Whereever there are resources there are predators. The more resources the more predators of all sizes there are. Crypto is a gusher of new resources and when a new segment of Crypto explodes the predators are quick to move in for the kill. DeFi, decentralised finance, is no exception.
DeFi’s far edge is, ‘yield farming’ where Crypto owners lodge assets with a new platform and for their trust and perhaps income flow from the ‘rehypoticated’ assets they have lodged, receive extremely generous issuances of the new projects tokens.
Uniswap, the kind of ‘DeFi’ exchanges recently doled out $1700 worth of their tokens to anyone who had used the site before a certain date and is running a scheme that is handing out millions worth of tokens to liquidity providers of certain pools over the next 4 years. As a receiver of those tokens recently for essential nada, I love the idea. What is not to love about $1700 of free money.
This is a tool to finance new project too and it’s also a way of gaining the most expensive of assets, user attention.
BUT…. Like all tools it can be used for evil purposes. Where ever there is a great tool there is a criminal looking for ways to miss use it.
For example most DeFi projects are open source which is a way to enable people to examine them to expose bugs, sleezy processes or anything else that might breed mistrust if it was open to inspection. This openness means that anyone can spin up and reskin a version of a successful project.
This is great on the one hand and terrible on the other. Its great because talented developers can use these opensource projects to create the next generation of DeFi utilities or embellish existing ones. Its terrible because scammers can do likewise with a ripoff in mind.
This is what helped kill the ICO wave. The scammer piled in and launched a bunch of me too projects, where the project was to fleece investors and vanish.
The ‘yield farming’ DeFi space is seeing this process well underway.
But how can you separate a proper project from a scam? Here is a check list.
Does the project exist. Can you use it. If it’s a yes, that’s a tick, if the project is a promise for tomorrow, that’s a cross.
Does the project do something innovative. If yes that’s another tick and a big one.
Are the people anonymous or real. If real it’s a tick, if anonymous a cross
Has the team done something before. Yes a tick, No a cross
A cross doesn’t mean, don’t get involved, you can weigh you ticks and crosses.
The next however is a huge red flag. A Nooooooooo! Nope. Non. Nyet.
The way certain ‘yield farming’ works is an investor stakes coin pairs of liquidity on Uniswap, say USDc and Ethereum on the site and gets coins in the new project at a high rate, perhaps 30% Apy. Then there is a pool on Uniswap for the projects coin, lets call it cowpat token. You can swap Cowpat for Ethereum and other tokens. Cowpat/USDc , Cowpat/Tether etc.
The pools on the Cowpat site will include Cowpat/Eth liquidity pool ‘yield farm’ paying giant rates say 3000%. That looks like a scam and it is, but the scam is not in the payout, its elsewhere, its in a pool called FERT/ETH which is another liquidity pool on Uniswap.
What the scammer is doing is dumping FERT, the Fertiliser token they own all of.
You looked at the Cowpat/Ethereum farm and thought, does the guy behing Cowpat have a zillion cowpat token and will he dump them into the Uniswap liquidity pool and drain it leaving the ‘farmers’ holding the huge bag of valuless Cowpat tokens. Oh no, there are none minted for the ‘team’ so that cant happen. Hurrah its safe, lets get farming that 3000% Apy.
Wrong.
What is happening is Cowpat is getting issue to the fellow behind this sham on the Fert/Eth pool and the Cowpat he is earning is getting sold in your Cowpat/Eth pool sucking Ethereum out and ultimately siphoning off your Ethereum. Now you could buy Fertiliser token on Uniswap and lodge it but that just means the scammer got you Ethereum without even having to try, because the FERT token is valuless too. Its only value is to get issued jumbo amounts of Cowpat to siphon your Eth out of the Cowpat/Ethereum swap pool.
Clearly any token with unlocked token held by the owner is prone to this manoeuvre as was seen with the Sushiswap fiasco, but the next generation of scammers are using this mechanism to gull the novice and there are plenty of them for sure.
So if you see a project with a farm and an obscure token pair in the mix, you can be pretty sure someone is pulling a fast one. It might not be illegal but it will certainly feel like it should be when you find your self long Cowpat and out of Ethereum.