Leveraged Yield Farming. How it works.
The concept of credit is about bring forward the desires and wants that you can only afford in future into the present. Leverage yield farming is no different, you borrow in order to earn more tokens right away.
The only reason why you’d invest your money in one of these schemes is because you believe that there will be net returns of your investment in fiat. Since, the concept of yield farming requires you to lock up either token A or B in return for a token C. Your return on capital can only end up positive if one of the below two scenarios happen.
First, the coins maintain at the same price as when you bought them and since you’ve gained yourself a few extra coins for taking the risk of locking up your tokens, you are now net positive on your investment
Second, the coins have gained in value and plus the few extra coins you’ve gained for taking the risk of locking up your tokens, you are now even more net positive on your investment.
As you can see all things hinges on the coin gaining in value. So in what scenario would the coins increase in value.
ANS: DEMAND and SUPPLY
The value of the coins can increase or decrease in value depending on demand or supply. Demand is something that is less under the control of the founders of the project. Supply on the other hand is totally within their control. Take for example, the introduction EIP1559 to make ETH deflationary and DFI’s founders decisions to burn their own tokens. These are both decisions that actively seek to reduce supply of the coins and hence lead to increase in their value. It is rare to find founders like Julian or U-zyn who are altruistic like this or for projects to be able to give up present gain for a future benefit. That’s why you can expect most to flood the market with supply at all time high prices, leading to the collapse of the market.
Demand is the driven by the ability of the protocols to get buyers to max bid the tokens in order to use them. In micro economics dynamic pricing seeks to reduce the consumer surplus and maximise the profit of the capitalise. In this case, it is the end users of the tokens that foot the bill. Money flows to the organisation that owns these protocols, if they have monopolistic practices and holds no regard for sustainability, there are no different from the Amazons, Facebook and Googles of today.
EXIT STRATEGY
So when and why do the designers of these schemes decide to exit the market? If it’s not a coordinated pump and dump, they all must have at least some kind of statistically driven model on where the intrinsic top of the demand of their coins may be. When coupled with a pinch of FUD and/or FOMO, price can fall outside their models by one standard deviation or two.
So if the price of the token is the signal for the designers of these schemes to exit the market, unleashing their bags upon the market. Then leveraged yield farming is the toxic combustion of “bag” drop from top of tower+ human launcher, investors take the risk of borrowing from the markets to push up the price of tokens to bring price up as fast as possible while the founders of these projects wait to dump their bags onto them.
CONCLUSION
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