If you’re a developer or you’re thinking of starting a cryptocurrency yield farm, then this guide is for you.
Here, we’ve compiled only the best tips and tricks from the teams over at Blizzard, Polypup, JetFuel, and Sugandese Tokens to get you started on your new yield farm.
Here are a few of the individual articles that helped contribute to this ultimate guide:
- How to Ensure Your Project Doesn’t Suck, an Essay Based on Experience From Jetfuel.Finance’s CEO Miro
- Underrated Predictors of Yield Farm Success, by Sugandese Tokens
- Yield Farm Tokenomics 101, by Blizzard.Money
- An Introduction to Yield Farming Tokenomics by Polypup
Otherwise, get started reading below!
Chapter 1: Supply & Demand
Supply is a crucial factor in the design of Tokenomics and in understanding the value of a token or coin.
To create the most value for your project, it is important to have both a fundamental and technical understanding of supply, factors that determine supply, and methods to control token supply.
In cryptocurrency, we specify supply as the circulating supply, total supply, or maximum supply, as the supply of a token will change over the course of its lifetime due to minting and emissions.
The circulating supply refers to tokens that are accessible to the public at any specific point in time. This is in contrast to the total supply which quantifies the number of coins in existence, such as the number of coins already issued less the coins that have been burned or destroyed to control supply.
The total supply is the sum of the circulating supply and coins that are locked or destroyed.
The maximum supply of a token quantifies the maximum amount of coins that will ever exist, including coins that are not yet minted or made available.
Supply alongside price determines the market capitalization, one of the most well known measures of value of an asset or security.
The market capitalization in traditional finance is calculated by multiplying the amount of outstanding stock shares by the current stock price.
However, in cryptocurrencies, the market capitalization is defined as the circulating supply of tokens multiplied by the current price (MCap = Nc*P).
For example, if a coin has 100 tokens circulating and is trading for $10/coin, it has a market cap of $1000.
It is important to realize that in calculating market capitalization, the key phrase is tokens “in circulation” as almost every project has tokens that are not in circulation as they have not been mined, minted, are locked, or lost.
The increasing number of coins over its lifetime from mining or minting loop back to this overall idea of controlling supply.
The initial mint, token cap, and emissions rate will be critical factors in determining token value through supply.
Many tokens, especially in DeFi, have massive supplies.
Dogecoin is one of the largest assets by market cap and minted 100 billion coins within its first two years which is reflected in an extremely low price per token compared to coins such as Bitcoin, which will only ever have a supply of 21 million coins at the end of an extensive mining period.
We also have Yearn Finance (YFI), which is nearly as expensive or occasionally more expensive than Bitcoin due to its small supply.
It is easier for a coin such as YFI to grow more in price given its current market capitalization of $1.38 billion compared to the $36.8 billion market capitalization of Dogecoin due to these differences in supply, which is something to consider as both a developer during design as well as an investor.
Now that you know a little about supply-o-nomics, let’s check out tokenomics in detail.
Chapter 2: Laying Out the Tokenomics
Tokenomics is a word commonly used in the crypto space when talking about the economics of a token project. It essentially means how the project is structured to deliver tokens to the project’s participants, Development Team, Advisors, Marketing funds, and other uses as determined by the roadmap and documentation.
Investors will ask repeatedly for a description of your tokenomics so it’s best to keep it short, simple, and most importantly, EASY TO UNDERSTAND.
DeFi is an international industry where you could be holding a conversation with a group from the US, Argentina, and Malaysia at the same time.
If the investors’ grasp on the main language for the project isn’t at a high level, you’re likely to lose that investor since they won’t understand how the project works.
How do you set up your project with killer tokenomics?
There are a hundred ways to structure a project, but let’s take a look at some tokenomic magic you can implement:
Inflationary Tokenomics
In inflationary tokenomics, this means that your token has no maximum supply and emits at a steady amount per block. Many tokens are established in such a way that new coins are created on a regular basis infinitely – otherwise known as infinitely minting tokens.
If a token has a limit on how many coins will ever be created, it will have a maximum supply which will limit the supply end of the supply and demand problem.
Whether you’re infinitely minting or creating a maximum supply is up to you, as both methods can see success (as long as proper deflationary mechanisms are in place, more on that below).
