Ethereum founder, Vitalik Buterin, blasts the ever-expanding yield farming space, comparing the token incentives to central banks’ constant money printing. In a tweet on Aug. 31, Vitalik said the economics behind these decentralized finance (DeFi) projects are similar to the “Federal Reserve being run by Ron Paul” – former republican congressman.
Question to anyone who normally sees themselves as a "defi enthusiast": what's your least favorite defi project?
(Ideally limit to projects that at least some respectable people are in favor of; yes we know complete scams exist but those are boring)
— vitalik.eth (@VitalikButerin) September 1, 2020
Over the past few months, the world of crypto has witnessed a magnanimous growth in yield farming. This is a process that sees investors provide liquidity to projects and receive incentives in tokens. Projects such as Yearn.finance (YFI), Aave (LEND), and Synthetix (SNX) then compete with each other to entice investors to their platform.
Some of these incentives, such as the YFI token, has grown to a $1 billion market cap in two months as investors’ demand in the project shot up. Despite the massive growth in the space, Ethereum’s co-founder, Buterin, remains skeptical of the sustainability of these projects.
I personally am steering clear of the yield farming space completely until it settles down into something more sustainable. But I'm not particularly a "smart mind in defi" so…. https://t.co/1Db86JwP0D
— vitalik.eth (@VitalikButerin) August 31, 2020
Can the projects remain profitable in the long term given the high returns promised by DeFi projects to entice liquidity providers?
According to Vitalik, the DeFi yield farming market is rapidly turning into money printing vehicles with little value being created. Responding to one user, Buterin argues the market is only favorable to liquidity providers who are incentivized using the DeFi yield farming tokens and sell them immediately. But the market could crash, leaving the ones holding the tokens with a significant loss.
He further highlights the constant ‘money printing’ across these projects to incentivize the liquidity providers – some promising up to 2,000% APY – is similar to major central banks going brrr. He tweeted,
“Seriously, the sheer volume of coins that needs to be printed nonstop to pay liquidity providers in these 50-100%/year yield farming regimes makes major national central banks look like they're all run by Ron Paul.”
However, some investors believe there is much more to DeFi tokens, including Questo app investor, David Lach, who compared the tokens with an equity stake in a startup.
If you see those printed coins as new cryptocurrencies (like BTC, ETH etc.), then yes, it's insane.
But if you see them as equity in new crypto startups/projects that generate cash-flows, it's not that crazy. There will always be new startups with real potential in crypto.
— David Iach | davidiach.eth 👨🌾 (@davidiach) August 31, 2020
The generation of cash flows, however, will need these projects to start building solutions or apps that generate fees, instead of relentlessly trying to reward users for providing liquidity on their platform.
“And I'm pessimistic on that strategy,” Buterin said.