Vitalik Buterin: DeFi Yield Farmers Go Brrr More Than Central Banks

Vitalik Buterin, the co-founder of Ethereum, is still skeptical of the latest craze that’s befouled his blockchain—yield farming.

On Ethereum, you get decentralized lending protocols and market makers. The details vary, but the important part is protocols reward you for putting cryptocurrencies into smart contracts with... more crypto!

Then came yield farming, where protocols would give you even more crypto, this time in the form of so-called governance tokens, for choosing their platform above others. yEarn’s $YFI, Compound’s $COMP and Aave’s $LEND are prime examples. 

Gumptious community members can use these tokens to vote on proposals to update the network, but another reason people farm these governance tokens is because they are worth lots of money—more each day, with some DeFi yield farming protocols promising returns of 2,000% a year. 

Buterin thinks the market is unsustainable. 

“Seriously, the sheer volume of coins that needs to be printed nonstop to pay liquidity providers in these 50-100%/year yield farming regimes makes major national central banks look like they're all run by Ron Paul,” he tweeted today, with reference to the former libertarian-minded Republican Congressman who famously called for the end of the Federal Reserve during his run for president.

In other words, the way yield farmers are going, central bankers and their brrring money printers might seem conservative by comparison, according to the Ethereum co-founder.

To encourage deposits, DeFi lending protocols and decentralized exchanges must constantly dangle lucrative rewards in front of their investors. But if everyone does that, those operating the protocols must constantly find ways to create new value to convince investors to increase their deposits into various protocols. 

Meme coins, governance tokens, yield farming—all these are examples of value, plucked from thin air, as incentives to keep investors playing. It’s working for now, while the hype around the market still exists, but Buterin doesn’t think it’s sustainable. “The thing is, I see no plausible path toward them generating cash flows. That requires building applications that generate fees,” he said. 

“And so far the only strategy toward generating long-term fees that I see is some kind of weird financial attack to grab liquidity and steal network effect from uniswap. And I'm pessimistic on that strategy,” said Buterin. (Here, he may be referencing Sushiswap, a kind of “Uniswap plus yield farming” tool that’s piggybacking off of Uniswap’s market). 

“I personally am steering clear of the yield farming space completely until it settles down into something more sustainable,” he said. 

Earlier this month, Buterin cautioned investors against yield farming. “You do NOT have to participate in ‘the latest hot DeFi thing’ to be in Ethereum. In fact, unless you really understand what's going on, it's likely best to sit out or participate only with very small amounts,” Buterin warned.