How to assess the risk of the attractive DeFi "food" farming game?

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, author: TokenBrice, head of the Ethereum Wallet Monolith community, French DeFi co-sponsor, translation: Lu Jiangfei, published with authorization.

This article is a quick primer that will allow players who want to enter the "food" DeFi wealth game to understand the basic business model (we will assume a "red wine coin" project), and will also help them assess risks so that they can stay safe. Live your own precious tokens.Come on, I think you must be hungryIn the decentralized finance (DeFi) industry, “food”-based DeFi wealth games are becoming more and more popular—such as sushi (SushiSwap), pasta (PASTA), shrimp (SHRIMP), tacos (TACO), etc. wait. Now, I'd like to write an article that provides some background information for those who aspire to enter this field, but I will not give a moral judgment on such projects, this question is for you to decide.

Yearn Finance launched last month may be the most important thing in the DeFi industry in 2020. If you are not familiar with this project at all, you can actually read this article first: "

YearnFinance - Is it a DeFi project on autopilot?

1. "(YearnFinance - DeFi on autopilot?). After reading it, it may help to better understand this article.
   In fact, Yearn Finance is extremely innovative: they distribute the entire token supply to users with the goal of providing liquidity to all pools associated with the protocol. Today, Yearn’s startup framework has become a “replication template” for many similar projects, which have followed suit after seeing the great success of Yearn (and some projects forked from Yearn Finance), such as: YFII, YFL, YAM, SHRIMP, PASTA, BASED, etc.

2. On top of the basic components of "cooperative farming" provided by Yearn, many DeFi projects will also add other economic elements to their basic assets to make them more sticky and attractive to users. These "economic elements" include:

3. Adopt a token deflation model (although this method seems a bit stupid), such as: PASTA (rest in peace PASTA).

2. Rebase mechanism (token supply can be adjusted, although it will be interesting to do so, but it will also increase the risk of information asymmetry), under this mechanism, the most important thing is to find the relevant price target and ensure that the rebase code is error-free / does not cause problems with other parts of the protocol, such as liquidity pools. But unfortunately, the rebase mechanism will turn the DeFi protocol into a behemoth, and eventually become "farmers" who plunder investors wildly-even though they have little experience, and the rebase mechanism makes the calculation of income more complicated and tricky.

Social-based mechanisms, such as giving daily/weekly rewards to top-ranked mortgage token holders, taking TACO as an example, they will provide double rewards every Tuesday, because "Taco Tuesdays are the most real!"

For some DeFi projects, the core value actually comes from the perspective of the community rather than the economy. For example, Shrimp, they are more inclined to build a community-driven project than other projects (everyone can create an advanced liquidity pool, and then Incentives are provided through SHRIMP tokens).

Tip: If you want to find a general solution to filter the noise, then governance tokens may be a good choice, and are also a necessary and ultimately critical element for the success of most DeFi projects, but you need to determine the governance type, governance process, and Determine who is responsible for optimizing the project, etc.

1. After reading this, I believe you already have a basic concept. DeFi, a wealth game, looks very simple and supports plug-and-play. So let's create a "foodcoin" (foodcoin) to have some fun:

2. First, we assume that this fictitious token is called "WINE", allowing users to farm "WINE" by locking other DeFi tokens in the first week, and then we can build a WINE/ETH liquidity pool to provide long-term Incentives (this liquidity pool will likely become a dumping pool, more on this later).

Next, "Red Wine Coin" will gradually become a community meme, and even have its own emoji emoticons, which is a good starting point! However, we still need to do more and find some fun and stickiness, so let's design a strategy like this again:

The person who holds the most "wine coins" has a 20% chance of getting "drunk coins" (Drunk) every day. Coin" will be randomly donated to 100 daily average active addresses;

In fact, you will find the above strategies uninspiring, but it will let you know that you can easily understand those seemingly complex DeFi concepts. Not only that, but these strategies can actually be implemented very quickly thanks to code blocks (such as the staking contract) forked from the standard (such as the Synthetix staking contract).

Special warning: The "wine coin" (WINE) mentioned above does not exist, just to give an example, don't buy "wine coin", but you can buy red wine🍷.