Proof of stake coins come with certain inflation baked in (5-15% is a common observation) so that validators and delegators can be incentivized. Coins like Polkadot dynamically adjust inflation based on staking and participation so that the security of the network can be maintained.
Many DeFi tokens also use inflation to reward liquidity providers and yield farmers on their specific protocols; they have very aggressive inflation schedules to maintain higher annual percentage yields.
However, too much inflation can reduce the value of these coins or tokens already in circulation… Unless the inflation schedule is extremely aggressive it will not impact short-term prices.
$CAKE is a great example of inflationary tokenomics in DeFi. The inflation keeps your APRs high, but requires careful control to make sure the supply doesn’t get out of hand.
You’ll likely need to manually handle burns (sending tokens to the 0xdead address), or develop some unique method to help manage the supply, such as extinction pools from DinoSwap.
While I would label inflationary mechanics as the most common tokenomics method we see in DeFi and especially yield farming, it is also the most advanced.
You need a calculated and active team that is ready to make tough decisions at any time in order to maximize the upside to this method. This method is recommended if you also intend to host many other farms on your platform, as you need higher emissions to do this.
On the other hand, we have deflationary mechanisms.
Deflationary Tokenomics
In deflationary tokenomics, your token has a maximum supply, reduced token emissions over time, or both! A deflationary design of a coin creates a reduction of supply over time, creating a shortage of supply, scarcity value, and hence price increase.
Deflationary assets also do not drastically alter the price in the short term and the demand drives longer-term exponential increases.
Deflation of highly adopted crypto assets can make them very valuable e.g., Bitcoin has a total supply of 21 million, with BTC created per block cut in half every four years.
However, at a token and not commodity scale, deflationary mechanics can sometimes be harmful if not executed properly.
For example, if your emissions reduce too much before your farm really gets going, it can negatively affect the APRs and turn off potential new investors who prefer only the most degen of farms. To maximize the upside with this method, try starting with a large, maximum supply, but burn some tokens manually from your developer/team allocation as a first line of defense instead of reducing the emissions should the price go down too quickly.
Deflationary tokenomics is a great overall strategy, and can lend itself to those looking for a more long-term project that don’t intend to have as many pools as PancakeSwap for example. This strategy is recommended should you intend to build on top of your farm with additional strategies such as vaults, stableswaps, or other unique features.
Good Team and Developer Allocation
Some projects tout themselves as giving 0 allocation to their developer team.
But is it really all that good?
The ONLY time this is ever a feasible option is when there is a massive benefactor supporting the project. A prime example of this is Venus Protocol which was previously managed by Swipe who is owned by Binance.
Running a project can be prohibitively expensive and developers will need funds in order to sustain the project.
Developers should aim to allocate 14-40% of the tokens for Treasury, Team, and Marketing expenses.
Allocating less than 10% of tokens for the Team/Expenses may have a detrimental impact on the longevity of the project UNLESS the team has a solid plan to generate revenue to sustain the project.
JetFuel Finance Case Study: The first project we launched was Jetfuel.Finance with our token $FUEL & $JETS. We had allocated only 2.5% of the total tokens for the team, minted over the course of 6 months. The low levels of tokens given to the team made it difficult to plan and fund operations since the treasury was so low. Looking back, we should have allocated 15%+ to the Dev team. Luckily, we had solid revenue generating products developed. We established a strong staking program with the $JETS token and implemented a 2.5% withdrawal fee that went directly to the dev wallet. We also built a very strong yield optimization program with auto compounding vaults. The withdrawal fees & performance fees from the vaults allowed the Jetfuel Treasury to grow rapidly and fund the growth of the project.
Yield Farming Emissions
Your next consideration is emission rate, which is defined by how many of your native tokens are minted every block.
An emission rate that is too high will provide high APRs but will result in over-inflation of your token supply, thereby aiding the price crash of your token. Whereas, an emission rate that is too low may provide a more realistic APR but may result in a boring farming experience for the users.
So where do we start with emissions?
The best performing tokens need to start with 70%+ of the emissions going to the native tokens liquidity and staking. The other 30% (or less) can be distributed to non-native token pairs and staking.
