How Sustainable Is Ethereum’s Agrarian Age?

At its peak, yield farmers could have earned over 200% annual percentage yield (APY) on certain platforms. It wasn’t easy, though. Crypto traders of yesteryear had to interact with complex DeFi protocols to double their holdings. After solving for complexity, how sustainable is Ethereum’s agrarian age?

Ethereum’s Hunter Gathers Take to the Fields

Amid the ICO boom of 2017, the game was simple. 

Market participants simply needed to find a promising token and spread the good word. After the project had bootstrapped millions of dollars, early investors waited patiently for a token listing on a top exchange. 

After dumping their tokens, investors would return to the cryptosphere in search of the next obscure project. Rinse and repeat.

Indeed there are exceptions to this model. Some ICO participants never sold upon reaching a token listing, claiming that they were invested over the long term. This behavior has undoubtedly been the case with big-name projects like Ethereum, Neo, Tezos, and a few others. 

Still, for an example of the hunter-gatherer behavior of 2017, consider the little known project Spectrecoin. Pitched as a privacy-centric cryptocurrency, the team ran an ICO from November 2016 to January 2017 and sold each token at $0.001. 

Today, this obscure token trades at $0.08, but this wasn’t before an eye-watering rise to $6.28 in January 2018. 

Spectrecoin (XSPEC) price action. Source: CoinGecko

Though it appears the token does enjoy some trading volume, the project’s story has ultimately concluded. XSPEC is ranked #530 on CoinGecko, and after reviewing its site, there have been few developments as of late. 

During this period, a project’s value hinged primarily on its over-hyped token. Investors made money mainly by catching small-cap tokens that mooned, or by day trading. These two activities still exist, of course. 

But these days, yield farming offers yet another money-making mechanism. 

This trend refers to the booming lending and borrowing landscape in DeFi. Instead of buying a token and hoping it appreciates, users can lend any number of tokens on platforms like Aave, Compound, Balancer, and Synthetix and earn a percentage for providing liquidity.

Balancer and Compound have taken this trend one step further. To accelerate activity, each platform has launched a governance token, BAL and COMP, respectively. Users can earn these tokens in proportion to the amount of liquidity they supply to a system. 

Though these tokens come with governance capabilities, they also hold pure USD value. Put otherwise, Balancer and Compound users can earn free money for using each platform.

2017 – Buy my token to use my service.

2020 – Use my service and earn my token.

— Eril Gün Ezerel (@eeril) July 4, 2020

Still, Jack Lipstone of Rari Capital believes it’s far more tenable than the ICO model. He told Crypto Briefing in an interview: 

“ICOs were fundraising on promises and pretty websites; this set of tokens is different: they have functional products, they have hundreds of millions in volume, they are providing value instead of just extracting it. While most of the tokens are being pitched as exclusively governance tokens, the token holders can evolve the token into something much more reminiscent of traditional equities with dividends, votes, and much more. We are not only unlocking liquidity into DeFi, but we are also building healthy financial infrastructure.”

The new token economy, according to Lipstone, looks far more like an actual economy and less like a yard sale. For all its promise, however, the model isn’t without its risks. 

Amateur financier’s run the risk of liquidation if they are not paying attention to the nature of the underlying asset. This danger becomes even more apparent as projects like InstaDapp allow users to leverage their positions to maximize their gains. 

I just went short on $USDT using $DAI as collateral on https://t.co/cnckUC54V0 using maximum $COMP mining recipe.

Looks like I'm earning way more than I'm paying interest with the current $COMP price hovering around ~$60.#YOLO pic.twitter.com/03YGZm0Jui

— Samyak Jain (@smykjain) June 15, 2020

Michael Anderson, a co-founder at Framework Ventures, told Crypto Briefing that “a low liquidity asset like could get pumped and liquidate many positions.”

Before Compound’s latest governance change, users were able to lend their Basic Attention Tokens (BAT) and earn up to 45% at its peak. The danger here lies in BAT’s volatility; any significant price swing and lenders risk losing their entire position.

Ultimately, the rise of yield farming within the Ethereum community marks a new era. Indeed there are major risks involved, especially as short-sighted speculators game the system. 

But as this trend matures and leaves its Spectrecoin-like hype cycle behind, users will have real incentives to continue interacting with various DeFi platforms. Entering the next era and increasing utility now hinges on fine tuning incentives and improving Ethereum.

A Bronze Age of innovation would thus be one that upgrades the substrate upon which DeFi operates. These improvements include scalability developments in the way of ETH 2.0 as well as retooling Ethereum’s emerging fee market. What comes next, only time will tell.