Now, your industry background and theoretical knowledge are almost mastered. As for the dimension of the DeFi community, I will discuss it in depth in the next article. For now, I hope to share some practical knowledge about the DeFi wealth game:

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If you've already stepped into those "food" DeFi wealth games, here are some practical tips

First and foremost, pay attention to gas costs! Because when farming those "food" DeFi tokens, you are usually required to mortgage ETH, no matter whether you place an order or withdraw, you may be charged a handling fee for each transaction. Depending on the liquidity pool you are farming, you sometimes have to go to decentralized exchanges to add liquidity, which will make the position more complicated and costly.

Second, never buy those “food” DeFi tokens — just farm them. Buying such DeFi tokens requires a huge risk, as you may need to fight against a large group of "farmers" who cultivate income, and they will dump these tokens at any time and anywhere.

Finally, there is a more practical approach, namely: to understand the risk scenarios of each farming liquidity pool type by looking at practical examples, so let's get started.

In the ERC 20 token liquidity pool, you can pledge a DeFi token (usually MKR, COMP, SNX, LEND, wETH and YFI) in exchange for "food" DeFi tokens, such as YAM.

If you want to minimize the risk, you can compare the staking code with the existing code to make sure there are no "ghost tricks" in it. Since you are only staking and not providing liquidity, you will not take any economic risk, just make sure the agreement security, then your yield farming capital will not be threatened.

When the safety of funds is confirmed, the main risk you need to take at this time is: as time goes by, the value of the DeFi tokens you have cultivated may become worthless. So what you need to do at this time is to choose the most reasonable project to avoid falling into the "death spiral". The picture below shows how a meme coin enters the final stage of survival:

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Risk Level = 2 (High Risk): 98%/2% Liquidity Pool

Such so-called "98%/2%" liquidity pools are usually "cunning". After all, they mainly provide liquidity for decentralized exchanges, so it is natural to choose tokens with good reputation, for example : 98% YFLink/2% YFL liquidity pool.

Here you may encounter a new type of risk: impermanent loss. When the prices of the two assets in the designated liquidity pool move rapidly in opposite directions, the impermanent loss will reach the highest point. It should be pointed out here that a liquidity pool with a ratio of 98%/2% is relatively better. Although this type of liquidity pool is not completely immune to impermanent losses, it is relatively safer.

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After the 98%/2% liquidity pool model, YFV becomes another wealth game

Risk Level = Catastrophic Level: Dumping Pool

This type of liquidity pool is the most dangerous! I recommend that investors and traders in this field avoid them - the game is too risky to play. The PASTA yyCRV/PASTA Uniswap pool is a good example.

1. Put it this way: if someone can lock up some DeFi tokens to farm PASTA tokens for free - why don't they just dump those tokens for yyCRV? After all, yyCRV is already one of the most profitable tokens in the industry. In fact, that's what people do.

2. As soon as the PASTA incentive pool was launched, a large number of PASTA farmers began to dump, and everyone wanted to exchange for more precious yyCRV tokens. The result was obvious, and the price of PASTA tokens dropped from $1 to $0.04 in an instant, allowing those who placed their trust in the PASTA liquidity pool Those with high hopes were all dumbfounded.

3. So, how do we distinguish which liquidity pools are potential dumping pools? Here, we will list some key features of dumping pools to help you avoid dumping more valuable DeFi tokens into these pools:

The liquidity ratio of dumping pool tokens is usually 50/50, half of which are shitcoins, and the other half are relatively high-quality assets, such as ETH, wETH, or yyCRV.

Dumping pools usually provide high budget incentives - after all, these liquidity pools have no real value, and they have no other means to attract liquidity providers except to take advantage of this high-yield incentive. Of course, once these dumping pools collapse, liquidity providers will lose most of their funds, and the income of those "food" DeFi tokens will also enter a "death spiral", unable to obtain good returns.

Dumping pools usually don't "dump" all at once, but for a period of time, after all you need to spend several days for farmers to accumulate liquidity.

Of course, you don't have to believe me, I'm just a simple "farmer" hanging around with legends like @DegenSpartan (this dude is really nice, he will disclose the news every time he sells).

Knowing the risks in this area, all I can say is good luck. Please remember, if you have just entered this field recently, you must bear in mind one thing: you are sharing this "food" game with "veteran cannon traders" with years of experience in the crypto industry.