Keep in mind by distributing tokens to non-native pools, those pools are earning the token “for free”, meaning they don’t need to have any exposure to the native token to earn it. This may cause investors to dump the token faster.
JetFuel Finance Case Study: Jetfuel started with 65% of FUEL emissions going to the FUEL-BNB pair. After we changed it to 85% of FUEL emissions to FUEL-BNB and the JETS token (staked FUEL token), the price began to rise again rapidly.
Chapter 3: Establishing a “Unique” Factor
Most investors don’t want another PancakeSwap or Goose fork.
We’ve seen enough of those.
Instead, investors need a reason to want to hold the native token instead of dumping it straight off the bat – this is done through utility tokenomics.
Popular methods of providing value to native token investors include:
- governance rights to the token
- profit/revenue share
- exclusive earning potential with other token pools
- memberships to features
- exclusive payment methods
…And more!
For example, if your token is used to earn $KEYS which unlock chests containing NFTs for your play to earn game. If you decide you want to add vaults and become an aggregator, your token may be used for governance and pay a dividend (like $BIFI).
In this instance, you’d want to consider a mix of both deflationary and inflationary measures that best compliment your goals.
If you pay a dividend for example, perhaps you’d want to consider reducing the supply over time, so that each holder’s share of the dividend becomes larger. If you want a large governance model that decides which vaults are added, perhaps you do want an infinite supply.
Some more examples from the Polypup team are as follows:
- Polycat – burns through vaults, lockups through staking
- Polyzap – lockups on harvested rewards
- Polypup – Dividend rewards: providing users many options to stake the native token to earn top tier tokens such as BTC, ETH, USDC, etc
Strong developers will always look at their token and ask themselves “Would I buy/hold this?”
If the answer is no, they get back to the drawing board and revamp the tokenomics to ensure value is delivered to their token holders.
The presence and viability of utility is almost the be-all-end-all of longer-term farm viability, as without a designated purpose, the entire point of the farm amongst informed participants is to dump for as many “real coins” as possible in a cynical race to the exits.
All said and done, you’ll want to first decide exactly what you intend to do with your farm and let that dictate the direction of your tokenomics. Using a mix of these tactics that fit your needs exactly will offer the best results both early on AND once you are more established.
And ultimately, always listen to the feedback of your community and investors to help guide your decision making process.
Chapter 4: The Low-Down on Liquidity
Liquidity, or perhaps more commonly seen as Total Native Liquidity (TNL), is the sum of the value stored in all native LP pairs. This value is important because it represents the native token’s resistance to price movement.
Further, unless there are multiple native tokens, TNL is equal to double the amount of “real coins” that investors can get out of a farm, colloquially referred to as the amount of “blood in the pig.”
This value can facilitate calculations about things such as the advisability of depositing, but it is rarely displayed, as TNL is not the amount staked but the entire amount of native liquidity in existence.
Now, moving on to the TNL/TVL Ratio. This is the ratio of TNL to TVL (total value locked), which is one of the most reliable indicators of farm health. This ratio represents the relationship between how much value can be extracted from the farm and how much value is pursuing that extraction.
This can be a useful indicator of future total returns assuming no further deposits. However, this ratio is essentially never shown in any farm’s data display; the farthest anybody gets is displaying both TVL and TNL next to each other.
Now, you may be wondering: “Just how much liquidity should I provide?”
The amount of team liquidity provided is a key contributor to a farm’s survival. Obviously, it reflects the amount of money available to buffer against token price movements or for investors to extract.
Providing a smaller amount of tokens during the liquidity event will result in a massive spike during token launch and a massive crash when farming starts.
While this will raise your prices in pre-sale and cater to your pre-farming hypers who are focused on the highest token price possible to trade, this is a bad user experience for your conservative yield farmers.
A better user experience comes from providing enough tokens to prevent this kind of crash at the beginning of farming. However, it is important to understand that some reduction in price is to be expected as the pre-farming hypers are looking to dump your token to turn quick profits.
If locked or burned, it can also represent a team’s financial commitment to the project. But it also represents another hidden factor: the amount of team liquidity provided is negatively related to the scamminess of its launch.
So-called “fair launches” that are rigged for insiders often start out with a suspiciously low amount of team-provided liquidity, followed by equally suspicious bot buys in the few blocks after launch.
