Most people who have dealt with cryptocurrencies in any capacity over the last couple of years are well aware that there are many projects out there o
Most people who have dealt with cryptocurrencies in any capacity over the last couple of years are well aware that there are many projects out there offering eye-popping annual percentage yields (APY) these days.
In fact, many decentralized finance (DeFi) protocols that have been built using the proof-of-stake (PoS) consensus protocol offer ridiculous returns to their investors in return for them staking their native tokens.
However, like most deals that sound too good to be true, many of these offerings are out-and-out cash grab schemes — at least that’s what 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. In simple terms, if one were to invest $1,000 in the project, the returns accrued would be $9,187,570, a figure that, even to the average eye, would look shady, to say the least.
YieldZard is not the first such project, with the offering being a mere imitation of Titano, an early auto-staking token offering fast and high payouts.
Are such returns actually feasible?
To get a better idea of whether these seemingly ludicrous returns are actually feasible in the long run, Cointelegraph reached out to Kia Mosayeri, product manager at Balancer Labs — a DeFi automated market-making protocol using novel self-balancing weighted pools. In his view:
“Sophisticated investors will want to look for the source of the yield, its sustainability and capacity. A yield that is driven from sound economical value, such as interest paid for borrowing capital or percentage fees paid for trading, would be rather more sustainable and scalable than yield that comes from arbitrary token emissions.”
Providing a more holistic overview of the matter, Ran Hammer, vice president of business development for public blockchain infrastructure at Orbs, told Cointelegraph that aside from the ability to facilitate decentralized financial services, DeFi protocols have introduced another major innovation to the crypto ecosystem: the ability to earn yield on what is more or less passive holding.
He further explained that not all yields are equal by design because some yields are rooted in “real” revenue, while others are the result of high emissions based on Ponzi-like tokenomics. In this regard, when users act as lenders, stakers or liquidity providers, it is very important to understand where the yield is emanating 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 yields.”
However, Hammer explained that most incentivized protocol rewards are funded through token inflation and may not be sustainable, as there is no real economic value funding these rewards. This is similar in concept to Ponzi schemes where an increasing amount of new purchasers are required in order to keep tokenomics valid. He added:
“Different protocols calculate emissions using different methods. It is much more important to understand where the yield originates from while taking inflation into account. Many projects are using rewards emissions in order to generate healthy holder distribution and to bootstrap 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 firm Jelurida, told Cointelegraph that the idea behind most high yield projects is that they promise stakers high rewards by extracting very high commissions from traders on a decentralized exchange and/or constantly mint more tokens as needed to pay yields to their stakers.
This trick, Yaffe pointed out, can work as long as there are enough fresh buyers, which really depends on the team’s marketing abilities. However, at some point, there is not enough demand for the token, so just minting more coins depletes their value quickly. “At this time, the founders usually abandon the project just to reappear with a similar token sometime 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 being pilfered from investors every year, primarily because they fall prey to these kinds of high-APY traps, adding:
“I mean, it is fairly obvious that there is no way projects can offer such high APYs for extended durations. I’ve seen a lot of projects offering unrealistic interest rates — some well beyond 100% APY and some with 1,000% APY. Investors see big numbers but often overlook the loopholes and accompanying risks.”
He elaborated that, first and foremost, investors need to realize that most returns are paid in cryptocurrencies, and since most cryptocurrencies are volatile, the assets lent to earn such unrealistic APYs can decrease in value over…
cointelegraph.com