Yield Farming $BOND: The Risks Involved

General Risks & Yield Farming

When the BarnBridge team was thinking through the best mechanisms to release $BOND into the market, we decided upon Proof of Capital. There were various reasons we decided to go with this distribution mechanism but to keep this short: we need liquidity on our network in order for product structuring to work properly.

We called this a “fair” distribution which is a relative term given that life isn’t fair & fair itself is a relative term that can mean equal outcome or equal opportunity. We believe that, in our mechanism of distribution, every $1 is worth $1. This means that if person 1 puts in $10,000 in our yield farming pools, their $10,000 is weighted no differently in it’s distribution as person 2 who put in $10,000,000 (ten million dollars consists of 1000 different $10,000 chunks which will get an equal amount of $BOND as the $10,000 from person 1).

That’s how we define fair, and philosophy aside, with ICOs banned in most jurisdictions, there aren’t many ways to ensure a distributed network that are any more “fair” much less tested than yield farming.

The idea is simple: put an asset in a pool for a set period of time, and you are returned the asset staked, along with an additional asset you are rewarded for “proving” you had capital.

The reason Proof of Capital works is because there are risks associated. As we’ve seen with some of the recent “rug pulls” and “hacks” there is a real scenario you can lose all of your funds staked by proving capital. There is also opportunity cost that your money would have been better placed somewhere else. In some ways, Proof of Capital could be called Proof of Risked Capital. Nothing in crypto is completely safe. Nothing in traditional finance is completely safe.

Rug pulls are when the creator of a yield farming pool executes some type of back door to pull the staked funds from a pool.

Hacks can happen when someone finds a vulnerability in a smart contract, sometimes even by the creators of the smart contract, extracting all funds to an anonymous wallet that are then sent somewhere else to be sold.

Further, pools often require numerous assets as pairs that are not directly correlated (meaning the assets in the pool can fluctuate in value causing loss greater than the value being farmed from the pool). This is called impermanent loss.

So let’s talk about impermanent loss.

In short, you can think of impermanent loss as putting up a group of tokens or single token in a pool that earns something that has value in return, but the underlying value of what you staked in the pool diminishes. You may still get an APY from the pool, but you lose money on the staked token to get the APY creating a loss denominated in ETH or USD (however, you track back to your baseline).

This risk of impermanent loss in our pool 1 was really only possible if one of the stablecoins went unpegged (which is why we didn’t include Tether to everyone asking).

BarnBridge’s pool 1 was built to REDUCE impermanenet loss. In part because of that, we are certainly one of the largest stablecoin yield farming pools to have ever existed. We’re super excited about that.

Pool 2 introduces 3 additional sets of risk:

1. Smart Contract Risk separate from Pool 1

2. Loss of Value of the underlying Tokens ($Bond and/or $USDC)

3. Impermanent Loss — which occurs whether $BOND (or $USDC) goes down OR up as a result of x*y=k

If you want to learn more about how impermanent loss works you can read this in depth article on the topic: https://medium.com/@pintail/uniswap-a-good-deal-for-liquidity-providers-104c0b6816f2

Pool 1 vs. Pool 2.

However, there are some things the community needs to know as we move from Pool 1 to Pool 2 and the tokens get distributed.

A few things before we get started:

1) We’re super excited about the reception of the launch of BarnBridge & $BOND. You’ve exceeded our wildest expectations of support for the protocol and we only hope it continues.

2) When we set up our distribution methods, we weren’t expecting for our pool to be 20x larger than any yield farm chasing after a no price token (a token that has never been bought or sold before) in history. We’re not bragging here — it’s important to understand we designed our distribution and float to accommodate, at best, 20x less of a pool size.

3) Many people in the community painted BarnBridge as a “safe” yield farming pool. This is a relative term as there is always the risk for a smart contract failing or getting hacked as we explained in the general overview. However, we’re a few days in and it seems the mechanisms are working to plan. The team is solid and has a reputation in the space. We also built it as a stablecoin pool so there isn’t upside and downside volatility. We didn’t include Tether because of peg risk.

However, “safer” doesn’t mean zero risk. It’s safer to jump out of an airplane with a parachute than it is to jump out without one, obviously. It’s also safer to not jump out of an airplane at all. Life happens fast.

We feel it’s important for us to warn people who are just learning how to yield farm, and even for the people well adjusted in this arena who ape into unaudited smart contracts: pool 2 has NONE of the price related safety risk as pool 1. The contracts will be “safer” as it’s a Uniswap pool vs. a new mechanism we built from scratch (at least from a smart contract risk perspective). The same team who built pool 1 designed the distribution mechanisms for pool 2. However, there is a real and much higher risk for impermanent loss. This is substantially higher for people who buy from the Uniswap pool to double down in the pool for additional rewards. Your APY earning from the pool could easily be eclipsed by a far greater loss caused by volatility during price discovery.

