I've been watching this DEFI yield farming narrative take hold in the shitcoin space after the let's raise money for stupid projects ICO phase failed, then the net's own things that have nothing to do with the blockchain NFT idea failed after the everything needs a token narrative failed.
Now DEFI started out as the creation of liquidity pools, where users could pool together two assets and make an automatic market to trade two assets. Now on the surface, this is not a bad idea, in fact, it's a cool idea, but it does come with considerable risk in its implementation.
The larger a smart contract gets in holding the more risk it poses and the more it encourages people to attack any insecurities in that so-called vault.
Now to get people to discount that risk, you have to offer them a return that is so stupid that they think any risk they take will be worth it, and that's how DEFI was bootstrapped.
Now we have a world where people are spinning up smart contracts and offering 100, 200, or 1000% returns but no one asking where these returns come from, they're just thinking about half of the equation.
Where do the returns come from?
Now there is an element of truth to a small part of the returns that are conflated with lies. The truth is there are some fees to be earned as the platform charges to swap between pairs of assets, but this is NOT enough to keep the platform attracting users to fund it.
The returns are either subsided by a third party, as in the case of the bigger projects like Luna, Uniswap, and Pancake swap. If they don't have big backers bootstrapping them to scale where it's big enough to dump tokens on the market to make back the return, then you'll have to come up with clever ways to do it.
So what do these DEFI platforms do? Pay you with inflation of course, tokens that they can print out of thin air so they can create any amount of yield they like as long as it looks attractive for marketing purposes, and pulls in suckers.
Now as people chase the yield those that get in first or those who gifted themselves with pre-mined tokens and airdrops get to dump into the demand craze for that yield and realize their return.
The rest sit around trying to bleed out any liquidity that does come from new suckers or from the Trinkle amount of fees earned through their service.
The truth is you are the yield, your friends are the yield the people you convince to come in after you are the yield.
Inflation eventually drives defi to zero
Now as more and more DEFI platforms are spun up to meet a certain demand, there is always going to be an oversupply of more and more shit you don't need. As more tokens hit less demand, they eventually trend towards zero.
All DEFI tokens make zero sense long term, they are a waste of your time and consideration. If they were a promissory note to access the growing treasury at a certain rate that would make sense but no DEFI token is doing that.
I could understand having the token as a debt instrument, and then having a set repurchase window that grows as the treasury from fees gets bigger. So let's say the trading pair is USDT/BTC, as the fees earned from that increases, you back the token, be that 1000/1, then reduce it until its 1-1 with the intention of destroying the token altogether and then leaving the established market to run and people who supply liquidity earn the fees of a scaled market.
Again, with risk as I mentioned previously.
Anyone selling you on DEFI either ignores what I've just explained or doesn't take all of 15 minutes to understand it.
Either way you're probably going to end up with a handful of a useless coins and if that's your goal, go right ahead.
Have your say
What do you good people of HIVE think?
So have at it my Jessies! If you don't have something to comment, "I am a Jessie."
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