This leads to a situation where the person who placed the bot buys gets to make money at the expense of all other participants.
Providing team liquidity at fair value prevents this from occurring.
Chapter 5: Gathering Your Team
Here’s the thing: Seniority matters.
A person’s likelihood of having good ideas is directly affected by their experience level. The ability to contextualize the current experiences of the yield farming industry in historical terms can impart the wisdom necessary to respond to situations.
The ability to grasp onto sources of appeal to major investors is extremely important. A founder who has an extremely high level of seniority might even have personal connections with people who can command large investments or have even bigger friends of their own.
The founder having an existing personal network in crypto (most commonly through another farm) is a very strong predictor of farm success.
And this doesn’t just go to the founder, either. You ideally want all of your team members experienced in something. You don’t have to, but a super-simple formula for team success is something like this:
# of Team Members * Experience in the field = Team Success
Sure, you can hire a bunch of indie developers, but one pro-level dev can wipe the floor with all of them. And, imagine what a huge team of expert devs can do…
Keep in mind you’ll also need to allocate extra team slots for any other roles in your team – marketing, Telegram or Discord moderators, content production members, graphic artists, etc.
Chapter 6: Ready to Launch
Coins can be created two ways: fair launch and pre-mined. In a fair launch allocation there are no coin allocations at the initial mining or minting process – you start from 0 and anyone who wants to mine, mint, or own a coin has an equal opportunity to grab one at the start.
In a pre-mine/pre-mint situation, there is an allocation the team behind the project has mined or minted.
Here some of the tokens have been created and allocated before opening the network to the public. Typically, these tokens are sold before the launch of the project to raise funds to build it.
Pre-mint/Pre-mine also creates interesting challenges.
If too many tokens are allocated to the team or early investors, it can limit the growth of the price. There is the possibility of a developer or early investor minting a large sum of tokens to themselves and later selling them all, dumping the token price for other holders, and destroying the value of the token.
Other factors that can impact supply are vesting and staking.
Vesting applies to pre-mined/pre-minted coins and refers to the allocation schedule of the coins. It is common practice for coin projects with pre-mining/pre-minting configurations to lock up a certain percentage of their tokens, gradually releasing them over time.
This increases the confidence of coin holders that the market won’t be flooded by private investors, venture capitalists or the team.
Vesting schedules with significant cliffs such as a large percentage being vested at regular intervals can be a killer for the coin price if people sell their tranches. Usually, vesting schedules are logical and take place over many years in bits and pieces.
Some coins build in staking features as well.
Staking is where those coins or tokens are usually locked up for some period in return for a reward or interest rate.
If a token’s price moons while a user has it staked, it will not be on any exchange which cuts the supply and helps boost price, but the users who staked cannot exit the locked asset until their staking period is over. Thus, staking without being able to remove liquidity is effectively a gamble.
Staking tokens are less common as standalone DeFi tokens and more common to coins such as ETH or DOT. A token that allows for staking with no locked period has some unique risks such as all staked tokens being able to move onto an exchange at any time, flooding the market, and pushing the token price down as people take profit.
It does, however, let the user capitalize on exiting at a peak value if they time their sale well.
Chapter 7: Overcoming Hype Cycles
Crypto currencies live and die by hype cycles. A hype cycle is the typical explosion of activity at the project’s launch with a dizzying surge of volume, pushing the token to incredible heights due to FOMO and low liquidity.
Here, the Telegram group and Twitter are generally all Moon Memes and the Poocoin page is DDOSing due to the number of refreshes from people checking prices.
After the early investors have made a multiple on their original investment, they begin to dump and the price comes crashing down. As the price crashes, investors quickly pull liquidity and sell, exasperating the downfall due to lower levels of liquidity.
Prices in the beginning of a project will drop faster than you would ever believe, sometimes even a 90% drawdown in a few hours can happen! It’s to be expected, so plan accordingly.
Here is where the strong survive to build, and the weak delete their Telegram Accounts and shut down their website.
If you can survive the dip and mitigate and control the damage/fud/”why is the price dumping” questions, your investors will start to buy back in, leveling out the prices and bringing confidence back to the project.
A price discussion channel is critical at this point so the main telegram isn’t flooded with negative price talk.
