Farming as a Service
Is this emerging narrative legit?
Farming as a Service. Is it the next big crypto narrative or the next opportunistic craze for scammers to steal your crypto? Probably both.
Why are we seeing FaaS emerge as such a growing narrative? My take is we’ve just witnessed the largest explosion of total value locked (TVL) across multiple blockchains, all offering yield to early DeFi protocol users, and many tokens that pulled 10-100X returns over the last 2 years. Money has been plentiful, and a massive chunk of that found its way into crypto!
Many of these successful blockchains, DeFi projects, NFT teams, and DAOs have have built 8-10 figure treasuries, an incredible amount of capital in a short amount of time. Farming as a Service organizations have been stepping in to help with capital allocation, strategic investments, diversification, financial statements transparency, and dashboard tooling.
Many individual/anonymous yield farmers or teams have been extremely fortunate during this historical bull market and DeFi yield farming period, and are now becoming entrepreneurs in FaaS. They’re riding a hot streak, and believe in the generational crypto investment opportunity. I’m very happy and lucky to have created my business and the Four Moons partnership after discovering the power of DeFi too.
However, mean reversion and dilution are inevitably going to dampen yields, so setting investor expectations and managing risk are essential for sustainable crypto Farmers as a Service.
I’ve seen hot streaks go cold very quickly - Chris Moneymaker won the Main Event at the World Series of Poker after coming out of nowhere and went pro…his career as a card player peaked at the Main Event. In sports betting, I remember following a legendary football run in 2010-11 by a guy named Randizzle (he posted 77% winners on SBRPicks - a sports betting forum). The next year he may have just barely broken even, but was able to sell his picks for a fortune to eager punters. One great year is a very small sample size and a reversion to the mean is likely when taking tremendous amount of risk.
Retail/Individual FaaS:
FaaS tokens
DigitsDAO has gotten a lot of love from anonymous crypto influencers. They claim to have made money in 11 of the last 12 months, which is astonishingly good in a volatile crypto market! In addition, their returns are eye popping!
Kudos for posting their wallet address as it allows for full transparency. They’re turning this recent success into a sales opportunity for their token, which represents ownership in an on chain hedge fund or prop trading fund of sorts. Here’s the catch…you have to pay up front for your potential returns. 14% slippage and 12% tax on getting in or out of the token. OUCH.
As a crypto fund manager, this sounds like a sweet deal, but would be an impossible sell to accredited investors. We have to kill what we eat, meaning we don’t make money unless we do our jobs well.
Wonderland DAO, the infamous Olympus fork that built a treasury worth over $1b and had a market capitalization of nearly $2b, has spectacularly collapsed due in part to irresponsible FaaS.
Many investors were drawn in to Wonderland and $TIME by the 60,000%+ staking APY, and were even offered $TIME tokens at a discount for exchanging stablecoins or other assets. The Olympus style protocol owned liquidity primitive was put into overdrive with the insanely high token emissions, so Wonderland amassed a gigantic treasury in order to yield farm and make other strategic investments on behalf of $TIME holders.
Things went south when over-leveraged team members were liquidated during a price downturn, and the token price crashed in short order. Investors were led to believe the Wonderland protocol would buy back tokens from the open market, using treasury assets, if the market price fell below the risk free value of the treasury. This mechanism broke and left many investors holding the bag. (Thread below describes the sequence of events).
To make matters worse, 0xsifu, Wonderland’s treasury manager and one of three people who controlled the $1b treasury, was doxxed as a QuadrigaX co-founder, the infamous Canadian cryptocurrency exchange that stole hundreds of millions of dollars from their users. No amount of token emissions is going to rescue a project that loses investor trust and credibility.
This story about students trading on leverage to make more money to send other students to conferences is just sad…rekt.
In summary, extreme returns require extreme amounts of risk, and when prices turn down, gains can evaporate and turn into losses quickly. When FaaS protocols exercise poor risk management, the risk is passed onto investors or token holders.
