What happens to LP if a protocol disappears?

I guess this one is for more seasoned defi investors.

I am a fully believer of defi as the future of investments, however still learning and I am trying to assess risk I might wanna take.

This might be a stupid question (sorry if it is), if I invest in a “safer” stablecoins or BTC-ETH Liquidity Pool plus Farming,

1. what happens if protocol where Liquidity is provided to disappear?
2. what happens if protocol where LP farm is disappear?

Am I still able to recover the original coins or am I doomed?

View Source

7 thoughts on “What happens to LP if a protocol disappears?”

  1. Let’s take Uniswap as an example. Every liquidity pool is a smart contract, that doesn’t have an owner or administrator. Nobody can destroy it or make it disappear. The smart contract code will exist forever (it cannot be destroyed). The only way for LP tokens to move out of the pool is for liquidity providers to withdraw them.

    Not all protocols function like that. Sushiswap LP pools work exactly as described above, however their farming contracts have a “migrate” function that an admin cal call. This allows the admin to move all LP deposited in the farming contract to a different address. People accept this risk as they trust that Sushiswap is not going to steal their tokens, however Sushiswap can steal user tokens deposited in their farming contract if they choose to do so.

    That’s why security audits exist – if you read an audit it will tell you all the (known) risks associated with admin controls. Audits are not perfect and they often miss fatal bugs, but they’re still useful.

    Here are some high level checks you must perform to make sure that a protocol can’t disappear with your tokens:

    * Is the code audited (they may have an audit of a previous version, that doesn’t mean that the new version is safe)
    * Is the smart contract on chain verified, and does it 100% match the audited code
    * When using the protocol do you interact with the smart contract directly, or with a proxy? If it’s a proxy can the proxy implementation be changed? If yes the proxy admin can take all user funds.

  2. You can’t really remove a decentralized protocal once it’s been deployed. Even if the front end website is removed the smart contract will still be available, you can access them pretty easily via a block explorer like etherescan.

    Obviously that’s only the case for DeFi, if you’re using some ‘CeFi’ platform then you’d just be shit out of luck if the protocol is removed.

  3. I stumbled across a total degen yield farm, cant recall the exact name but it had the theme of a coal mine. I caught it on the release day, they had some crazy APY on Dai (single coin stake) think it was over %2000. So I thought “stablecoin, they cant screw with that” so I put in $100 for fun, boy was I wrong. They paid out in the native site token, so on that same day, they:

    – they paid APY in their native coin, which accumulated fast, it was really slow then blocked rewards withdrawals for a while, then they made it impossible to swap the token to something else, they slowly increased slippage. But you could easily restake the token.

    – and the token itself dropped like a rock

    – i managed to get out the same day with $120 after spending hours watching, trying to withdraw etc and adjusting slippage etc.

    the next day the site was a shell, zero liquidity left in any pool.

    There was some kind of presale, all in all there was probably over $100k blew through there in one day.

    The point is that with bad actors they can do what they want with contracts .

    [rugdoc.io](https://rugdoc.io) is a good place to check, although I think this site was on it and passed an audit. I knew it was a degen site and the liquidity was pretty low so I knew what I was getting into but many dont.

  4. Generally your LP’s future depends on whether the contracts were malicious or not. Usually websites don’t disappear if they’re not malicious, but it can go any which way. For exactly some honest actors might be hit by Russia sanctions and go down or underground. If the contracts are benign then you never lose the LP, it’s there to be withdrawn by calling the correct contract. In pragmatic terms this might mean that somebody more capable in the community restores/reconstructs a website or a script with the right contract call. They might even be motivated to restore the whole website, except that the website was funnelling profits/fees/entities to some other wallets/entities, so they might create migration contracts that instead redirect profits to them. On the bright side, if the contract was profitable you’ll continue making profits while others are trying to sort out this mess!

  5. Anyone know anything about MetaFiyielders.com? I’ve seen a bunch of websites saying it’s a scam but I have yet to see any proof of actual scamming taken place. Nobody has submitted anything indicative of being scammed yet. I’m pretty new to Defi investing and just like the op said I do believe defi lending is the future of investments.

  6. There was another site I was looking at that still exists, Jade protocol, it was an ohm fork. They are the craziest nut jobs I ever came across in defi. When it started to crash (like all ohm forks did) back in Dec. Rather than prop up the price with the treasury like it stated in their whitepaper, they did nothing and let it crash. They then blamed the investors for not being Diamond hands and living up to 4,4 like they were supposed to. They didnt block withdrawals but many left it in because they had lost so much. They stopped paying out interest and bonds were negative. So rather than try to pay out the treasury ($22 million) or restart the this rebase with new tokenomics like many others did. They just said “guess what everyone, we are now the greatest crowdfunded VC, Diamond hands everybody, you will be rewarded” they have made an number of very questionable investments in existing projects and no sign of anything, 4 months later, no sign of anything other than a lot of talk. They have some die hard suckers still in.

    I should add there is liquidity still there, people can withdraw it if they want but ohm forks and others accumulated a backing treasury through bonds mostly. That treasury of $22 million is under the owner/dev control. The owners bought investments with the treasury without asking users, they did claim they were user driven and had a voting mechanism which they just ignored. And if its not obvious they suddenly changed to being a VC without asking, many think its illegal for a financial project like this to change to another business, there is alot of money at stake, some people were trying to get a class action lawsuit going.

    And really in most cases any of the voting, Dao aspects give a false sense of input and control. There are many sites that do but you need to check it out carefully.

  7. A good place to find out what happens to protocols is to look at [rugdoc.io](https://rugdoc.io) there are some that hard rug but many just empty and are a shell. So if you take a look at many of the older sites there a tons that are empty and by empty I mean zero or a few $$ liquidity. You could probably add to the liquidity if you wanted to.

    The site I was referring to in the earlier post was [https://thecoalfarmdefi.com/farms](https://thecoalfarmdefi.com/farms) its empty, emptied in 48hrs but it was checked out by [rugdoc.io](https://rugdoc.io) but they can only do so much and it looks like they gave them feedback and re-adjusted their contract.


Leave a Comment