Is education the key to curbing the rise of scammy, high APY projects?

Is education the key to curbing the rise of scammy, high APY projects?

As DeFi projects offering insane returns continue to infiltrate the market, experts believe that investors need to better equip themselves to avoid such scams.

Most people who have dealt with cryptocurrencies in any capacity over the last couple of years are well aware that there are many projects out there offering eye-popping annual percentage yields (APY) these days. 

In fact, many decentralized finance (DeFi) protocols that have been built using the proof-of-stake (PoS) consensus protocol offer ridiculous returns to their investors in return for them staking their native tokens.

However, like most deals that sound too good to be true, many of these offerings are out-and-out cash grab schemes — at least that’s what the vast majority of experts claim. For example, YieldZard, a project positioning itself as a DeFi innovation-focused company with an auto-staking protocol, claims to offer a fixed APY of 918,757% to its clients. In simple terms, if one were to invest $1,000 in the project, the returns accrued would be $9,187,570, a figure that, even to the average eye, would look shady, to say the least.

YieldZard is not the first such project, with the offering being a mere imitation of Titano, an early auto-staking token offering fast and high payouts.

Are such returns actually feasible?

To get a better idea of whether these seemingly ludicrous returns are actually feasible in the long run, Cointelegraph reached out to Kia Mosayeri, product manager at Balancer Labs — a DeFi automated market-making protocol using novel self-balancing weighted pools. In his view:

“Sophisticated investors will want to look for the source of the yield, its sustainability and capacity. A yield that is driven from sound economical value, such as interest paid for borrowing capital or percentage fees paid for trading, would be rather more sustainable and scalable than yield that comes from arbitrary token emissions.”

Providing a more holistic overview of the matter, Ran Hammer, vice president of business development for public blockchain infrastructure at Orbs, told Cointelegraph that aside from the ability to facilitate decentralized financial services, DeFi protocols have introduced another major innovation to the crypto ecosystem: the ability to earn yield on what is more or less passive holding. 

He further explained that not all yields are equal by design because some yields are rooted in “real” revenue, while others are the result of high emissions based on Ponzi-like tokenomics. In this regard, when users act as lenders, stakers or liquidity providers, it is very important to understand where the yield is emanating from. For example, transaction fees in exchange for computing power, trading fees on liquidity, a premium for options or insurance and interest on loans are all “real yields.”

However, Hammer explained that most incentivized protocol rewards are funded through token inflation and may not be sustainable, as there is no real economic value funding these rewards. This is similar in concept to Ponzi schemes where an increasing amount of new purchasers are required in order to keep tokenomics valid. He added:

“Different protocols calculate emissions using different methods. It is much more important to understand where the yield originates from while taking inflation into account. Many projects are using rewards emissions in order to generate healthy holder distribution and to bootstrap what is otherwise healthy tokenomics, but with higher rates, more scrutiny should be applied.”

Echoing a similar sentiment, Lior Yaffe, co-founder and director of blockchain software firm Jelurida, told Cointelegraph that the idea behind most high yield projects is that they promise stakers high rewards by extracting very high commissions from traders on a decentralized exchange and/or constantly mint more tokens as needed to pay yields to their stakers. 

This trick, Yaffe pointed out, can work as long as there are enough fresh buyers, which really depends on the team’s marketing abilities. However, at some point, there is not enough demand for the token, so just minting more coins depletes their value quickly. “At this time, the founders usually abandon the project just to reappear with a similar token sometime in the future,” he said.

High APYs are fine, but can only go so far

Narek Gevorgyan, CEO of cryptocurrency portfolio management and DeFi wallet app CoinStats, told Cointelegraph that billions of dollars are being pilfered from investors every year, primarily because they fall prey to these kinds of high-APY traps, adding:

“I mean, it is fairly obvious that there is no way projects can offer such high APYs for extended durations. I’ve seen a lot of projects offering unrealistic interest rates — some well beyond 100% APY and some with 1,000% APY. Investors see big numbers but often overlook the loopholes and accompanying risks.”

He elaborated that, first and foremost, investors need to realize that most returns are paid in cryptocurrencies, and since most cryptocurrencies are volatile, the assets lent to earn such unrealistic APYs can decrease in value over time, leading to major impermanent losses. 

Related: What is impermanent loss and how to avoid it?

Gevorgyan further noted that in some cases, when a person stakes their crypto and the blockchain is making use of an inflation model, it’s fine to receive APYs, but when it comes to really high yields, investors have to exercise extreme caution, adding:

“There’s a limit to what a project can offer to its investors. Those high numbers are a dangerous combination of madness and hubris, given that even if you offer high APY, it must go down over time — that’s basic economics — because it becomes a matter of the project’s survival.”