At this point is where your marketing budget needs to go into full effect. Once you lose the initial hype of the launch, many investors will seek to move on to the next hot token where they can ride the wave up in the hopes of cashing out easy profits.
You’ll need to hold the attention of these investors to ensure your project has the investor base to increase prices and liquidity.
Hitting Twitter, Reddit, Discord, Medium, with massive amounts of quality content, funny memes, and insightful commentary while engaging the community will become a full time job.
Project Developers will need to work their ass off to form partnerships with large and smaller projects and work to expand their holder count.
Chapter 8: Creating a Community
The token’s community is one of the strongest intangible assets a developer can build. Treating the community well, listening to their feedback, and acting on their feedback goes a long way in the eyes of the community.
Unhappy community members will dump the token and leave for other projects.
Some developers are quick to ban community members who are “fudding”. Generally, the “fudder” has a good reason to be upset and their comment should be analyzed to see what could have been done differently and act accordingly.
A happy and interactive community will grow the project to massive levels, while an unhappy and mismanaged community will destroy a project.
Here at RugDoc, we’ve grown our community to levels that we’re extremely happy with. In fact, without the help from our amazing community, we wouldn’t have all the amazing farm reviews, community moderators, content creators, and generally awesome people that we do now!
So think of the type of community and people you’d like to attract – is it the smart and savvy folks who do their own research, or more of the fast-and-go apes?
Whatever your audience is, grow that aspect and cater to their needs – and make sure to set up boundaries.
Chapter 9: Maximizing Security
Security is the most important aspect of the project. Poorly designed code will result in a poor user experience – or worse, exploits. An exploit can drain the contracts of the users’ funds to a hacker or leave the users funds locked and inaccessible.
Defi is built on smart contracts, and once smart contracts are deployed, they are immutable (meaning they can not be changed). So…
A developer must take extreme care when pushing their smart contracts to the public.
The best projects will have their code audited and tested before it enters production. Deploying the project first and THEN getting an audit serves no purpose except as a marketing gimmick.
So if you’re looking for the best auditing companies, head on over to our article and take a look: What is a Smart Contract Audit? A Review of Different Audits
What happens if the deployed code has a vulnerability? The developer must pray the contract is not exploited – and if it’s not exploited, then force their community to withdraw and redeposit to a new contract.
This results in a poor user experience and a lack of proper planning.
JetFuel Finance Case Study: At Jetfuel, we take a security first approach to our development. All our code is audited prior to deployment and any pending issues are fixed before our community touches the smart contracts. We’re proud of the “Low Risk” rating bestowed from Rug Doc.
Chapter 10: Advanced Mathematics
Related to the mintable or minable supply is understanding emissions and rewards mathematically.
Logic failures or incompatible math, especially when adding new pools, are some of the most common problems we find in our reviews at RugDoc.io which cause complete protocol breakdowns, so it is important to at least consider the fundamentals that underlie your contracts.
The schedule of how coins will be created and released can be described with an emissions curve or emissions schedule, which will be encoded into your contracts.
An emission curve can also anticipate how valuable a currency may be over time.
Token emissions can be constructed in many ways and your coin will have its own unique emissions structure that you get to determine to make your market attractive for both sellers and buyers, achieve desirable network effects, motivate users to enroll in your ecosystem, and raise demand for your token.
A common mint equation comprises Rj the total number of tokens at year j with R1 the initial genesis mint and Rl the last year that the values of
Were changed and wherein
Are two key parameters in governing the minting rate function.
Cj is the yet un-minted supply of coins to reach the final supply at year j such that Cj is less than or equal to the genesis mint amount; u represents a staker with usamount representing the stake amount u has and ustime representing the length of staking.
And where:
From this cumulative mint equation we can also derive how many new tokens will be distributed to users in a given block number, b.
If τ” s=”s is a function which gives us a time when some share was submitted or when a block b was found, the time is measured in seconds from some stable point in time such as the start of the pool operation.
The exact share value at a given moment is defined by a scoring function c which calculates score of a share s at time t0
Where
Is a dimensionless parameter which defines how fast the score assigned to a share declines in time. The greater it is, the slower old shares lose their value compared to new shares.
