So a few days ago I joined a yield farm with two tokens that advertised a very high yield, as in over 2000% APY. But since then, the total value has actually decreased! Not by much, but from $205 total value to $204. This makes no sense, since at that high of an APY, I think I should see some increase even on a daily basis. The value of the two tokens involved is stable or increasing over the timeframe. What could be happening?
Inflation
Impermanent Loss
Edit: and token value decreasing as well.
20x the coins doesn’t mean 20x the money
It’s expected coz the reward is in volatile and high inflationary token.
Simple illustration:
– They have 1Million token “X”
– 300K token “X” is added to liquidity pool with some ETH
– 700K token “X” they give it for free bia staking vault with very high APY e.g. 200%
– So we buy the token “X” with our real money in order to get more token “X” or the APY
– in the end they successfully creating money from thin air, and we lose our money
Impamanent loss at play. As long as they are not both stables, then these decreases will be seen. To burst your burbles, you might end up half of your stake at the end of the year hahaha. It’s crazy right?
I guess this is why many prefer single-side staking compared to providing liquidity. I stake on Tetu, Dafi protocol too, and not that you don’t get IL with your stakes, but it’s not as devastating as LPing, and ofcus, your token number runs up.
Of course the value dropped.
To get that value, you have a trading pair with at least one shitcoin. You expect a stable investment paying 2000%?
Lmfao. Google impermanent loss. There’s no free money. Those high rates entice people to join in on what is generally a shitty investment.
Factors that decrease your LP value, coin going down in value ( either of the two posted) and impermanent loss. The yield can be more than or less than either previously mentioned loss you will have to do your own math. In general as more people commit capital the yield declines, as the yield declines so does the value of the at least one of the tokens. Play carefully and read up on impermanent loss to better understand farming position risk. Good luck to you.
Based on the info provided, I think all of the other responses to this post are wrong. While IL is certainly a very real issue when farming high APR shitcoins (which this clearly is given the yield), that’s not the issue here since the OP mentioned that the two assets in his LP are price-stable or increasing. And to be clear, IL doesn’t always result in losing money (in $$ terms), it’s just the opportunity cost vs. holding the two assets separately. If you have an LP with 100 tokens of A ($1/token) and 100 tokens of B ($1/token) and token A increases by 100x, the total value of your LP will be significantly higher than the starting value of $200 despite the impact of IL.
Additionally, APR/APY’s are measured in $-terms. If that yield is being paid in a rapidly deteriorating shitcoin, then the APR of the pool would drop alongside the price. I’m guessing that the reason the value of your deposit hasn’t changed is because it’s only displaying the value of your LP, not your rewards. Most farms will separate your LP from your earned rewards.