Why do ROI platforms always seem to fail or get rugged? And why do yield farms tend to stick around? What’s the difference?
It seems like every other week, a new crypto DeFi platform is in your inbox, trying to get you to invest in their get-rich-quick scheme. They all advertise super-catchy daily, weekly, or annual returns to get you to pour your money in. I have certainly written about the ones that I have found interesting. And, yet, for every one that has stuck around, there are dozens that fail. And, there are also a handful of attractive yield farms, vying for your capitol with the carrot of providing you rewards on your investment of capital. This article will help inform the differences between two popular types of investments, ROI platforms and yield farms, and help you know what you are getting yourself into before you invest.
This article contains no referral links, no endorsements, no appeals for you to invest anything. You’ll know those articles when they are written, and this ain’t it. This is a comparative analysis between the two most popular types of crypto investment platforms.
First off, if you’re looking for ROI or yield farm platforms, we are like-minded. I believe strongly that it is opportunistic to let your crypto work for you, the same way the wealthy let their large capital of savings work for them.
The first type of investment is an ROI platform. You’ll recognize these from catchlines that advertise daily returns higher than 0.5%. They are contracts that you deposit in, and then you reap the rewards daily, with your stake compounding and growing to seemingly life-changing balances.
The second type of investment is a yield farm. You’re recognize these from headlines that draw you in with yearly APRs (or APYs) on your investment. They are contracts that you deposit in, and then you earn rewards that you claim. They don’t offer life-changing compounding, but instead a slow and steady reward system.
These two platform types, ROI and yield farms, and often seen as the same thing. But, they are quite different, and have very different structures and payout systems. Instead of talking about each one individually, I’m going to review the features and structures, comparing each one as we go. I’ll do a summary at the end of each type of platform.
New to trading? Try crypto trading bots or copy trading on best crypto exchanges
Feature One: Deposit
- ROI platforms (think BakedBeans.io, DRIP Garden) require that you deposit an asset. When you deposit the asset, you can never withdraw the asset directly. While some platforms offer a short window of “refund”, you lose any rewards that you have earned. ROI platforms are deposit-locked.
- Yield Farms (think Pancakeswap, Animal Farm) also require that you deposit an asset. However, unlike ROI platforms, you can withdraw the entire asset that you deposited. There are often deposit and withdrawal fees, but besides fees, you can get out what you put it. Yield Farms are not deposit-locked.
Feature Two: Staked Asset
- ROI platforms. When you deposit into an ROI platform, usually you are actually purchasing some abstract production mechanism. In essense, you are starting an earning engine. I’m going to use a fictional platform called RACE. In RACE, you deposit BUSD, and in return, you purchase HORSEPOWER. You no longer have BUSD to withdraw, because you have purchased HORSEPOWER. Withdrawing HORSEPOWER would do you no good, so you simply can’t withdraw it. You now have HORSEPOWER forever. ROI platforms have you purchasing a production mechanism in exchange for your deposit.
- Yield Farms. When you deposit into a yield farm, your deposit asset remains in the exact type of asset as long as it’s deposited. Depositing into Pancakeswap, you would stake BNB. And, in the yield farm, it remains BNB. And, when you withdraw, you get BNB back. You are, in essence, lending Pancakeswap your BNB, and you get it back when you want. Yield Farms keep your deposit in the form that it was deposited, and when you withdraw, you get it back.
Feature Three: Rewards Structure
- ROI platforms. Once you’ve purchased your production mechanism, it produces. Quite well (at first)! When you have purchased HORSEPOWER, it produces SPEED (or whatever the thing makes). When you have SPEED, you can either compound it for more HORSEPOWER, or you can sell your SPEED for BUSD. So, if the platform advertises 5% daily returns, after one day, you’ll be able to sell your earned SPEED for BUSD, 5% of your original deposit. And here’s where things get frustrating. The next day, you’ll earn the same amount of SPEED as they day before. And, you’ll go to sell it, and you’ll get 4.5% of your original investment in BUSD. Wait, what? I was promised 5% daily? What happened? Here’s what happened. RACE (the fake platform) is actually a race. Everyone else who invested in the platform chose to compound on day one. So, while you were withdrawing your 5%, everyone else compounded their SPEED into more HORSEPOWER. And, in doing so, it made SPEED WORTH LESS. Not worthless, but worth less (an important distinction). The analogy I chose RACE/HORSEPOWER/SPEED is a very effective one, because your “engine” will gradually run out of steam. If you withdraw every day, your earnings will decrease every single day. Your HORSEPOWER will soon become slower and slower. It’s nearly impossible to get your original deposit out by withdrawing daily. And yet, if you compound every day, you never withdraw anything. ROI Platforms reward you daily in a made-up asset, that you chose daily what to do with: compound or withdraw. Withdrawing slows down your production engine.
