DYOR: Choosing A DeFi Farm For Investment

Dmitry Mishunin, the founder and CEO of a DeFi security and analytics company HashEx

The cryptocurrency market is growing, and more decentralized protocols and tokens are coming on the scene every day. However, a sizable chunk of new ones turn out to be a waste of your time if you bother investing your money in them. 

Unfortunately, most modern farms are created according to a pyramid scheme, reaching significant APR values due to the constant flow of new investors, and even knowing this, many people are ready to play this game for profit. 

How to choose a farm for investment

First and foremost, pay attention to 2 proposed parameters - TVL (total value locked) and APR (annual percentage rate) of the farm.

The higher the TVL value, the better, so look for farms and pools with a TVL over $500,000-$1m. It is worth not paying attention to unrealistically profitable pools with APYs surpassing 600–1,000%. More realistic APYs in trustworthy pools would be between 10–300% for pools with cryptocurrencies and tokens and from 3% to 20% and even 30% for stablecoin pools. For example, a farm with a TVL of 1m dollars and an APR of about 100% is most likely acceptable.

If the first step leaves confusions, go check the project’s social pages and see how its community behaves. If the Twitter account has less than 1,000 subscribers and there is no activity on the page from the community, it is a red flag showing that the project is more or less dead. The same applies to Telegram groups. If a project has none to little social activity on its social media channels, it shows that there is no interest in the project from the audience, so there is no financial activity on the protocol. Then, it is worth checking the availability of a security audit and the reliability of the auditor as this information will give you insight as to the safety for your funds being locked in a platform’s smart contract. Good projects always go through multiple audits with first-tier auditors.

Also, you should consider the market performance of the token that the farm pool offers to farm, the liquidity lock of this token, the period of the lock, its capitalization among other things, as well as the number of holders. Cryptocurrency can be very volatile, so it's worth considering the risks. According to statistics of the blockchain analytics platform AnalytEx, only 20% of new liquidity mining protocols have a total value locked (TVL) that is sufficient to make the platform attractive for investors. It means that 80% of new DeFi protocols are not suitable for investments or do not have an active community. 

Always DYOR

In order to recognize the reliability of the farm it is enough to compare the values ​​of TVL and APR, study the token for reliability and volume, and also pay special attention to the social networks of the project. It is the most reflective indicator of how things are going in it. If the audience is very small and inactive, it would suggest that trading volume in its pools is very small or even non-existent.