Cryptocurrency farming, or yield farming as it is better known, is an investment strategy that stands to make a lot of money for investors than current forms of traditional investing.
What’s crypto farming?
- Cryptocurrency farming, or yield farming as it is better known, is an investment strategy that stands to make a lot of money for investors than current forms of traditional investing.
- It’s a chance for brave investors to win big on a large bet, but is also risky and so the United States Securities and Exchange Commission (SEC) has made statements about whether this new form of investing should be regulated as a security.
So, what does that mean?
- So, yield farming, also known as yield or liquidity harvesting, involves lending and having your crypto locked up in an account with the hopes that you’ll make more crypto.
- In short, yield farming basically allows investors, called liquidity providers (LP), to offer up their crypto into a pool of crypto assets. These LPs then get rewarded for lending these accounts their assets with interest or fee payments.
- It’s kind of how traditional banking works. Think of all that money in a bank. It comes from people who are opening up savings accounts and putting money in their money. They are encouraged to keep their money there by being offered interest payments so that the bank has more capital.
- This is common practice with standard currency, and people who invest in a similar position with the US dollar can generally earn back, on average, .06% with their savings account annually.
- While this may not seem like a lot, if you dump US$100,000 into your savings account paying this interest rate, you can earn US$6,000 a year without ever lifting a finger or losing a dime. I.e. you’re earning US$6,000 in passive income.
- The difference between traditional investing and yield farming, though, is that putting your crypto assets into one of these accounts can yield returns as high as 9% annually. So, your investments could soar in value.
This seems too good to be true. What’s the catch?
- Well, just like how your crypto investments could soar in value, it could also crash. Like with all things crypto, it isn’t exactly stable.
- Unlike traditional bank accounts, crypto accounts aren’t insured, and customers can lose their deposits if a firm goes bust, is hacked or otherwise loses its customers’ funds.
- Due to the unregulated nature of crypto, it’s not completely uncommon for these scenarios to play out.
- In June, two brothers from South Africa, Raees and Ameer Cajee, vanished alongside US$3.6 billion worth of bitcoin investments after starting a crypto investment platform called Africrypt.
- The brothers eventually re-appeared through the proxy of lawyers, but to this day, they claim they have nothing to do with the money disappearing, and no legal action has been taken.
What are the SEC’s thoughts on yield farming?
- The question that regulators are currently raising is whether or not yield farming constitutes a security.
- In finance, a security is an asset that has value and can be bought, sold or traded against cash. So this can be a stock or a bond.
- Here’s the catch: all public sales of securities in the US are regulated by the SEC, and since crypto trading is largely unregulated, you can kind of see why this is a problem.
- The SEC believes that platforms that offer yield farming should be treated like a security, so should therefore be regulated by the SEC.
- Several major US crypto exchanges have tried to offer this lending feature for their users, one of which is Coinbase Global Inc. But, the SEC didn’t exactly respond well and the company got some nasty letters that basically threatened charges.
What are experts saying?
- While some critics are confident in yield farming, others aren’t sure.
- Aly Madhavji, a managing partner at Blockchain Founder’s Fund, posted a LinkedIn article back in January where he expressed his concerns regarding investing in crypto controlled by smart contracts.
- “Yield farming is controlled by smart contracts that remove the middlemen in traditional finance. Smart contact risk is high because a malicious hacker can explore bugs in the codes,” said Madhavji. “The greatest example of smart contract risk in DeFi happened in August this year when the Yam token price dropped from an all-time high of $167.66 to around $0.97. This drop in the token was caused by a bug that was found on the smart contract.”
- Madhavji mentioned the various risks involved with yield farming, including liquidation risk and gas fees. Still, he ended his article by saying that it is up to the investor to decide whether the risks were worth taking.
- “Yield farming is a powerful way of earning profit from DeFi platforms,” says Madhjavji. “Yield farming risk can be managed when an investor is aware of the various risks associated with yield farming.”
What’s next?
- As of right now, news on yield farming is fringe and speculative at best, much like crypto in general.
- The SEC hasn’t made any significant moves regarding its stance on yield farming since last month.
- Still, the group has looked into broadening their perspective on crypto by most recently, allowing trading of an Exchange-traded fund (ETF) for Bitcoin.
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