Protocol level FaaS:
VeDAO - This is arguably the most successful fair launch DAO ever. They raised no investor funds, sold no tokens, but created a massive and growing treasury by being opportunistic. Andre Cronje released Solidly, a low fee AMM that awards fees and emissions to protocols rather than individual LPs. veDAO learned the rules, executed a strategy, and have been able to amass a tremendous amount of capital (>$25mm), voting influence, and support through their farming expertise.
LlamaDAO - Manages treasuries of very large DeFi projects like Aave, and produces very high quality transparency reports for each month.
Yearn Finance has over $4.3 billion in deposits. The protocol is a yield aggregator, and has been offering small to very large investors gas-efficient yield since the middle of 2020. Yearn has also provided protocol to protocol liquidity and yield that enables the development of new primitives like Alchemix’s ‘self repaying loans.’
Assessing Risk when looking for FaaS offerings:
In addition to the high volatility risk of the underlying assets and protocols these FaaS treasuries invest in, one must assess additional complexities. Be aware of the risks and watch out for these red flags.
Regulatory risk - These investment DAO tokens may be the first to get cracked down on by the SEC as you’re essentially investing in a hedge fund. Accredited investor laws apply to traditional funds and are likely going to be adopted within crypto, whether you like it or not.
One private key holder - This is a massively overlooked risk by many investors. If a single entity or even just a couple own the treasury wallet private keys or smart contracts, all user deposits can be removed with the click of a button. This is the classic ‘hard rug’ risk all DeFi investors need to be aware of.
Liquidity - With low cap FaaS tokens likely springing up in numbers, low liquidity and slippage can cause investors to overpay for tokens when buying, and sell for a steep discount when exiting a position.
Governance - Governance and sybil attacks are becoming more prevalent now, especially with smaller cap tokens, where a single entity can change the token economics with their votes. There’s no recourse or dispute for other token holders with dissenting opinions.
Copycats - We’ll start to see accounts claiming outsized returns, promising investors continued success, and pop up with new tokens left and right. Most of these will be cash grabs that take significant fees, and some will be pure scams that drain the liquidity or smart contract and run.
Skin in the game - What does the FaaS team or individual have to lose? Are they doxxed? What kinds of checks and balances exist between the team and investors?
Closing thoughts:
A Farming as a Service offering must be transparent. If you aren’t able to see historical data about where funds were deposited, how they were traded, and who had control of them, avoid this FaaS at all costs. Reputation is definitely a factor, but a transparent process is far more important.
For individual investors looking at FaaS tokens or DAOs:
I am personally avoiding these for several reasons. I am experienced, I know my own risk tolerance, and I am a control freak when it comes to my crypto. The most rewarding part of becoming a DeFi user and crypto investor is the power to make your own decisions and self-custody your assets. I created Ethropy because I truly believe in ‘teach a person to fish so they’ll feed their family for a lifetime’ when it comes to DeFi. It’s a very do-it-yourself space, which is daunting for newbies, and requires a bit of handholding. Ethropy is here so WAGMI (we’re all gonna make it) together! If you’re strapped for time, using tried and true yield aggregators, like Yearn, are a safe and steady bet.
For DAOs looking into FaaS:
At the DAO or protocol level, a DAO holding 10+ figures of capital should be very involved with managing their own treasury. It’s irresponsible to have that many assets and not know how to be capital efficient while managing risk. FaaS are essentially acting as a protocol CFO or consultant to the DAO Treasury to help with cash flows. DAO investment strategies are very boutique, and should be catered to the team/product’s needs in order to have ample liquidity for both the short and long term. I feel this is where FaaS has product market fit because these entities act as consultants to DAOs. They can provide advice, keep track of new/safer strategies, connect DAOs to insurers, and bring in tooling that help keep things organized.
FaaS takes many forms. For my partners’ and my first fund, I often referred to our strategy as DeFi as a Service. Our investors were looking for ways to get high beta exposure to crypto markets while being capital efficient. This is a powerful phenomenon that only DeFi has unlocked to a whole new world of investors. FaaS will create many new jobs within DAOs, companies, and for entrepreneurs. If we are smart about our due diligence process and avoid the red flags/risks mentioned above, it can be a positive sum for the space.
so sincerely words，respect