Joining pool 2 is far more speculative than joining pool 1. It’s like poker — there are pros in pool 2 just like there are card sharks in casinos.

It’s not the role of the BarnBridge team to figure out the price of the $BOND token. It’s the role of the community and the people participating in an automated market making pool that allows users to trustlessly swap $BOND tokens establishing an equilibrium for price. It would be severely unethical for us to publicly speculate whether we think the price will be high or low but we CAN warn that it very well may be volatile and the community should understand the risks related to that.

On October 26th, $BOND tokens will be distributed into the wallets of the yield farmers who put up $200m (as of the time writing this on October 22nd) to farm 32,000 $BOND tokens, along with 22,000 more $BOND tokens which unlock in the fair vesting contracts for founders, seed investors, and advisors.

These 54,000 tokens which will be unlocked on October 26th is known as our float.

That means there will be a sum total of 54,000 $BOND tokens out of a 10,000,000 (ten million) $BOND token supply circulating in the market. The total of number of tokens circulating in the market is known as our market capitalization, or market cap. Websites like Coinmarketcap & Coingecko who white listed $BOND the day after our farms opened currently show our current price as $0 with 0 total circulating supply.

On October 26th, the $BOND token will be worth “?” x 54,000 as it’s market capitalization.

Easy right? Not so fast.

There are still 9,946,000 $BOND tokens that WILL be distributed to the market eventually. A number that often is ignored in crypto is what is known as fully diluted market cap. That means that the sum total of $BOND that will eventually be in the market at full dilution.

In other words, the actual value of all $BOND tokens will be 185x higher, at full dilution, than the listed market cap on most websites.

Further, with a pool size as large as the $BOND pool, there are good actors and there are bad actors. While some of the pool consists of people who legitimately believe in the long term value of our project, there are also robo-farmers and opportunists who know full and well the difference between market cap, fully diluted market cap, low floats, and their affect on price. Individuals with large amounts of $BOND at inception will not only look for ways to make money off less experienced participants, they may actually try to manipulate the market.

Some of these opportunists will have large followings, and they may seem like they’re putting out well thought out pieces on why they are bullish or bearish on the $BOND token, the team, or just about anything they can to pull on the emotional strings of market participants to achieve their desired outcome. In the industry, we call this psyops.

Some people who FUD (spreading fear, uncertainty, and doubt about a project) the token may only be doing so in order to accumulate the supply of something they want to own more of at a cheaper price. Worse, some people who release thought pieces on why they are bullish on the team, the space, the token, the project, and everything that is related to how BarnBridge “can and may change traditional finance forever” are only doing so to pump the price so they can dump it on the true believers who buy into their psyops (literally). This may be a anonymous Twitter account with a cute and harmless avatar who acts like your “fren” or it may be a major investor or influencer in the space.

On October 26th, nobody is your friend. You have to DYOR (do your own research). If you see a ton of people in pool 2, that doesn’t make it any more safe.

If this article doesn’t make sense to you, or you thought it was a great and well thought out piece where you learned a ton of new information — you may want to think very hard on whether you understand the risks of moving real funds into pool 2. It may be a great idea for you or you may lose real money.

Only risk what you can afford to lose, or don’t risk money at all.

Right now, if you are in pool 1 farming $BOND token, you are proving you are willing to put your capital at risk to earn a pre-disclosed reward. If you decide to join pool 2, you are making a price assumption that you are not making in pool 1.

There are many people who have speculated that pool 2 will be less competitive than pool 1. It very well may be: there is more price risk associated in pool 2 than there is in pool 1. One reason there is so much money in pool 1 is because of our efforts to make pool 1 less risky than comparative pool 1 yield farming efforts up to this point in the ecosystem. As I communicated before, these price protections do not exist in pool 2.

My advice to you is to make your own decisions on October 26th for what you think a token like $BOND should be worth and behave accordingly.

Just keep in mind that nobody is your “fren” unless you actually know and trust that person. Do not FOMO (fear of missing out) into pool 2 because you see a ton of people bragging (understand they could be potentially lying) about making money in pool 2 if you don’t know what you are doing. That person bragging about making money in pool 2 could very well be a robo-farmer encouraging people to ape into pool 2 to dump their $BOND tokens on them.

Again, if you don’t know what any of this means, just understand that you can lose money in pool 2.

If you want to learn more about how impermanent loss works you can read this in depth article on the topic: https://medium.com/@pintail/uniswap-a-good-deal-for-liquidity-providers-104c0b6816f2