Passive Income Yield: Farming Stables and Degens
Yield Farming Summary Overview
From a user’s viewpoint in exchange for being a participant in a protocol, farming lets you get yield on what would otherwise be an unproductive asset (capital appreciation aside).
Instead of just passively holding (“HODLing”) Bitcoin, Ethereum, or countless other altcoins banking on the price appreciation (number go up), yield farming allows us to capture both the price appreciation as well as gaining active income.
From the protocol’s viewpoint Emerging protocols launching onto the scene need to encourage users to move their capital onto their platform in order to compete for market share of said money with one another.
Protocol’s are also looking to disperse liquidity (allowing their tokens to be traded in large lots). They reward and incentivize early adopters of the protocol which in turn is an incentive for the user base to continue to move the project forward.
Tokens get distributed to the users on the protocol in exchange for providing trading liquidity on the market in pools (LPs).
Airdrops can also be provided as an incentive and reward for being a participant/early adopter. There are also staking tokens issued with governance rights DAOs which allow holders voting rights on the protocol weighted based on quantity held.
These are examples of the incentive systems in place provided by a protocol to users in order to onboard users and propel growth.
Degen Yield Farming Overview
This represents a high risk high return yield farm protocol. We’re speaking extremely far out on the risk curve with potential high rewards, high probability of a catastrophic collapse (rug pull). Many if not all of these tokens exist without a use case utility and are surviving off hype, momentum, basically a greater fool theory. It’s an extremely dangerous albeit thrilling situation.
Some traits of a degen farm:
- Extremely high rewards (100s%, – 1000s%, – to 10,000s+%) APY/APRs
- Lacking in Social Media Presence
- No Code Audits
- Low documentation on the protocol or development team
If you decide to participate in these sorts of farms just know what you are getting yourself into. You can and will get rugged, these are high stakes games and risks you must be willing to take on when entering into these types of yield farms.
Some may say a rugpull is sort of a rite of passage in the crypto world. Obviously we are talking about the higher end of the risk spectrum. Buying and holding Bitcoin and/or Ethereum on a cold wallet is the lower end of the risk spectrum and on the other end we have these degen farms.
They provide the opportunity to multiply your money several hundred percent in a matter of days and hours with the potential for losing it all just as quickly.
It’s a zero sum game, and for every winner there has to be a loser.
Degen yield farming is almost a game of hot potato or musical chairs, these are innately worthless tokens being pushed out at an alarmingly fast pace seeing who is first to blink and sell.
To increase your probability of success if you decide to participate in this game a few ways to increase your chances:
- Get in early on the farm, ideally when it launches
- Position sizing is key, don’t put your entire stack in. Use a portion of your capital you can afford to lose and live to fight another day if and when the ponzi goes bust.
- The reward token should be “memable”, clever and the ability to catch on virally somehow.
At the end of the day it’s a game of hot potato, zero sum, not everyone can win, many will go bust. It’s kill or be killed in this arena with no mercy. Traditional government regulatory agencies aren’t coming to bail you out if you cry foul as rules and regulations do not apply.
Enter at your own risk. Be first and DYOR, no one will spoon feed you alpha unless you have an inside tract with them and are providing some value exchange in order to receive said alpha.
As always it’s good to be plugged into various social media platforms to gauge sentiment for the community and gather information from them, the team, and stay up to date with developments. Use Twitter, Telegram, Discord as social media resources for projects.
This is not for amateurs but experienced daredevils. Nonetheless it’s worth highlighting and bringing it to light as they exist.
This is a good case study of a prior darling protocol that came out strong, burned hot and flamed out just as quickly. Here one minute gone the next. If you had spotted this at inception and taken action, riches would have been yours to reap.
However, issues with its algorithmic stable coin caused its downfall. They’ve relaunched a new yield farm on the Polygon network (see above) but it’s a shadow of its former glory.
We’re talking about a star that burned hot and bright, supernova’s then flamed out quickly, billions of dollars of Total Value locked with thousand percent APYs reduced to ashes albeit still standing, a shadow of it’s former shelf.
Based on the current price action of the token $ICE has dumped since it’s peak and has steadily declined.
Going by the charts, price action, TVL, seems to be pretty much a no go coin without too much value.
It previously boasted 10,000%+ APRs on it’s platform with over 2 Billion of TVL at its height last summer to where it stands now at a paltry 5 Million of TVL
Stable Yield Farming Overview
I’ve highlighted some characteristics of unstable degen farms, now on the other end of the spectrum we look to stable passive income yield on higher quality yield farms.
Factors that comprise a quality farm:
- Individuals on the dev team are reputable and known within the community (doxxed) / good investors
- Strong and active social media presence, no abandoned admin channels
- Audits from reputable institutions done and issues are highlighted and addressed
- Project has a use case, solves some type of problem, adds value, vision and path forward.
- Team has good security for treasury, multi-sig setup at least
- APRs/APYs are more reasonable, (not 1000%s) yields
These are low risk, more reasonable returns, although we’re not out of the park yet risk remains albeit at a lower level. You have smart contract risk, risk of hacks, whales dumping their positions. This is just part of the space and risk you’re taking on should you choose to participate.
To become successful with these more stable farms similar rules apply:
- Be an early adopter, APY is usually higher at launch
- The catchiness (memability) and chance to go viral is still at play
- High profile prominent individuals in the space always helps the case
An active and engaged dev team is a good sign. Look for consistent updates on progress of the roadmap and a budding community around the project. Strong sentiment from the user base to the project is typically a bullish sign.
These more blue chip caliber, stable, quality farms give you a little more peace of mind in the capital stack being deployed. It gives you the luxury of not having to be on the pulse of the farm minute by minute. Of course it’s not a hundred percent passive strategy depending on the farm and they’ll have to be recalibrated and rotated from time to time.
Solid price action, healthy volume.
Dopex has a good interface with a variety of farms to choose from. Some with more stable yields and traditional pairings others with higher yields and more farm tokens. You can measure risk a little by volume and TVL, you’ll notice higher APY farms have less TVL/Liquidity this is obviously due to the riskier nature of them.
As it stands Dopex is focused on a potentially vast derivatives market in the crypto space around decentralized options. Hence the name (Decentralized Options Exchange)
It’s also built to allow for Arbitrum compatibility, an emerging Layer 2 chain that sits on-top of Ethereum‘s base.
So we see on their official site and an affiliated one Crypto Twitter superstars “Tetranode” and
“DeFiGod1” are listed as Investors and Partners of Dopex. This is a good sign. You want to follow the smart money as a good rule of thumb in life.
It’s a decent starting guideline but not an absolute rule as there are other variables. Their entry price, if when they exit will you know?, their level of involvement, and also a whale has way more leeway and flexibility to sustain multiple positions and losses than your average retailer. So just keep that in mind.
Not to disparage this in the least bit just laying out factors to take into account when trailing whales into a project and position.
At the End of the Day
A good way to approach crypto investing and even TradFi investments is to ride your positions up to the point where you can pull out your principal initial outlay then keep a bit of the investment in to ride out further appreciation if it happens. This gives you the privilege of de-risking your position by reclaiming your initial outlay and capturing further upside should it happen giving you the best of both worlds.
So there you have it, the two forms of DeFi yield farms as they exist on each end of the spectrum, safe and risky. The Dopex example is by no means the safest farm we’ve seen in DeFi; it just represents a balanced risk reward level as it stands. Always DYOR and Ape responsibility. Passive Income Yield is another way to get active income on-top of crypto assets you currently hold.