- Yield Farms. The rewards come from freshly minted coins minted by the site. You can choose to withdraw the minted coins. And when you do, you can choose to hold them or sell them. In many cases, you can even choose to stake those coins in a different pool or farm, earning more rewards on those coins. Yield Farms reward you in their own coins, where you can choose what to do with them.
Feature Four: Source of Rewards
- ROI Platforms. These platforms, sometimes surprisingly DO NOT GIVE YOU ANYTHING. By that, I mean, they are not minting anything, and they are not providing ANY of their own capital. Instead, they are taking deposits, putting them into a large treasury, and then releasing a small percentage of that treasury daily to all investors, proportionally to the size of your MADE UP production engine. And, the production engine that you bought on day one is going to be slowed down daily, unless you keep compounding. But, there is NO external source or rewards. There is no fueling the treasury by external means. ROI Platforms pay you with your own money, and the money of future investors.
- Yield Farms. These platforms give you reward tokens that have some value. CAKE, for example, has a sellable value. Other platforms offer reward coins with a sellable value. But, you are not being paid with your own money nor the money from future investors. Yield Farms provide you reward tokens with sellable value.
Feature Five: Sustainability
- ROI Platforms. These platforms live and die by new investments. If you get in early, you stand to make money. If you adopt a healthy compound/withdraw pattern, and new investors enter the platform, you can make back your money over the long term. However, if you enter late into a platform’s cycle, and you only withdraw, you will never make your deposit back. ROI Platforms depend on new investors to succeed.
- Yield Farms. These platforms live and die by the tokenomics of the site. If a site has regular buy-backs and burns, they can fuel the price of the coin. But, if they don’t do buy-backs and burns, then every single sale of the reward token serves only to de-value the coin, and the reward token value will die a slow and painful death, until there’s no point in staking on the site with 0.0005% APR. Yield Farms depend on tokenomics and buy-back and burn methods.
Summary of each platform:
ROI Platforms
- ROI Platforms require that you deposit, but you can never withdraw your original deposit.
- By depositing, you are purchasing a production mechanism.
- The production mechanism is slowed when you withdraw, and increased when you compound.
- You are paid with your own money, and that of future investors, so it’s profitable to get in early and have a good compound/withdraw ratio.
Yield Farms
- Yield Farms require that you deposit, and you can withdraw it all.
- By depositing, you are lending your crypto to a site.
- You earn reward tokens, which are another cryptocurrency, like CAKE. You can sell CAKE, stake CAKE, or hold it for later sale.
Exceptions:
There are ROI platforms that DO provide external value besides your own money and future investors. These are often advertised as trading bot platforms. You invest, and a trading bot provides you daily or weekly ROI. Some of these platforms are completely legit. Some are scams. It is increasingly difficult to tell which is which.
There are Yield Farms that have reward systems that pay out in non-native coins. They pay out in BUSD or BNB, for example, through a complex system of fees and structure. I believe these are the platforms that will succeed, because they have good tokenomics.
WHY THEY RUG.
Why do these platforms fail? Let’s look at the two types of platforms.
ROI platforms fail because early investors have an early strategy of compounding, letting their engine pick up speed, while letting middle time-frame investors see a healthy return initially. Then, overnight, they all begin withdrawing, and the contract drains at a quick pace. Middle and late investors can’t possibly make their money back because the contract is draining faster than they can do anything about. They can only join the crown, trying to squeeze any value they can before the contract goes to zero.
Yield farms fail because the site has poor tokenomics, or excessively high rewards emissions rates. If the platform mints too many tokens daily, the value will drop as the market becomes saturated with decreasing-value tokens. If there are no buybacks and burns, then the token value will never stop falling. And then, the APRs dwindle to nothing, and the site dies.
Finally, what you can look for.
First, if an ROI platform is more than a month old and is not funded by a legit trading bot (hard to tell, I know!), stay the hell away. You’re going to be funding the early investors for sure. Look at the contract balance, which is often listed on the platform site. Read the Telegram group. Is everyone excited? It might be early. Look at the history of the Telegram channel too.
For a yield farm, look for a platform that has an active community on Telegram, and read the messages. Are they excited? Do the developers have a plan for buybacks, or some other way to keep the token value high? Look for platforms with dynamic emissions control, that respond to market conditions.
Ok, I have no endorsments, as promised. But, I’m going to tell you what I’m invested in.
I’m invested in a yield farm called The Animal Farm. They have tokenomics that ultimately reward you in BNB and BUSD. I like yield farms because no matter the tokenomics, I’m just lending my crypto, and I can take it out at any time. Anything I earn is a bonus.
I want to let my crypto work for me. I hope you do too. Just keep your eyes open for the right ways to do it.
If you like this article, please give me some claps! It’s free!
And follow me on Medium, please! And leave a response if you this article helped you in any way.
Thanks!
Join Coinmonks Telegram Channel and Youtube Channel learn about crypto trading and investing