And while he conceded that there are some projects that can deliver comparatively higher returns in a stable fashion, any offering advertising fixed and high APYs for extended durations should be viewed with a high degree of suspicion. “Again, not all are scams, but projects that claim to offer high APYs without any transparent proof of how they work should be avoided,” he said.

Not everyone agrees, well almost

0xUsagi, the pseudonymous protocol lead for Thetanuts — a crypto derivatives trading platform that boasts high organic yields — told Cointelegraph that a number of approaches can be employed to achieve high APYs. He stated that token yields are generally calculated by distributing tokens pro-rata to users based on the amount of liquidity provided in the project tracked against an epoch, adding:

“It would be unfair to call this mechanism a scam, as it should be seen more as a customer acquisition tool. It tends to be used at the start of the project for fast liquidity acquisition and is not sustainable in the long term.”

Providing a technical breakdown of the matter, 0xUsagi noted that whenever a project’s developer team prints high token yields, liquidity floods into the project; however, when it dries up, the challenge becomes that of liquidity retention. 

When this happens, two types of users emerge: the first, who leave in search of other farms to earn high yields, and the second, who continue to support the project. “Users can refer to Geist Finance as an example of a project that printed high APYs but still retains a high amount of liquidity,” he added.

That said, as the market matures, there is a possibility that even when it comes to legitimate projects, high volatility in crypto markets can cause yields to compress over time much in the same way as with the traditional finance system.

Recent: Terra 2.0: A crypto project built on the ruins of $40 billion in investors’ money

“Users should always assess the degree of risks they are taking when participating in any farm. Look for code audits, backers and team responsiveness on community communication channels to evaluate the safety and pedigree of the project. There is no free lunch in the world,” 0xUsagi concluded.

Market maturity and investor education are key 

Zack Gall, vice president of communications for the EOS Network Foundation, believes that anytime an investor comes across eye-popping APRs, they should merely be viewed as a marketing gimmick to attract new users. Therefore, investors need to educate themselves so as to either stay away, be realistic, or prepare for an early exit strategy when such a project finally implodes. He added:

“Inflation-driven yields cannot be sustained indefinitely due to the significant dilution that must occur to the underlying incentive token. Projects must strike a balance between attracting end-users who typically want low fees and incentivizing token stakers who are interested in earning maximum yield. The only way to sustain both is by having a substantial user base that can generate significant revenue.”

Ajay Dhingra, head of research at Unizen — a smart exchange ecosystem — is of the view that when investing in any high-yield project, investors should learn about how APYs are actually calculated. He pointed out that the arithmetic of APYs is closely tied into the token model of most projects. For example, the vast majority of protocols reserve a considerable chunk of the total supply — e.g., 20% — only for emission rewards. Dhingra further noted:

“The key differentiators between scams and legit yield platforms are clearly stated sources of utility, either through arbitrage or lending; payouts in tokens that aren’t just governance tokens (Things like Ether, USD Coin, etc.); long term demonstration of consistent and dependable functioning (1 year+).”

Thus, as we move into a future driven by DeFi-centric platforms — especially those that offer extremely lucrative returns — it is of utmost importance that users conduct their due diligence and learn about the ins and outs of the project they may be looking to invest in or face the risk of being burned.

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Singapore’s Central Bank, DBS, JPMorgan Collaborate to Explore Uses of Digital Assets, Defi

Singapore’s Central Bank, DBS, JPMorgan Collaborate to Explore Uses of Digital Assets, Defi Under New Project GuardianThe Monetary Authority of Singapore (MAS) has partnered with major banks and financial services companies to explore the uses of asset tokenization and decentralized finance (defi). DBS Bank and JPMorgan will pilot the first project. Project Guardian Launched The Monetary Authority of Singapore (MAS), the country’s central bank, announced Tuesday that it has partnered with […]
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Singapore to target DeFi potentials with new JPMorgan partnership

The Monetary Authority of Singapore (MAS) has launched a digital asset pilot program to examine the potential of asset tokenization and decentralized finance tagged “Project Guardian.” Project Guardian is a collaboration between the regulator and several key financial players who will serve as trust anchors.

The post Singapore to target DeFi potentials with new JPMorgan partnership appeared first on CryptoSlate.

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“DeFi is not decentralized at all,” says former Blockstream executive

“DeFi is not decentralized at all,” says former Blockstream executive

Samson Mow, former chief strategy officer at Blockstream, is convinced that DeFi protocols can’t compete with Bitcoin as monetary networks due to their lack of decentralization.

Samson Mow, former chief strategy officer at Blokstream and founder of JAN3, is convinced that most decentralized finance protocols can’t compete with Bitcoin when it comes to providing an effective monetary network because of their lack of decentralization. 

