Yield Farming Scams
What Are Yield Farming Scams?
Yield farming scams make use of fake or hacked platforms to steal money from cryptocurrency investors, who hope to profit by “staking” or lending their crypto tokens.
Yield farming is a huge growth area in the cryptocurrency space. As well as investing in cryptocurrency with the hope of it growing in value over time, people can “stake” their crypto tokens on decentralized finance (DeFi) platforms. By doing so, they provide liquidity to the platforms.
In return, they hope to realize a regular return that could far exceed that of any conventional investment. The return is paid out either as “interest” – in the form of additional tokens of the currency invested – or as a different cryptocurrency.
In March 2023, platforms and protocols offering yield farming reached a total market cap of more than $10 billion. Inevitably, where there is money, there are scams, and yield farming scams are a growing type of cryptocurrency fraud and financial crime. “Rug pull” scams, of which an increasing number relate to yield farming, are becoming particularly common.
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How Do Yield Farming Scams Work?
Here’s a simple example of how a yield farming scam can work:
1. Cybercriminals create a DeFi crypto platform and promote it to attract investors. Due to the largely unregulated nature of decentralized finance, this is surprisingly easy to do. Scammers can circulate press releases, attract attention on platforms like Discord and Reddit, and build hype on forums.
2. The scammers promise impressive returns to those who stake their cryptocurrency on the platform.
3. When the platform goes live, investors transfer legitimate cryptocurrency in the belief that they will earn staking rewards.
4. Often, cybercriminals will take their time providing genuine returns to the initial investors. This can help to build hype around the platform and attract more investments. Alternatively, they may operate the platform like a pyramid scheme, using new investors’ money to pay profits to other investors.
5. At a certain point, the scammers withdraw all of the liquidity from the platform, leaving investors with worthless tokens. Often the entire platform, complete with its Twitter account and website, will disappear overnight. This is known as a rug pull scam.
Not all yield farming scams involve the creation of fraudulent platforms: It’s also possible for hackers to target a legitimate platform. Due to the open-source nature of DeFi, this is often a plausible route for cybercriminals to take.
What Platforms Provide Yield Farming?
Many cryptocurrency platforms provide yield farming capabilities. Even some mainstream giants such as Coinbase give users the ability to stake their crypto tokens, a basic form of yield farming.
For a broader range of yield farming options, such as the ability to borrow, lend, or provide liquidity, investors have a choice of established and emerging DeFi platforms.
Well-known platforms that allow yield farming include:
It’s crucial to fully research any platform before getting involved in yield farming. Even well-known crypto platforms with solid reputations have collapsed, causing investors to lose money.
Is Yield Farming a Scam?
Yield farming is not inherently a scam, and it can be very profitable if it’s properly executed. In fact, some savvy crypto investors claim to make returns upward of 500%.
Nevertheless, yield farming is both a complex process and an area where plenty of scammers are actively looking for victims, who they tempt with high annual percentage yields (APY).
Is Yield Farming Risky?
Yield farming can be risky, especially for those without extensive knowledge of decentralized finance, smart contracts, and cryptocurrency in general. A CoinGecko survey in 2020 showed that 40% of people getting involved in yield farming did “not know how to read smart contracts and the associated risks”.
Examples of Yield Farming Scams
Here are two real-life examples of yield farming scams:
- In January 2022, a DeFi platform called Arbix was believed to carry out a “rug pull” yield farming scam, leaving investors $10 million out of pocket.
The platform had been approved and audited by Web3 smart contract auditor CertiK, leading investors to believe that they had been interacting with a legitimate business. However, Arbix’s website and Twitter account disappeared, and money was drained from the liquidity pool. Subsequently, CertiK labeled Arbix as a rug pull and advised investors not to interact with the project.
- In April 2022, a company called MaxAPY was reported to have carried out a rug pull scam. It led users to expect a “unique auto staking and auto compounding mechanism” that could potentially result in “an annual compound interest rate of 960,000%”. However, its Twitter and Telegram presence disappeared, and its native token dropped by 67%.
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What Are The Signs Of Yield Farming Scams?
A good way to spot the signs of yield farming scams is to use the old adage: If something seems too good to be true, it probably is.
New crypto platforms offering extremely high returns for staking and yield farming should raise a red flag. As is the case with other fraud attacks, such as forex fraud, big investment promises are often signs of even bigger scams.
Similarly, individuals should be wary of any new name in the crypto space that suddenly seems to have promotional material all over the web. Often, these are nothing more than paid posts and sponsored press releases.
Another sign of yield farming scams is hastily thrown together websites for new DeFi services, whose content often has poor grammar and no way for you to do due diligence on the people behind the project.
How to Avoid Yield Farming Scams
The best way to avoid yield farming scams is to only get involved in yield farming if you are confident in both your cryptocurrency knowledge and technical ability.
Sticking with well-established and regulated platforms, and of course the right fraud investigation software, is an important way to minimize risk. Nevertheless, remember that it remains difficult to eliminate risk entirely in this space.
The high-profile collapse of FTX – which has lost some investors up to $2 million – is just one example of a failed crypto firm, so make sure your best care and research keep you equipped at all times.
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