When a block b is found at time τ(b) and its value is finally known – V(b), the pool can calculate reward Ru for each user u as follows (f stands for a pool fee) with:
If you want to get really into the math you can derive that into the full rewards formula for a continuous scoring system:
You may notice this equation contains e which while lovely and needed, is an irrational number and thus computational kryptonite.
Computers unfortunately have limited resources, and blockchains being computer networks operate under the same constraints.
An irrational number has infinite information in them, which is impossible to store on a computer. So, you will need to linearize these equations by estimating the curve through the equation of multiple linear points if you want to stick them in your code.
There are all sorts of other fun equations related to the continuous scoring system you can calculate and may find useful if you ever decide to go create an entire protocol from scratch such as the on-chain calculation of staking rewards or developing Bonding Curves.
The staking rewards a user (U) can get at any time can be determined by:
Where ∆pi denotes individual productivity of the user U between the consecutive block numbers ti-1 and ti, ∆Pi denotes global productivity between the consecutive block numbers ti-1 and ti, and ∆Gi denotes gross product between the consecutive block numbers ti-1 and ti.
Depending on what sort of a system you wish to build, your staking rewards may be used to incentivize or build into other supply controls.
For example, a staking reward may incentivize a wrapped token on one chain to bridge into the proper token on its native chain using a bonding curve. Bonding curves are equations used to create a smooth cause-and-effect relationship between a token price and circulating supply.
Bonding curves describe a clever little smart contract that enables users to mint/burn tokens according to a previously defined pricing algorithm. Bonding curves manage all the fun and awesome properties we appreciate in DeFi such as continuous tokens with continuous price fluctuations, limitless supplies, deterministic price, and instant liquidity where tokens can be bought or sold instantaneously, and the bonding curve acts as an AMM.
A bonding curve equation can represent many types of shapes from very basic ones like CurrentPrice = TokenSupply2 to all sorts of funky polynomial shapes based off y = axn, sublinear curves, S-curves, and all manner of odd distributions.
The original bonding curve equation is the Bancor formula which calculates the dynamically changing price of a continuous token. The Bancor formula relies on a constant reserve ratio:
The reserve ratio represents a fixed ratio between the continuous token’s total value (total supply * unit price) and the value of its reserve token balance.
Each purchase or sale of a continuous token triggers an increase or decrease of reserve tokens and continuous tokens, the price of the continuous tokens with respect to its reserve tokens will continuously recalculate to maintain the configured reserve ratio.
A higher reserve ratio between the reserve token and the continuous token will result in lower price sensitivity so that each buy and sell will have a less than proportionate effect on the continuous token’s price movement.
A lower ratio will result in higher price sensitivity so that each buy and sell will have a more than proportional effect on the continuous token’s price action.
The Bancor formula can be simplified so the continuous token’s current price can be calculated by:
From this simplified equation we can derive two new equations: one to calculate the amount of continuous tokens a user receives for a given number of reserve tokens:
PurchaseReturn = ContinuousTokenSupply * ((1+ReserveTokensRecieved/ReserveTokenBalance)^(ReserveRatio)-1)
And another to calculate the amount of reserve tokens one receives in exchange for a given number of continuous tokens:
SaleReturn = ReserveTokenBalance * (1-(1-ContinuousTokensRecieved/ContinuousTokenSupply) ^(1/(ReserveRatio)))
These formulas are the final price functions to use in a bonding curve contract.
Ultimately, token value relates to the market basics of supply and demand.
As a new market maker, you will want to pay close attention to ways to control your supply of continuous tokens and increase demand for them.
Consider building in token caps to limit the number of tokens made available. This maintains a constant supply such that if demand rises or even stays constant, the value of the token will increase.
Even if you do create a token with infinite or very large mints, you can control supply with token buybacks where you can buy on the market tokens in circulation and destroy them through burns to encourage appreciation.
There are many factors that will determine the value of your token, and most of them are out of your control. The power of hype and sentiment in the market is unpredictable and massive.
However, by designing your tokenomics to account for and control token supply in your actual logic implementation and project design you can build user trust and organically add value to your token.
Chapter 11: Sustainability Secrets
#1: Set up your treasury
Will your project have an accessible treasury?
This is the amount of money the project has available. I know it’s not exactly “fair to the little guys,” but the amount a team is willing to spend on a project signals both commitment AND the ability to accomplish goals.
