Is education the key to curbing the rise of fraudulent projects and high APYs?


Most people who have dealt with cryptocurrencies in any capacity in the past couple of years are well aware that there are plenty of projects offering mind-blowing annual percentage returns (APY) these days.

In fact, many decentralized finance (DeFi) protocols that were built using the Proof-of-Stake (PoS) consensus protocol offer ridiculous returns to their investors in exchange for staking their native tokens.

However, like most offers that seem too good to be true, many of these offers are outright money grabbers – or so the vast majority of experts claim. For example, YieldZard, a project positioning itself as a DeFi innovation-focused company with an auto-staking protocol, claims to offer a fixed APY of 918,757% to its clients. Put simply, if one were to invest $1,000 in the project, the accrued returns would be $9,187,570, a figure that even to an average eye would seem fishy to say the least.

YieldZard is not the first project of its kind, the offering being a simple imitation of Titano, a first automatic staking token offering fast and high payouts.

Are such returns really achievable?

To get a better idea of ​​whether these seemingly ridiculous returns are actually achievable in the long term, Cointelegraph reached out to Kia Mosayeri, Product Manager at Balancer Labs – an automated DeFi market-making protocol using new self-balancing weighted pools. In his opinion :

“Sophisticated investors will want to research the source of the return, its sustainability and capacity. A return that is derived from solid economic value, such as interest paid for debt capital or percentage fees paid for exchanges, would instead be more sustainable and scalable than return that comes from arbitrary token issuances.

Providing a more holistic look at the issue, Ran Hammer, VP of Business Development for Public Blockchain Infrastructure at Orbs, told Cointelegraph that in addition to the ability to facilitate decentralized financial services, DeFi protocols have introduced a another major innovation in the crypto ecosystem: the ability to earn returns on what is a more or less passive holding.

He further explained that not all returns are created equal by design, as some returns are rooted in “real” income, while others are the result of high emissions based on Ponzi-like tokenomics. In this respect, when users act as lenders, stakeholders or liquidity providers, it is very important to understand where the return is coming from. For example, transaction fees in exchange for computing power, trading fees on liquidity, a premium for options or insurance, and interest on loans are all “real returns”.

However, Hammer explained that most incentive protocol rewards are funded by token inflation and may not be sustainable, as there is no real economic value to fund these rewards. This is similar in concept to Ponzi schemes where an increasing number of new buyers are needed to maintain the validity of tokenomics. He added:

“Different protocols calculate emissions using different methods. It is much more important to understand where the return is coming from while accounting for inflation. Many projects use reward issuance in order to generate a healthy distribution of holders and start what is otherwise healthy tokenomics, but with higher rates, more scrutiny should be applied.

Echoing a similar sentiment, Lior Yaffe, co-founder and director of blockchain software company Jelurida, told Cointelegraph that the idea behind most high-return projects is that they promise stakers high rewards in extracting very high commissions from traders on a decentralized exchange and/or constantly minting more tokens as needed to pay returns to their stakers.

This trick, Yaffe pointed out, can work as long as there are enough new buyers, which really depends on the marketing capabilities of the team. However, at some point there is not enough demand for the token, so simply minting more coins quickly depletes their value. “At this time, the founders usually abandon the project just to reappear with a similar token in the future,” he said.

High APYs are fine, but can only go so far

Narek Gevorgyan, CEO of cryptocurrency portfolio management and DeFi wallet app CoinStats, told Cointelegraph that billions of dollars are stolen from investors every year, mostly because they fall prey to this guy. of high APY traps, adding:

“I mean, it’s pretty obvious that there’s no way projects can offer such high APYs for extended durations. I’ve seen plenty of projects offering unrealistic interest rates – some well over 100% APY and some with 1000% APY. Investors see big numbers but often overlook the shortcomings and risks that come with them.

He explained that, first and foremost, investors need to realize that most returns are paid in cryptocurrencies, and since most cryptocurrencies are volatile, assets lent to earn such unrealistic APYs may lose value over time, resulting in major impermanent losses.

Related: What is an impermanent loss and how to avoid it?

Gevorgyan further noted that in some cases, when a person stakes their crypto and the blockchain uses an inflation model, it is good to receive APYs, but when it comes to very high returns, investors must exercise extreme caution, adding:

“There is a limit to what a project can offer its investors. These high numbers are a dangerous combination of madness and hubris, given that even if you offer a high APY, it has to come down over time – that’s basic economics – because it becomes a matter of project survival. .

And while he admitted that some projects may offer comparatively higher returns on a stable basis, any fixed and high APY advertising offers for extended durations should be viewed with a high degree of suspicion. “Again, not all of them are scams, but projects that claim to offer high APYs without any transparent proof that they work should be avoided,” he said.

Not everyone agrees, well almost

0xUsagi, the pseudonymous protocol manager of Thetanuts – a crypto derivatives trading platform that offers high organic returns – told Cointelegraph that a number of approaches can be used to achieve high APYs. He said that token returns are usually calculated by distributing tokens pro rata to users based on the amount of liquidity provided in the tracked project relative to an epoch, adding:

“It would be unfair to call this mechanism a scam, as it should be viewed more as a customer acquisition tool. It tends to be used early in the project for quick cash acquisition and is not sustainable in the long run.

Providing a technical breakdown of the matter, 0xUsagi noted that whenever a project’s developer team prints high token yields, liquidity floods the project; however, when it dries up, the challenge becomes one of retaining liquidity.

When this happens, two types of users emerge: the first, who go in search of other farms to obtain high yields, and the second, who continue to support the project. “Users can refer to Geist Finance as an example of a project that printed high APYs but still retains a high amount of liquidity,” he added.

That said, as the market matures, it is possible that even when it comes to legitimate projects, the high volatility in crypto markets could cause yields to compress over time in the same way as with the traditional financial system.

Recent: Terra 2.0: A Crypto Project Built on the Ruins of $40 Billion in Investor Money

“Users should always assess the degree of risk they are taking when participating in a farm. Look for code audits, backers, and team responsiveness on community communication channels to assess project security and pedigree. There is no free lunch in the world,” 0xUsagi concluded.

Market maturity and investor education are key

Zack Gall, vice president of communications at the EOS Network Foundation, believes that whenever an investor encounters mind-blowing APRs, they should simply be viewed as a marketing gimmick to attract new users. Therefore, investors should educate themselves in order to steer clear, be realistic, or prepare for an early exit strategy when such a project eventually implodes. He added:

“Inflation-induced returns cannot be sustained indefinitely due to the significant dilution that must occur on the underlying incentive token. Projects must strike a balance between attracting end users who typically want low fees and incentivize token stakers who want to get maximum return.The only way to maintain both is to have a substantial user base that can generate significant revenue.

Ajay Dhingra, Head of Research at Unizen – a smart exchange ecosystem – is of the opinion that when investing in a high yielding project, investors should learn how APYs are actually calculated. He pointed out that the arithmetic of APYs is closely tied to the symbolic model of most projects. For example, the vast majority of protocols reserve a considerable portion of the total supply – for example, 20% – solely for issuance rewards. Dhingra further noted:

“The main differentiators between scams and legit yield platforms are clearly stated sources of utility, either through arbitrage or lending; token payments that aren’t just governance tokens (things like Ether, USD Coin, etc.); long-term demonstration of consistent and reliable operation (1 year+).

So, as we enter a future focused on DeFi-centric platforms – especially those that offer extremely lucrative returns – it is of the utmost importance that users do their due diligence and familiarize themselves with the ins and outs. and the outcomes of the project they might seek to invest in. in or run the risk of being burned.

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