We’ve already highlighted the yield farming risks that come from crypto’s volatility and how that impacts the dynamic returns and the dangers of impermament loss. There is another dimension to safety that relates to being scammed or hacked.
Given the huge popularity of yield farming and the willingness of so-called crypto degens to take in a lot of risk chasing returns, there has been a big increase in DEFI services that are scams. The most common is known as a rug pull.
A rug pull is when a DEFI protocol is set up to attract a certain amount of locked value before the founders withdraw the funds and disappear. Chainalysis estimated that rug pulls accounted for 37% of all crypto scam revenue in 2021, at a value of $2.8bn.
If your funds are lost or impacted by a rug pull you will likely bear all the losses because funds held in DEFI protocols aren’t insured by any government scheme.
Of equal concern is the risk of using a non-custodial wallet like Meta Mask. Non-custodial means that you have complete control of the funds through a recovery Seed. You can read elsewhere on Learn Crypto what a recovery Seed is and how it works, but what’s important to understand is that losing that Seed means the loss of all funds within your wallet.
As a result, hackers using malware and social engineering to try to access your Seed has a huge and growing threat. Scammers will use every conceivable trick to get you to share it. You can mitigate the threat by making by constantly reviewing your online security and understanding that there is no circumstance where you should ever legitimately be asked to share your Seed.
What’s next for yield farming?
DEFI is still so immature with so much growth potential that we’re likely to see a widening of the spectrum of ways to earn yield. We are already seeing the early DEFI brands establishing their place as safe services, offering modest but consistent returns. This is based on the reliability of the Smart Contracts and the effort they put into auditing and security, as well as improving usability, eating further into the territory of traditional finance.
The increase in rug pulls, and the growing threat from wallet hacking, is unlikely to dampen enthusiasm for yield farming at the other end of the risk spectrum, where they are considered an implied cost of being the sector. However, the scale of DEFI scams will likely lead to changes in the wild west nature of yield farming:
- The growth in DEFI insurance products
- Increasing intervention from regulators to try and protect consumers
- The evolution of the governance of DEFI protocols building in rules for dealing with loss from theft, whether from the existing treasury or shared among users
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