High gas fees hinder the work of smaller farmers, CoinGecko indicates. Forty percent of investors do not know how to audit or read smart contract codes.
Crypto farmers who make life on Ethereum’s decentralized finance platforms (DeFi) may expect to pay around USD 100 in fees per day. A recent report from the CoinGecko platform indicates that 10% of a yield farming practitioner’s wallet may go solely on gas fees.
A survey of 1,347 people last August served as the basis for calculating these numbers. Several individuals involved in yield farming participated in the interview.
With this new investment strategy, users seek to make profits based on the interest rates and incentive tokens that DeFi platforms grant. By accumulating both benefits, investors can multiply the return on their assets and achieve annual profits of up to 100%.
This has managed to seduce a large number of investors, but the high gas fees in Ethereum can hinder the work of the most novice and small farmers. According to the CoinGecko report, those who have invested less than USD 1,000 in yield farming typically do not achieve as good a return, since transaction fees significantly decrease their profits.
In this way, gas fees become one of the main concerns of investors, since 73% of them are not willing to pay a fee above USD 10 per transaction. However, these expectations may be unrealistic for the reality of Ethereum. This blockchain tends to become congested by the overflow of transactions and scalability limits, which raises the fees of the network.
Cryptocurrency Farmers Claim to Understand Risks that They Do Not Understand
The CoinGecko report highlights that most of the farmers making life on Ethereum claim to know about the financial risks of yield farming, so they remain cautious about them.
However, 40% of them say that they do not know how to audit or read smart contracts. In other words, they do not know if there is a code error that makes the contract vulnerable to scams or hacker attacks. That technical knowledge is relevant in decentralized finance since these protocols base on the principle that money is programmable.
Thirty-three percent (33%) of investors do not know what an impermanent loss is; this makes things even more critical. An impermanent loss refers to a risk that DeFi liquidity providers face due to the volatility of the cryptocurrency market.
In contrast to the financial benefits that holding a cryptocurrency provides, when users deposit assets in a decentralized finance platform, they usually balance the value of all the deposited tokens.
For that reason, if the price of a token increases considerably, investors will surely not receive the profits of that token, but they would be balancing the difference in losses that the other deposited tokens generate. Likewise, if the price of any of the assets decreases too much, the user may have negative returns.
Users need to know the tokens that comprise the portfolio of the platforms where they do yield farming. If one of these assets is very volatile, it is best not to deposit any money on said platform.
Yield farming is a very new practice, which also works in an ecosystem that is still experimental and has not reached its maturity. For that reason, crypto farmers should be even more cautious when conducting these investment strategies since they could lose more money than they expect.
By Alexander Salazar
