Is education the key to curbing the rise of scammy, high APY projects?

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Most people who have traded cryptocurrencies in any capacity over the years are well aware that there are many projects nowadays that offer attractive Annual Percentage Returns (APYs).

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

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However, like most deals that sound too good to be true, many of these offerings are cash-grab schemes – at least that’s what the vast majority of experts claim. For example, YieldZard, a project that has established itself as a DeFi innovation-focused company with an auto-staking protocol, claims to offer its customers a fixed APY of 918,757%. Simply put, if one invests $1,000 in the project, the return earned would be $9,187,570, a figure that, even to the average eye, would appear shady, at least.

YieldJard is not the first project of its kind, the offering is merely a copy of Titano, an early auto-staking token that offers fast and high payouts.

Are such returns really possible?

To get a better idea of ​​whether these ridiculous returns are actually possible in the long run, Cointelegraph contacted Kia Mossiri, Product Manager at Balancer Labs – a DeFi automated market-building protocol using the novel self-balancing weighted pool. In his view:

“Sophisticated investors will want to look for the source of the yield, its stability and potential. A yield that is driven by a sound affordable price, such as interest paid for borrowed capital or percentage fees paid for trading, can generate arbitrary token emissions. Will be more sustainable and scalable than the produce coming from

Providing a more holistic overview of the matter, Ran Hammer, vice president of business development for public blockchain infrastructure at Orbs, told Cointelegraph that in addition to its ability to facilitate decentralized financial services, the DeFi protocol has created another major innovation in the crypto ecosystem. Introduced: Ability to earn returns on more or less passive holding.

He further explained that not all yields are equal by design as some yields are rooted in “real” revenue, while others are the result of higher emissions based on Ponzi-like tokenonomics. In this regard, when users act as lenders, stakeholders or liquidity providers, it is very important to understand where the returns are arising. For example, transaction fees in exchange for computing power, trading fees on liquidity, premiums for options or insurance, and interest on loans are all “real yields”.

However, Hammer explained that most incentive protocol rewards are funded through token inflation and may not be sustainable, as there is no real economic value to these rewards. This is similar in concept to Ponzi schemes where an increasing amount of new buyers are required to keep the token valid. He added:

“Different protocols calculate emissions using different methods. Considering inflation it is much more important to understand where yields originate. Many projects are using reward emissions to generate healthy holder distributions. And bootstrap what is otherwise a healthy token, but with higher rates, more scrutiny should be implemented.

Echoing a similar sentiment, Lior Yaffe, co-founder and director of blockchain software firm Gelurida, told Cointelegraph that the idea behind most high-yield projects is that they allow stakers to collect huge commissions from traders on a decentralized exchange. Continually mint more tokens as needed to promise higher rewards and/or pay returns to your stakeholders.

Yaffe explained that this trick 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 tokens, so simply minting more coins loses their value quickly. “At this point in time, the founders usually leave the project to reappear with a similar token sometime in the future,” he said.

High APYs Are OK, But Can Only Go So Far

Narek Gevorgian, CEO of cryptocurrency portfolio management and DeFi wallet app Coinstats, told Cointelegraph that billions of dollars are being stolen from investors every year, mainly because they fall prey to these kinds of high-APY traps, adding:

“I mean, it is quite clear that there is no way that projects can offer such high APY for an extended period of time. I have seen a lot of projects offering unrealistic interest rates – some from 100% APY Higher and with some 1,000% APY.Investors look for large numbers but often overlook the flaws and the accompanying risks.

He elaborated that, first and foremost, investors need to realize that most of the returns are paid in cryptocurrencies, and since most cryptocurrencies are volatile, it takes a given asset time to earn such unrealized APY. may decrease in value together, causing major temporary losses.

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Gevorgian further added that in some cases, when a person stakes their cryptocurrency and the blockchain is using an inflationary model, getting APY is fine, but when it comes to really high yields, So investors have to exercise extreme caution:

“There is a limit to what a project can offer to its investors. Those high numbers are a dangerous combination of madness and arrogance, given that even if you offer a high APY, it should go down over time – This is basic economics – as it becomes a matter of survival of the project.

And while he acknowledged that there are some projects that can deliver comparatively high returns in a steady fashion, any fixed advertising for extended periods and offering high APY should be viewed with a high degree of skepticism. “Again, not all scams are scams, but projects that claim to offer high APY without any transparent evidence of how they work should be avoided,” he added.

not everyone agrees, well almost

0xUsagi, the pseudonymous protocol lead for Thetanuts – a crypto derivatives trading platform that boasts high organic yields – told Cointelegraph that several approaches can be employed to achieve higher APYs. He said token yields are typically calculated by distributing tokens pro-rata to users based on the amount of liquidity provided in a tracked project during an era, adding:

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

Providing a technical analysis of the matter, 0xUsagi stated that whenever a project’s developer team prints a high token yield, the project is flooded with liquidity; However, when it dries up, the challenge becomes that of liquidity retention.

When this happens, two types of users emerge: the first, who set off in search of other farms to earn higher yields, and the second, who continue to support the project. “Users can refer to Geist Finance as an example of a project that prints a high APY but still retains a high amount of liquidity,” he said.

That said, as the market matures, there is a possibility that when it comes to legitimate projects, the high volatility in the crypto markets could reduce yields over time, just like the traditional finance system.

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“Users should always assess the degree of risk when participating in any farm. View code audits, backers and team feedback on community communication channels to evaluate project security and lineage. There is no free lunch in the world ,” concluded 0xUsagi.

Market maturity and investor education are key

Zack Gall, vice president of communications for the EOS Network Foundation, believes that whenever an investor is exposed to attractive APRs, they should be viewed as just a marketing gimmick to attract new users. Therefore, investors need to educate themselves so as to either stay away, be realistic, or devise an early exit strategy when such a project finally gets bogged down. He added:

“Inflation-driven yields cannot be sustained indefinitely due to the significant dilution that occurs for underlying incentive tokens. The balance between incentivizing projects to attract end users and incentivizing token stakeholders interested in earning maximum yields The only way to sustain both is to have a substantial user base that can generate significant revenue.”

Ajay Dhingra, head of research at Unigen, a smart exchange ecosystem, is of the view that when investing in any high-yield project, investors should learn how to actually calculate APY. He pointed out that the arithmetic of APY is closely tied to the token model of most projects. For example, most protocols reserve a substantial portion of the total supply – for example, 20% – only for emission rewards. Dhingra added:

“The major difference between scams and legitimate yield platforms is clearly the sources of utility, either through arbitrage or lending; Payments in tokens that are not just governance tokens (things like Ether, USD Coin, etc.); Long-term performance (1 year+) of consistent and reliable functioning.

Thus, as we move into a future powered by DeFi-focused platforms – especially those that offer extremely attractive returns – it is of utmost importance that users conduct their due diligence and learn about the project that they are looking for. They want to invest. in or face the risk of burns.