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

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

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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Record Investment Outflows of $423 Million Led to Crypto Bloodbath

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Record Investment Outflows of $423 Million Led to Crypto Bloodbath

Last week saw record outflows of $423 million from crypto assets, according to CoinShares.

The report found that the outflows last weekend were likely responsible for bitcoin’s decline to $17,760. Analyst James Butterfill said: “The outflows were solely focussed on bitcoin, which saw net outflows for the week totaling US$453m.”

BTC outflows bring down institutional investments 

Therefore, if bitcoin is removed from the calculations, Ethereum contributed an inflow of around $11 million while other alts also added minor positive flows, aggregating inflows to the extent of $70 million. 

This was Ethereum’s first inflow after 11 consecutive negative sessions according to CoinShares.

In the past week, the BTC market has slid under the $20,000 level twice. Short-bitcoin saw inflows of $15 million due to the launch of the first U.S.-based short investment product in the week in question, the report noted.

[1/5] This week’s Digital Asset Fund Flows Report is now available! Written by @jbutterfill, the headline for this week is: Record US$423m outflows last week while Short-Bitcoin saw inflows of US$15m. Read on for the highlights -> pic.twitter.com/eIalnFhacv

— CoinShares 👩‍🚀 (@CoinSharesCo) June 27, 2022

Benefits of a crypto bear market

Similar wide margins were last seen in the previous negative peak, in terms of outflows, in Jan at $198 million.

However, in relative terms, Butterfill remarked that the week did not witness the largest negative flows against total assets under management (AuM). 

“This record occurred during the bear market in Feb 2018 where outflows representing 1.6% of AuM were witnessed, while the outflows last week were the third largest on record, representing 1.2% of AuM,” the report noted.

According to FTX CEO Sam Bankman-Fried, the Federal Reserve’s decision to aggressively increase interest rates was the main reason behind the market crash.

But despite the bearish sentiments, some crypto bosses are optimistic about the results of a market downturn. Charlie Silver, founder of Permission.io told Insider: ” There are hundreds of firms that are built on hype and not substance. It will be good for the industry to have them go away.”

“Bear markets are healthy because it resets valuations to reality and flushes out the bad actors. There are many cryptos that are true Ponzi schemes, that pay investors only with new investor money. When the new money dries up the project falls apart,” Silver added.

Disclaimer

All the information contained on our website is published in good faith and for general information purposes only. Any action the reader takes upon the information found on our website is strictly at their own risk.

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Uzbekistan warms up to Bitcoin mining, but there’s a catch

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Uzbekistan warms up to Bitcoin mining, but there’s a catch

The executive order spares all the mined assets from taxation and bans mining anonymous currencies.

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Uzbekistan warms up to Bitcoin mining, but there’s a catch

The National Agency of Prospective Projects (NAPP) in Uzbekistan announced its demands toward crypto mining operators. It would only allow the companies that use solar energy to mine Bitcoin (BTC) or other cryptocurrencies. 

The normative act on the government page, dated June 24, describes the confirmation of “Guidelines on the registration of the crypto assets mining,” and sets the finalization date on July 9. The second article of the document offers an uncompromising wording:

“Mining is being carried out only by the legal entity with the use of electric energy, provided by a solar photovoltaic power plant.”

As a further complication, the miners should own the solar photovoltaic power plant that they will use for energy.

The executive order also obliges any mining operator to obtain a certificate and register in the national registry of crypto mining companies. This procedure demands a brief list of documents, and should take no more than 20 days from submitting to the final decision to the licensing body. The certificates would be valid for one year after the registration.

Related: Go green or die? Bitcoin miners aim for carbon neutrality by mining near data centers

All the currency generated from mining activities would be spared taxation, though the mining farms would face the special tariffs on the consumed energy set by the Uzbekistan government. But, the trade operations with mined assets would have to be conducted only on the exchange platforms that are registered in Uzbekistan. The mining of anonymous cryptocurrencies would be prohibited.

In April 2022, the freshly-restructured NAPP became Uzbekistan’s exclusive crypto regulator with the mission to adopt a special crypto regulation regime in the country. This move came in a row of initiatives launched by the Uzbekistan President Shavkat Mirziyoyev to provide the regulatory framework for crypto. In September 2018, Mirziyoyev signed a law prohibiting local firms from launching their crypto exchanges in Uzbekistan. The law only offered legal status to crypto exchanges established by foreign legal entities.

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Celsius denies allegations on Alex Mashinsky trying to flee US

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Celsius denies allegations on Alex Mashinsky trying to flee US

Celsius CEO Alex Mashinsky wasn’t trying to leave the U.S. last week but has continued to work on recovering liquidity and operations, the company has claimed.

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Celsius denies allegations on Alex Mashinsky trying to flee US

Troubled crypto lending firm Celsius is putting their best foot forward to recover operations alongside CEO Alex Mashinsky, who currently stays in the United States, the company has claimed.

A spokesperson for Celsius has denied rumors that the company’s CEO tried to flee the U.S. last week amid the ongoing liquidity crisis of the Celsius Network.

The representative told Cointelegraph on Monday that the firm continues working on restoring liquidity, stating:

“All Celsius employees — including our CEO — are focused and hard at work in an effort to stabilize liquidity and operations. To that end, any reports that the Celsius CEO has attempted to leave the U.S. are false.”

Celsius’ statement came shortly after Mike Alfred, co-founder of the crypto analytics firm Digital Assets Data, took to Twitter on Sunday to claim that Mashinsky attempted to leave the country last week via Morristown Airport in New Jersey.

Citing an anonymous source, Alfred alleged that Celsius’s CEO was trying to go to Israel. “Unclear at this moment whether he was arrested or simply barred from leaving,” he added.

Alfred’s claims followed a massive GameStop-like “short squeeze” of Celsius, with Celsius’ native token Celsius (CEL) jumping 300% in one week by June 21. CEL price also abruptly rallied more than 600% on June 14, with analysts attributing the event to an exchange glitch or liquidation of short traders.

At the time of writing, CEL is trading at $0.741, down around 5% over the past 24 hours, according to CoinGecko. Celsius’ native token is still up more than 160% over the past 14 days.

Celsius Network token (CEL) 30-day price chart. Source: CoinGecko

Some industry observers in the crypto community have expressed skepticism about Alfred’s tweets about Mashinsky, with many considering his allegations as FUD.

If @Mashinsky attempted to leave the country this week, why are you reporting it now exactly when the CEL price is going down? Seems very coincidental Mike Alfud. And why no mainstream media or crypto media is reporting this? #CelShortSqueeze https://t.co/ynJbzWib9o

— Otis — #CelShortSqueeze ©️ ⚡️ (@otisa502) June 27, 2022

As previously reported by Cointelegraph, Celsius officially announced that it would be “pausing all withdrawals, swaps and transfers between accounts” on June 13. United States regulators subsequently started an investigation into Celsius as multiple accounts on the network were frozen.

Related: South Korean prosecutors ban Terraform Labs employees from exiting the country: Report

According to some analysts, Celsius’ liquidity issues should be attributed to shortcomings of the existing crypto lending model in general, as other lenders in the market have faced similar problems recently.

Celsius has been working hard to fix the consequences of the platform’s liquidity crisis, reportedly onboarding advisers and restructuring consultants to help the platform handle potential filing for bankruptcy. On June 18, Celsius’ lead investor BnkToTheFuture and its co-founder Simon Dixon offered to assist the network by deploying a recovery plan.

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