Is education the key to curbing the rise of high-profile APY scams?

Is education the key to curbing the rise of high-profile APY scams? – Mail Bonus

Most people who have dealt with cryptocurrency in any capacity in the last two years are well aware that there are many projects out there that offer a noticeable annual percentage rate of return (APY) these days.

In fact, many Deficit-based protocols (DeFi) that have been built using proof-of-stake (PoS) approval rules offer their investors ridiculous returns in return for depositing their original tokens.

However, like most deals that sound too good to be true, many of these deals are out-and-out money-grabbing systems – at least that’s what most experts claim. For example, YieldZard, a project that positions itself as a DeFi innovative company with automated collection, claims to offer its customers a fixed APY of 918,757%. In simple terms, if one were to invest $ 1,000 in the project, the return would be $ 9,187,570, a figure that, even for the average pool, would look shady, to say the least.

YieldZard is not the first project of its kind, as the offer is only a copy of Titano, an early auto-mortgaged token that offers faster and higher payouts.

Is such a return really feasible?

To get a better idea of ​​whether this seemingly ridiculous return is actually feasible in the long run, Cointelegraph reached out to Kia Mosayeri, product manager at Balancer Labs – DeFi’s automated marketing method, which uses new self-balancing pools. In his opinion:

“Sophisticated investors will want to look for the origin of the yield, its sustainability and ability. A rate of return driven by sound economic value, such as interest paid on loans or percentages paid on transactions, would be more sustainable and scalable than yields derived from random outflows.

To provide a more comprehensive overview of the case, Ran Hammer, vice president of business development for public blockchain infrastructure at Orbs, told Cointelegraph that in addition to the ability to facilitate decentralized financial services, DeFi protocol has introduced another major innovation in the cryptocurrency ecosystem: the ability to earn returns which is a more or less inactive holding.

He further explained that not all returns are equal in design because some returns are rooted in “real” revenue, while others are the result of high emissions based on Ponzi-like symbolism. In this context, when users act as lenders, shareholders or liquidators, it is very important to understand where the return comes from. For example, transaction fees in exchange for computer power, transaction fees on liquid assets, premiums for options or collateral and interest on loans are all “real returns”.

However, Hammer explained that most incentive-based rewards are funded by token inflation and could not be sustainable, as there is no real economic value that finances these rewards. This is similar in ideology to Ponzi schemes where increasing numbers of new buyers are required to maintain symbolic values. He added:

“Different protocols calculate emissions using different methods. It is much more important to understand where the yield originates while taking inflation into account. Many projects use prize giveaways to create a healthy distribution of holders and to launch what is otherwise sound symbolism, but with a higher proportion, more scrutiny should be applied.

Lior Yaffe, founder and CEO of blockchain software company Jelurida, echoed a similar sentiment, telling Cointelegraph that the idea behind most high-yield projects is to promise stakeholders a high reward by earning very high commissions from traders on a decentralized stock exchange and / or beating stock exchanges. more tokens as needed to pay returns to those involved.

This trick, Yaffe pointed out, can work as long as there are enough fresh buyers, which really depends on the team’s marketing capabilities. However, at some point, there is not enough demand for the symbol, so hitting more coins destroys their value quickly. “At this time, the founders are leaving the project only to reappear with similar symbols at some point in the future,” he said.

High APY is fine, but can only go so far

Narek Gevorgyan, CEO of Currency Asset Encryption Currency and DeFi Wallet CoinStats, told the Cointelegraph that billions of dollars are stolen from investors each year, primarily because they fall prey to this type of high-APY trap, adding:

“I mean, it’s pretty obvious that there’s no way a project can offer such a high APY for a long time. I have seen many projects that offer unrealistic growth – some well above 100% APY and some with 1,000% APY. Investors see big numbers but often overlook loopholes and the associated risks. “

He explained that first and foremost, investors need to realize that the highest returns are paid in cryptocurrencies and since most cryptocurrencies are volatile, the assets borrowed to earn such an unrealistic APY can decrease in value over time, leading to large permanent loss.

Connected: What is a permanent loss and how to avoid it?

Gevorgyan further pointed out that in some cases, when an individual puts their encryption in custody and the blockchain uses an inflation model, it is okay to get an APY, but when it comes to very high yields, investors have to be very careful and added:

“There is a limit to what a project can offer its investors. These high numbers are a dangerous mix of madness and hybris, given that even if you offer high APYs, it will have to go down over time – that’s basic economics – because it’s a matter of survival.

And while he has acknowledged that there are some projects that can deliver relatively higher returns on a steady basis, any long-term and high-end APY should be viewed with great skepticism. “Again, these are not all scams, but projects that claim to offer great APYs should be avoided without clear evidence of how they work,” he said.

Not everyone agrees, almost

0xUsagi, the pseudonym’s protocol Thetanuts – a high-yield organic cryptocurrency trading platform – told Cointelegraph that a variety of APY methods could be used. He said that the return on tokens is generally calculated by distributing tokens proportionally to users based on the amount of liquidity provided in the project, traced to a period, and added:

“It would be unfair to call this system a scam, as it should rather be seen as a tool to gain customers. It tends to be used at the beginning of the project for rapid liquidation and is not sustainable in the long run. “

By providing a technical breakdown of the issue, 0xUsagi pointed out that every time a project development team prints a high return, liquidity flows into the project; However, when it dries up, the challenge will be to keep liquidity.

When this happens, there are two types of users: the first, who goes in search of other farms to earn a high harvest, and the second, who continue to support the project. “Users can cite Geist Finance as an example of a project that printed high APYs but still maintains a lot of liquidity,” he added.

In other words, as the market matures, there is a possibility that even when it comes to legitimate projects, large fluctuations in cryptocurrency markets can cause yields to compress over time in the same way as in a traditional financial system.

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“Users should always consider how much risk they are taking when participating in any estate. Look for code audits, sponsors and response teams on the community communication channels to assess the security and lineage of the project. There is no free lunch in the world, “said 0xUsagi in the end.

Market development and investor education are key

Zack Gall, Vice President of Communications at the EOS Network Foundation, believes that whenever an investor encounters the usefulness of APR, they should only be seen as a marketing ploy to attract new users. Therefore, investors need to be educated to either stay away, be realistic or prepare for a policy of quitting when such a project finally explodes. He added:

“Inflation-driven yields cannot be maintained indefinitely due to significant dilution that must occur for the underlying stimulus signal. Projects must strike a balance between attracting end users who typically want low commissions and encouraging symbolic parties who are interested in earning maximum returns. The only way to maintain both is by having a significant user base that can generate significant revenue.

Ajay Dhingra, Head of Research at Unizen – a smart stock exchange ecosystem – believes that when investing in any high-yield project, investors should learn how to actually calculate APY. He pointed out that the APY account is closely linked to the symbol model of most projects. For example, the vast majority of protocols account for a significant proportion of the total supply – for example, 20% – only for emission prizes. Dhingra also pointed out:

“The key distinction between fraud and legitimate returns is clearly identified sources of utility, either through arbitration or lending; payouts in symbols that are not just control symbols (Things like Ether, USD Coin, etc.); a long-term demonstration of continuous and reliable activity (1 year +). “

Therefore, as we enter a future driven by DeFi-centric systems – especially those that offer highly profitable returns – it is extremely important that users conduct their due diligence and learn about the ins and outs of the project they may be working on. looking to invest in. in or at risk of burns.