As the self-appointed Safety Officer for 0xDAO, I figured I’d take some time to outline the dangers of farming projects like this. Click here for a quick history of Defi summer and the original “farm-to-0” projects.
I’ll start off by breaking down the logic of these systems for you:
- Users buy X farming token to take advantage of astronomical APR for providing liquidity. Price goes up.
- Users provide liquidity and start receiving insane amounts of farming token.
- Users sell farming tokens to lock in profit. Price goes to 0.
To call these tokens “uninvestable” would be an understatement. They’re toxic. They’re hot potatoes. They’re often used as a way to funnel funds into veterans’ pockets from tender DeFi newbies, structured in a way that abstracts away poor ethics and lets profiteers walk away with clean consciences.
Despite all these shortfalls, these systems can be pretty fun, so I’d like to help the uninitiated better understand what they’re getting into. I’ll outline some strategies below and briefly analyze their risks. One thing to remember above everything else is this: none of this is DeFi. These are high risk games, and if it’s your first time playing you’re probably going to lose your shirt.
To keep your shirt, don’t bet it! Keep your exposure small and monitor price action closely. Whales are going to hoard tokens and wait for the price to run up so they can drop bombs on the liquidity pool when euphoria peaks. Remember, exposure to these farming tokens is nothing more than a gamble, so treat it with the same caution.
Strategy 1: Swim with the Big Fish
The safest money comes from following whales to the single-sided pools. We can’t control prices like they do, so stake your coins and dump as often as you can! To help you with this, we’re considering strategies like this on Reaper, so you can go about your day without stressing about farming token exposure.
Strategy 2: Playing with Fire
Especially in the first week, farming tokens will experience volatility that would make trad-fi investors’ stomachs turn. For a lot of you degenerates, this means exciting trade opportunities — so strap in and ride the wave. I’d equate the risks here to ‘high speed motor chase’ or ‘making toast in the bathtub,’ but I know a lot of you are into that. Have fun and keep your trades small.
Strategy 3: Be Everyone’s Exit Liquidity
While the quadrillion % APR might seem enticing, providing liquidity for these farming tokens is the most difficult way to make money. You’ll rarely make as much as traders and the interest & fees aren’t nearly enough to make up for impermanent loss — volatility is just too high. I’d only recommend staking liquidity if you plan on micro managing your position, adding liquidity in-between volatility spikes and withdrawing when shit hits the fan. Much easier said than done.
Strategy 4: Ultimate Big Brain Strategy
Go outside. Learn a skill. Eat some ice cream. Come back once the dust settles and pick up some commemorative tokens for the low-low price of $0.00.
Of course, I’m neither a professional investment manger nor a fortune teller. There’s really no telling what’s going to happen, so use everything I’m saying here to come up with your own predictions and strategies. Just be careful and have fun.