The recent hype involving liquidity providers shares some interesting similarities with a previous cryptocurrency trend. While investing in DeFi is akin to ICOs, the “locking up” of assets isn’t all that different from running altcoin masternodes. This latter segment eventually blew up and cost people a lot of good money, however.
The Masternode Industry Issues
Between late 2018 and late 2019, there was a very popular trend among altcoins. Numerous projects launched to provide masternode support. It is a great way to ensure liquidity on exchanges remains extremely scarce. As a result, the initial price of tokens tends to move up, as everyone needs starting capital to run a masternode. This is not entirely different from providing liquidity to engage in DeFi yield farming.
To run a masternode, users need a significant amount of funds. That funds need to be kept in the masternode wallet to earn network incentives at regular intervals. Removing the funds will make a user ineligible for future rewards until the situation is restored. It is very similar to yield farming, although the latter’s minimum requirements are a lot lower. Having more money to provide to the pool or network will yield higher returns.
The downside to this masternode “hype’ is how there were so many scams to contend with. Over half of the projects collapsed within the first months after developers dumped their holdings on exchanges. Multiple projects ran into logistical issues as no one audited their code until it was too late. With dozens of new projects launching every day, setting up masternodes became a 24/7 job. Ultimately, it resulted in many people losing good money. That trend still continues today.
Can Yield Farming be Different?
At its core, yield farming is very similar to running masternodes. Users need to provide collateral to earn rewards. It requires owning a native currency or token before one can earn rewards. Putting existing assets to work, instead of having to buy new tokens, is an improvement.
Moreover, there is still a growing number of projects not going through an official audit. Several firms specializing in reviewing code related to smart contracts, DeFi, and yield farming. No self-respecting project should bypass these reviews, as they bring more legitimacy to projects and their teams. Speaking of teams, a fair few projects in masternodes and yield farming have no public team. Another worrisome correlation that more people should be worried about.
The high returns of yield farming also mimic masternode rewards. users are often incentivized to provide liquidity for returns of 1,000% per year and higher. a lot of the shady altcoin projects start out that way too before eventually disappearing. A rug pull in DeFi is not that different from an altcoin developer cashing out their premine.