Vitalik Buterin, the co-founder of Ethereum, has taken to Twitter to warn against naive bullishness in the decentralized finance (DeFi) sector by comparing the economics of yield farming tokens to the Federal Reserve’s money printing.
It has been reported that yield farming has taken the crypto community by storm and sparked the DeFi boom.
However, Buterin highlighted the aggressive supply inflation of many governance tokens by saying that this puts downward pressure on the prices of “coins that are getting printed nonstop to pay the liquidity providers.”
“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.”
Likewise, he’s not alone in his assessment of these inflationary aspects of the DeFi sector, with Twitter user ‘Larrypc’ likening yield farming to “a giant Ponzi scheme.”
Yield farming at this point is just a giant Ponzi scheme Someone forks a well-established project, makes minimal changes, gives it a funny name Some insiders farm a large amount of coins, shill it on social media, and dump it on naive investors at massively inflated prices — Larry | larrypc.eth (@Larrypcdotcom) August 31, 2020
Investor David Lach said:
“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.”
But Buterin countered that he sees “no plausible path” for many projects to generate cash flow, emphasizing the need for fee-generating applications to sustain a project over the longer term.
“So far the only strategy toward generating long-term fees that I see is some kind of weird financial attack to grab liquidity and steal network effect from Uniswap. And I’m pessimistic on that strategy.”
According to the report, Buterin’s comments come in the light of decentralized exchange and yield farming platform SushiSwap exploding in popularity over the weekend owing to an aggressive governance token distribution strategy intended to incentivize early users, with 10 times the base rate of 100 SUSHI per block set to be paid out to liquidity providers.
Vitalik Buterin believes many DeFi tokens are catering to liquidity providers at the expense of long-term hodlers https://t.co/q2Y2fWZQ2S — Cointelegraph (@Cointelegraph) September 1, 2020
Thus, the yield farming frenzy has reignited concerns regarding Ethereum’s scaling capacity, with the complex smart contract executions underpinning the transactions of many DeFi projects resulting in fees in triple-figures to perform basic operations.