If we are prospectively analyzing a team’s propensity to “rug pull” i.e. exit scam, money dedicated to the project is an obvious indicator of persistence.
This is why the RugDoc KYC service is among the best values in the business: it provides a permanent signal of not only commitment to the project, but also financial outlay.
#2: Mind your supply expansionsion
The supply expansion of your yield farm is the number of tokens that a farm mints in any 24-hour period. This is shown as a percentage of the supply at the beginning of that 24-hour period.
The supply expansion number measures how much “dump pressure” there is on the ecosystem and is a key indicator of future token price.
Multiplying this percentage by the current market cap gives the amount of buy support that will have to come into the ecosystem in order for the token to maintain price for the 24-hour period in question.
Most farms do not display this information because it is simply too unfavorable for them, as the majority of farms expand their supplies far too rapidly.
Displaying numbers like 21,600,000% supply expansion per day would make it obvious that many farms are not sustainable. Too many coins minted relative to the existing supply harms native stakers and liquidity providers because of the inevitability of token price drop.
There are two main reasons why farm operators continue to emit too many tokens relative to the supply:
- Ignorance. Many farm operators do not realize the mathematics of the situation. We can do something about that, but we cannot do anything about the second reason…
- Greed. The example above shows how easy it is to rig things so that the farm appears to be producing $10,000+ per block. This encourages deposits by naive investors because the displayed APRs in such situations are incredibly high. However, the returns will quickly disappear if the supply expands by 5 times its size in the first block.
Keep the supply expansion happy, and your farmers will be happy in return!
#3: The Live-Action Roleplay (LARP) Factor
LARPers are those people who dress up and talk in Belvedere Castle accents while whacking each other with cardboard swords.
So what do LARPers and yield farm operators have in common? They both pretend to be something they are not.
Many yield farms pretend to have a token sink (aka utility) or other mechanism that will make them sustainable, when in fact, most of these “LARPs” are either complete lies or recycled old canards that don’t really work.
The LARPs that have been complete lies are pretty straightforward to understand: some farm creators have actually done extremely well by promising things that they never deliver.
The promise of fake things to come simply makes people hold the coins, creating a sink that is more effective than many real things.
The recycled old canards are somewhat more difficult to dissect. The idea of a centralized “dividend pool” being added to a farm is the most common type of concrete LARP attempt, but such pools usually require 100% principal risk while holding a single inflationary token.
Further, most so-called dividend pools merely drip out a relatively small amount of money from a pile controlled by a centralized entity.
This is not exactly in accordance with the “spirit of decentralization” that blockchain technology espouses, and the arrows of money always point from plebs to token creators in such arrangements (thus the description of the claim to offer dividends as a LARP).
Ultimately, because very few farms actually have any innovative ideas, a farm’s ability to LARP effectively can be a key determinant of success.
In the end, a yield farm can emit four tokens and call them “fire,” “earth,” “water,” and “air,” but if people don’t want them for any particular reason, they are all actually “shit.”
We have to be realistic and admit that LARPing is most farms’ only way of making people want the tokens.
In fact, I would call the LARP factor the most underrated factor in yield farm evaluation, as success in this area can single handedly and drastically extend a farm’s lifespan.
So, yield farm runners are well advised to put tinfoil on their best piece of cardboard and get to LARPing as hard as they can!
#4: Know your investor
From the outset a developer needs to decide what kind of yield farmer they’re trying to cater to. Farmers vary in their strategies:
1) You have the ‘short term apes’ – people looking for insanely high APRs and then dip in and out of those farms while scooping up nice returns.
2) You have the ‘pre-farming hypers’ who buy in during token launch and hype up to increase people buying in and then dump the token just prior to the start of farming.
3) You have the conservative yield farmer that buys your token at a decent price compounding multiple times per day. These are the farmers developers ideally want and look for.
Once you know who your ideal audience is, things get a bit easier from here. (Just a bit!)
Chapter 12: The Road to Glory…
So you read this entire guide – congrats!
Now, the rest is up to you.
There are many ways to create an outstanding project – if you’d like, feel free to join our Telegram channel for further discussion or to talk about anything yield-farming related (we’ve got a loooot of experience!).
We’d love to see your project launch! Good luck and stay awesome!
