high yielding debt or unsecured bonds,” Dallas billionaire owner Mark Cuban told The Wall Street Journal. Mavericks and an active crypto yield farmer. “There’s a reason they have to pay more than other businesses. They are more at risk. “

Even the pros can get hurt. In June, Mr. Cuban lost money when Titan, a digital currency in which he was earning yield, crashed to zero.

Mark Cuban, owner of the NBA’s Dallas Mavericks, is an active crypto yield farmer.


Richard Shotwell / Invision / Associated press

Instead of putting their money in a bank, yield producers typically hand over their cryptocurrencies to computer programs. Some of these programs lend coins to borrowers and collect interest for yield producers.

For example, if an investor wanted to earn interest on tether, a so-called stablecoin that seeks to maintain the same value as the US dollar, he could link his digital wallet to Aave, a crypto-lending platform.

Aave would lend the investor’s core funds and pay the interest directly into their digital wallet. On Friday night, Aave offered an annualized return of around 2.9% on tether. These returns can fluctuate from minute to minute depending on lending and borrowing activity.

Aave is among the biggest players in decentralized finance, or DeFi, the fast growing segment of the crypto market in which yield producers typically seek yields. DeFi projects attempt to replicate traditional financial activities, such as lending and borrowing, using cryptocurrencies.

Some successful DeFi projects boast annualized returns of 30% to 50% or more. The catch is that returns are often denominated in tokens that depositors receive as a reward for using their platforms. If the tokens lose value, it erodes the value of the returns.


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Yield producers can also lose money due to fraud. DeFi projects are frequently run by anonymous teams who sometimes run away with funds from investors in scams known as carpet draws. From January through April, DeFi frauds cost investors $ 83.4 million, according to CipherTrace, an analytics company.

“It’s the virtual equivalent of handing your money over to a stranger and expecting them to return your money,” said Ryan Watkins, senior research analyst at crypto-data firm Messari.

Marcio Chiaradia, a digital marketer in Irvine, Calif., Started yield farming in December. He lost a few hundred dollars on a mat called MoltenSwap which offered a return of over 1000%, he recalls. But Mr Chiaradia said his record was mostly positive.

“It looks like the start of the internet, with these weird and crazy things that aren’t going to exist in the long run,” said Mr. Chiaradia, who is 39 and has committed several thousand dollars in assets to produce power. Agriculture. . “But I have a feeling that there are DeFi sites that are going to stay.”

It is difficult to measure the exact amount of agricultural activity yielding, but a rough approximation is the total assets pledged as collateral with DeFi projects. The metric, called the locked-in total value, hit $ 74 billion from less than $ 2 billion a year ago, according to data provider DeBank.

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Some popular strategies of yield farming have no direct analogues with traditional finance. In “cash mining,” investors place digital coins into asset pools managed by decentralized crypto exchanges such as Uniswap and collect a portion of the exchange trading fees.

In a related strategy known as “staking”, investors lock their coins to support the integrity of a currency’s underlying computer network. In return, they are paid in new coins, generating interest.

There is a huge gap between dollar interest rates and the yields available in cryptocurrencies, even in stablecoins allegedly tied to the US dollar. The national average interest rate for savings accounts is 0.06%, according to Meanwhile, crypto platforms offer depositors annualized returns of 1% to 10% or more on dollar-indexed stablecoins.

Such discrepancies have arisen due to the huge demand for digital currency borrowing, said Marco Di Maggio, a professor at Harvard Business School who studied crypto lending.

The demand comes mainly from trading companies which can profit from various strategies, explains Mr. Di Maggio. One strategy, for example, is to exploit the difference between the price of bitcoin and futures contracts linked to the price of bitcoin in the coming months. But it takes significant capital for such strategies to work. Since crypto firms often cannot borrow from banks, they turn to crypto lending platforms, where they are willing to pay high rates.

Crypto interest rates will fall as the market matures, predicts Di Maggio. Additionally, a crypto price crash would chill the current frenzy for digital currency lending. “It’s sustainable as long as there is a bull market and demand for leverage,” he said.

Meanwhile, companies such as exchange operator Coinbase Global Inc.

hope to benefit from the high interest rates of cryptocurrencies. Last month, Coinbase announced a program in which customers can earn a 4% annual return on stablecoin USD Coin. And the return is low by crypto standards. BlockFi, a crypto-lending startup, offers depositors a 7.5% annual return on the same coin.

“It is becoming more accessible to people who are not crypto-native,” said Peter Johnson, partner of Jump Capital, a venture capital firm that has supported BlockFi and a number of DeFi projects.

“If you just want to earn 4% on your dollars, now there are ways to do it without having to know a lot about crypto,” he said.

Bitcoin, Dogecoin, Ether: the cryptocurrency markets

Write to Alexandre Osipovich at [email protected]

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