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Crypto ‘Yield Farmers’ Chase High Returns, but Risk Losing It All

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One of many hottest developments in cryptocurrencies is a monetary exercise that dates again to biblical instances: lending cash to earn curiosity.

As an alternative of simply ready for his or her

bitcoin,

ether or different digital coins to rise in value, cryptocurrency buyers at the moment are actively chasing returns by lending out their crypto holdings or pursuing different methods to earn yield. Such “yield farming” can earn double-digit rates of interest, far increased than the charges one can get with {dollars}.

It’s a high-stakes endeavor. Traders run the danger of getting their digital wealth stolen by scammers or erased by sudden bouts of volatility. The area can be largely unregulated. Yield farmers aren’t protected by the Federal Deposit Insurance coverage Corp., which compensates depositors when banks fail.

But the promise of outsize returns in a low-yield setting has helped appeal to mainstream consideration. Previously 12 months, skilled and novice buyers alike poured tens of billions of {dollars} into yield farming, in response to trade analysts and knowledge suppliers.

“Yield farming is just not a lot totally different than shopping for high-dividend paying shares or high-yield unsecured debt or bonds,”

Mark Cuban,

the billionaire proprietor of the Dallas Mavericks and an energetic crypto yield farmer, instructed The Wall Avenue Journal. “There’s a cause they need to pay greater than different corporations. They’re at higher threat.”

Even professionals can get harm. In June, Mr. Cuban misplaced cash when Titan, a digital forex by which he was incomes yield, crashed to zero.

Mark Cuban, proprietor of the NBA’s Dallas Mavericks, is an energetic crypto yield farmer.



Photograph:

Richard Shotwell/Invision/Related Press

As an alternative of placing their cash in a financial institution, yield farmers sometimes hand their cryptocurrencies to laptop packages. A few of these packages lend cash to debtors and accumulate curiosity for the yield farmers.

For instance, if an investor needed to earn curiosity on tether, a so-called stablecoin that seeks to take care of the identical worth because the U.S. greenback, she may hyperlink her digital pockets to Aave, a crypto-lending platform.

Aave would lend out the investor’s tether funds and pay the curiosity immediately into her digital pockets. As of late Friday, Aave was providing an annualized yield of round 2.9% on tether. Such yields can fluctuate minute to minute based mostly on lending and borrowing exercise.

Aave is among the many greater gamers in decentralized finance, or DeFi, the fast-growing segment of the crypto market in which yield farmers generally look for returns. DeFi projects try to replicate traditional financial activities, such as lending and borrowing, using cryptocurrencies.

Some upstart DeFi projects tout annualized returns of 30% to 50% or more. The catch is that returns are often denominated in tokens that depositors receive as rewards for using their platforms. If the tokens lose value, that erodes the value of the returns.

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Yield farmers can also lose money to fraud. DeFi projects are frequently run by anonymous teams that sometimes abscond with investors’ funds in scams known as rug pulls. From January to April, DeFi frauds cost investors $83.4 million, according to CipherTrace, an analytics firm.

“It’s the virtual equivalent of handing your money to a stranger and expecting them to give you your money back,” said

Ryan Watkins,

a senior research analyst at the crypto-data firm Messari.

Marcio Chiaradia,

a digital-marketing professional in Irvine, Calif., began yield farming in December. He lost a few hundred dollars on a rug pull called MoltenSwap that was offering a yield of more than 1,000%, he recalled. But Mr. Chiaradia said his record has been mostly positive.

“It feels like the beginning of the internet, with these weird and crazy things that are not going to be around in the long run,” said Mr. Chiaradia, who is 39 years old and has committed several thousand dollars of assets to yield farming. “But I feel like there are some DeFi sites that are going to stick around.”

It is hard to measure the exact amount of yield-farming activity, but a rough proxy is the total assets deposited as collateral with DeFi projects. That metric—called total value locked—has swelled to $74 billion from less than $2 billion a year ago, according to the data provider DeBank.

Nonfungible tokens, or NFTs, have exploded onto the digital-art scene. Proponents say they are a way to make digital assets scarce and therefore more valuable. WSJ explains how they work and why some question whether they are built to last. Photo illustration: Jacob Reynolds/WSJ

Some popular yield-farming strategies don’t have direct analogs to traditional finance. In “liquidity mining,” investors put digital coins in pools of assets run by decentralized crypto exchanges comparable to Uniswap and accumulate a slice of the exchanges’ buying and selling charges.

In a associated technique referred to as “staking,” buyers lock up their cash to assist the integrity of a forex’s underlying laptop community. In return, they’re paid in new cash, incomes curiosity.

There’s a large hole between greenback rates of interest and the yields out there in cryptocurrencies—even in stablecoins purportedly tied to the U.S. greenback. The nationwide common rate of interest for financial savings accounts is 0.06%, in response to Bankrate.com. In the meantime, crypto platforms provide depositors annualized returns of 1% to 10% or extra on dollar-pegged stablecoins.

Such discrepancies have arisen due to the massive demand for borrowing digital currencies, stated

Marco Di Maggio,

a Harvard Enterprise College professor who has studied crypto lending.

The demand comes principally from buying and selling corporations that may reap earnings from varied methods, Mr. Di Maggio says. One technique, as an example, includes exploiting the distinction between the worth of bitcoin and futures contracts linked to the worth of bitcoin in months to return. Nevertheless it takes vital quantities of capital to make such methods work. Because the crypto corporations usually can’t borrow from banks, they flip to crypto-lending platforms, the place they’re keen to pay excessive charges.

Crypto rates of interest will fall because the market matures, Mr. Di Maggio predicts. Furthermore, a crypto worth crash would cool the present frenzy for digital-currency loans. “It’s sustainable so long as there’s a bull market and demand for leverage,” he stated.

In the meantime, corporations such because the trade operator

Coinbase Global Inc.

hope to learn from lofty cryptocurrency rates of interest. Final month Coinbase introduced a program by which clients can earn 4% annual yield on stablecoin USD Coin. And the yield is low by crypto requirements. BlockFi, a crypto-lending startup, presents depositors a 7.5% annual yield on the identical coin.

“It’s getting extra accessible to individuals who aren’t crypto-native,” stated

Peter Johnson,

a companion at Leap Capital, a venture-capital agency that has backed BlockFi and a variety of DeFi tasks.

“When you simply need to earn 4% in your {dollars}, there at the moment are methods to do this with out having to know lots about crypto,” he stated.

Bitcoin, Dogecoin, Ether: Cryptocurrency Markets

Write to Alexander Osipovich at alexander.osipovich@dowjones.com

Copyright ©2021 Dow Jones & Firm, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8


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