As Mow pointed out, DeFi projects are governed by entities that can modify the protocol at will.

“At the fundamental level, money should be immutable,” explained Mow. “If you can change it at will, then you’re no better than a fiat currency governed by the Fed.”

Bitcoin’s decentralization makes it very difficult to modify its protocol, which is why Mow considers it a unique candidate for becoming a truly global monetary system.

Mow pointed out that despite the immutability of Bitcoin’s base layer, developers can still build applications on the Bitcoin blockchain by working with its layer-2 scalability solutions. 

In particular, Mow is a strong proponent of the Lightning Network, which allows instantaneous, cheap Bitcoin transactions. By promoting Lightning technologies, Mow is trying to accelerate the path toward hyperbitcoinization — a situation where people will be exchanging Bitcoin without the need to convert it into fiat currency.

“Lightning will displace Visa, Mastercard and everything else,” he stated. “And it reduces costs for merchants, which means better experience and savings for consumers.”

Check out the full interview on our YouTube channel, and don’t forget to subscribe!

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Blockchain and crypto can be a boon for tracking financial crimes

Blockchain and crypto can be a boon for tracking financial crimes

The notion of crypto being a tool for money laundering is often propagated by naysayers that include policymakers with a stake in the traditional financial system.

Governments around the globe have also become more aware of the crypto market and the various ways in which it can be regulated. 

Despite a growing adoption rate and involvement of mainstream financial giants, however, naysayers continue to portray crypto as a tool for miscreants and criminals.Several crypto platforms and decentralized finance (DeFi) protocols have been compromised over the years, owing to various code vulnerabilities or centralization problems. However, stealing of money is the easiest part, while moving that money and cashing it out is nearly impossible.

This is primarily because most crypto transactions are recorded on a public ledger which acts as a permanent trail, and even if the hacker uses various coin mixing services to hide its origins, powerful transaction monitoring tools can eventually identify such illicit trails.

Even coin mixing services themselves have started to block transactions associated or flagged as illicit.

Through rigorous study, crypto forensic firms such as Chainalysis and Elliptic have further debunked the notion that cryptocurrency provides an ideal tool for financial crimes and masking illicit activity.

A recent report by Chainalysis shows that the percentage of crypto transactions associated with illicit activities in 2021 was a mere 0.15%.

Cryptocurrencies have become more mainstream over the past couple of years, with the public prescription of the crypto market evolving from an internet bubble a couple of years ago to a reliable investment option today.

Dmytro Volkov, chief technology officer at crypto exchange CEX.IO, told Cointelegraph why the notion of crypto being primarily used by criminals is outdated:

“The misconception that crypto is predominantly used by criminals probably has roots in the days of the Silk Road. The truth is that the immutable aspect of the blockchain makes hiding transactions very difficult. In the case of Bitcoin, whose blockchain ledger is publicly available, a serious exchange with a competent analytics team can easily monitor and thwart hackers and launderers before the damage is done.”

He added that “as long as the security team stays proactive and ahead of the curve on blockchain technology, we can continue protecting our customers. As this industry continues to grow, I believe that this myth of crypto being used mainly by criminals will fade.”

Volkov noted that there is an “arms race going on between cybercriminals and the security teams of cryptocurrency ecosystems,” as ne’er-do-wells still try to find instruments to facilitate illicit activities. However, “this is not exclusive to the digital asset industry,” Volkov claimed. 

A “paper” trail

There have been several instances in which criminals were found to be trying to launder stolen cryptocurrencies years after the fact, the most recent example being Bitfinex. 

Law enforcement agents were able to follow the stolen Bitcoin (BTC) — estimated to be around $4 billion in today’s value — through the blockchain to eventually detain influencer Heather Morgan and her husband Ilya Lichtenstein, a cybersecurity specialist.

Related: Making sense of the Bitfinex Bitcoin billions

Derek Muhney, executive vice president at Coinsource — a Bitcoin ATM provider — told Cointelegraph:

“Look at the outcome of the 2016 Bitfinex hack. The individuals involved attempted to launder approximately $4.5 billion in cryptocurrency by employing several methodical laundering techniques. Still, law enforcement was able to follow the money through the blockchain, identify the perpetrators and recover a significant portion of the stolen money. Cases like this prove that criminals may try to take advantage of crypto but they won’t succeed. Crypto was created for the people and will continue to be for the good guys.”

From an outside perspective, using cryptocurrency for criminal activities might seem ideal. Online transactions can be done quickly and without having to physically move sums of money across far distances. But, those in the crypto world know there are robust protocols in place that allow law enforcement to keep records and verify the identity of customers if need be.

