Daily Chain Claims: “Lattice Will Make Yield Farming Bearable”
In only 11 years cryptocurrency has created an entirely new sector of financial technology. By solving the problem of “double spending” and digital scarcity, blockchain solutions are now beginning to encroach upon the banking industry. One of the hottest and most controversial developments has been the rise of yield farms. These are incredibly high-risk investments with little to zero oversight. Code bugs, faulty UI, and greed permeate yield farms to the degree that would humble Gordon Gecko.
Despite these drawbacks, they remain extraordinarily popular due to the potential for massive and rapid returns. In this piece, we will examine the phenomenon of Yield Farms and see what sort of improvements will be possible through Lattice.
The nuances of yield farms are legion. Between pools, reward tokens, staking, smart contract audits, and lockups, the number of variables is nearly too high to count for the casual user. For simplicity, we will focus on what may be the three archetypes of Yield Farms: Rug Pulls, Short Term, and Medium Term.
The smart contracts of yield farms can be challenging to read, let alone understand. This barrier to entry can lead to users interacting with smart contracts that may be promising a limited token supply but may be programmed to print an infinite number of reward tokens.
A developer may use this feature in the code to drive up the price of their token before unloading their share on an unsuspecting market. This is the “Rug Pull,” a move that destroys price and user confidence, or takes down the website — accomplishing the same thing.
The inability to verify smart contracts leads directly to rug pulls. Users may be buying up tokens they are being told are scarce, but in fact, can be printed into infinity. This continual dilution of value leads to hyperinflation and a severe price drop. We have recently seen several projects fall on this sword, as greed overtakes logic and risk management strategies. Onlookers from traditional markets may look at these and label crypto a “scam,” patting themselves on the back for not getting involved.
Unfortunately, these are the projects that receive the most attention.
- Life expectancy 1 to 7 days, some less than 24 hours
- Team — Anonymous
- Yields of 1,000–100,000%
For projects with an actual team and valid smart contracts, the prospects look more promising. There will be a more active Telegram or Discord, developers will engage and answer questions, and the website will not be a copy of Sushi Swap or other popular yield farms. Yields will be less than their outrageously high rug pull counterparts. These projects may bring one or two innovations and have a lower rate of return.
- Life expectancy 7 to 30 days, loss of interest may sink price
- Team — Pseudonymous, 1–5
- Yields of 100–1,000%
The most “stable” of yield farms will most resemble actual software projects. As yield farming is such a new development in the blockchain space, there is no “Long Term” project category. But for the more secure farms, social media channels, community members, chatty admins, and active Github repositories will all be present. There will be a sense of community and less of the “Give me money NOW” attitude. Look for actual innovation or an improvement over current industry practices.
The devs tokens may also be held under a timelock, which keeps them from selling their founder tokens. There may also be some automation that keeps micromanaging to a minimum.
- Life expectancy 30+ days
- Team 2–7, Pseudonymous or identified via LinkedIn
- Yields of 1–100%
One glaring flaw in these yield farms is the constant need for micromanagement. Higher risk pools can drop in value at any time, and the more stable pools still require constantly withdrawing rewards, adding liquidity, or converting to different crypto to reduce exposure. This “tending” process can require hours of diligent attention.
What is the Ideal System?
Having laid out what is wrong with yield farming, let us explore how an ideal yield farm would operate.
Any financial platform should be somewhat resistant to volatile price action. There will need to be enough liquidity in the system to resist large holders that could cause prices to spike up or down.
Transactions would be instantaneous with small fees. Low fees will encourage interaction with the platform while allowing users to experiment with its features without cutting into their profits. To date, only Binance Smart Chain has come close to implementing this for yield farms.
Easy entry and exit
The ideal yield farm will have a “one-button exit” option, which means users can exit their position and withdraw all funds and liquidity. Currently, multiple steps are required to accomplish this.
Price Alerts and Orders
Most yield farms are Uniswap clones and inherit all its drawbacks. There are no real-time order books, limit orders, or volume indicators. To accurately monitor a yield farm’s health requires multiple tabs, and there is often a delay in the information. There needs to be a way to have all this data easily accessible.
For the hands-off investor, these should be an automated system to handle the yield farming steps. Like a trading bot, a user should be able to input their risk tolerance, price slippage, and profit/loss preferences. Preserving capital with an automated system could churn out profits throughout the day without the fear of rug pulls. There is currently no system to handle all of these variables on a single chain, let alone in a cross-chain ecosystem.
Lattice as a Solution
Does Lattice solve these issues? Not at the outset. As long as there is capitalism, there will be those who make money and lose money. However, Lattice does have all the tools to limit the risk and downside of yield farming.
Price stability can be solved by tapping into liquidity providers as we have detailed in the past.
Lattice will have the ability to execute algorithmically complex orders across multiple exchanges. With these functions, both market and limit orders will be easier to code and implement. Lattice’s programmability will enable users to exit positions faster and with fewer fees in a more automated manner.
For the “legacy” yield farmers, Lattice’s cross-chain features will let ERC-20 tokens be swapped instantly for tokens on the Hypergraph Transport Protocol (HGTP) network. Operating across blockchains would increase the liquidity for yield farms and any project that uses an ERC20 token.
Wrap it Up
After reading through the challenges and issues with yield farming, astute readers may wonder why Lattice involves itself in such a new and risky ecosystem. The fact of the matter is Lattice is not doing anything; it is a base-layer protocol designed to power the next generation of DeFi systems. The current blockchain systems are struggling to handle the demands of DeFi, and Lattice has several clear advantages over them. Innovating and improving these nascent platforms will undoubtedly lead to even more efficient capabilities. These improvements may only exist on a whiteboard at the moment or in the brain of an ambitious developer. Remember, in 11 short years, the industry progressed from Bitcoin to smart contracts, to returns on food-based yield farms. Whatever the next 11 years bring us, Lattice is likely to be a cornerstone of the architecture it powers.
Original post by Carlos Park on here on The Daily Chain.
Carlos has been actively involved in cryptocurrencies since 2014 and since then has authored multiple articles and reviews, edited podcasts, and acted as an advisor for several projects related to blockchain technologies.
Visit Carlos on Twitter.