Crypto exchanges play a key role

Crypto exchanges play a key role in identifying and blocking or freezing stolen funds, as they effectively serve as off-ramps for crypto to fiat. 

Recently, Binance blocked $6 million worth of stolen funds associated with the Ronin bridge hack. The crypto exchange revealed that the hacker tried to cash out $5.8 million out of the total $600 million via 86 accounts in small batches.

As laundering via centralized exchanges with heavy Know Your Customer (KYC) policies has become difficult, hackers have then turned to decentralized exchanges (DEX) in hopes of anonymizing their movements.

Most of the time, however, these hackers convert their stolen crypto into stablecoins, which, once flagged, can be easily frozen by the issuer. Thus, laundering via DEX platforms has become increasingly difficult as well.

Tigran Gambaryan, vice president of global intelligence and investigations at Binance, told Cointelegraph that while criminals will continue to use crypto for laundering, exchanges are the first line of defense against them:

“Criminals will launder money no matter what form it comes in. When it comes to cryptocurrency, exchanges are the first line of defense and have to be prepared for that. What exchanges need to do is to have a sufficient number of people with the right expertise and the necessary tooling to stop and identify suspicious transactions. Proper KYC and transaction monitoring tools are essential.”

Binance has also helped take down a cybercriminal ring laundering $500 million in digital assets received through ransomware attacks. The exchange has also worked with local governments and law enforcement agencies to tackle ransomware risks.

Fiat currencies are more vulnerable to illicit activities

Some of the biggest naysayers that propagate the narrative of crypto as a tool for criminality are traditional bankers, who themselves are not innocent of ill financial deeds.

Despite governments pouring billions of dollars into stringent banking regulations, including Anti-Money Laundering (AML) measures, major banking institutions have paid over $300 billion in fines since 2000 for a slew of various conduct violations including but not limited to insider trading and AML deficiencies.

Some of the biggest naysayers that propagate the narrative of crypto as a tool for criminality are traditional bankers, who themselves are innocent of ill financial deeds.

Despite governments pouring billions of dollars into stringent banking regulations, including Anti-Money Laundering (AML) measures, major banking institutions have paid over $300 billion in fines since 2000 for a slew of various conduct violations including but not limited to insider trading and AML deficiencies.

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DeFiChain Announces the Launch of Decentralized Bridge to Connect with the BNB Chain

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DeFiChain, a decentralized Proof-of-Stake blockchain created as a hard fork of the Bitcoin network to enable advanced DeFi applications, has announced the official launch of the BNB bridge. Dubbed the DeFiChain Bridge, the platform is now accessible from BNB and vice versa. Indeed, multi-chain is the future of blockchain technology. Worth noting, that DeFiChain is […]

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DeFi partnership aims to tokenize shares of pre-IPO companies

DeFi partnership aims to tokenize shares of pre-IPO companies

Chandra Duggirala, Portal’s executive chairman, explained that the tokenization of traditional assets sparks the merging of the Bitcoin ecosystem with mainstream finance.

Decentralized finance (DeFi) protocol Portal has partnered with the asset marketplace HighCircleX (HCX) to tokenize stocks of pre-initial public offering (IPO) companies, according to an announcement shared with Cointelegraph on Monday. 

The collaboration aims to make investing in private equity easier by building on top of the Bitcoin (BTC) blockchain. Through this, HighCircleX is looking to solve problems such as the lack of liquidity and value uncertainty for traditional assets.

According to the announcement, HCX will create and manage a limited liability company (LLC) for the investments. While the investors will not own the shares of the LLC, they will own tokens that “represent ownership” of the LLC. Such tokens can be traded on the HCX marketplace.

Furthermore, the funds gained by the LLC will be used to purchase a pre-IPO investment. The pre-IPO companies that can be tokenized and traded include SpaceX, Epic Games, Klarna, Automation Anywhere and Cross River Bank.

Chandra Duggirala, Portal’s executive chairman, explained that the partnership aims to bring more utility to BTC. He said that:

“Portal is bringing real-world use cases to Bitcoin. Eventually, we will see the tokenization of many more financial assets onto the Bitcoin blockchain.”

Additionally, Duggirala explained that while the assets are different from BTC, simplifying the interface for traditional assets starts the “beginning of merging the Bitcoin ecosystem with mainstream finance.”

Related: Texas-based Bitcoin mining operator files for $60M IPO

Last year, crypto platform Coinbase became the first company to go public in the United States. However, based on market trends, owning BTC is currently better than owning Coinbase stock (COIN) by 20 percent.

Meanwhile, crypto block explorer and exchange Blockchain.com is exploring how the company can conduct an IPO in 2022. If the firm succeeds in conducting an IPO, the firm will be the second exchange in the United States to do this, following Coinbase.

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