Copy- Farm Risk Management
It’s a bit of an open secret: Don-key’s drag and drop Farming Strategy Builder is coming, and it’s coming sooner than many may think. This both means decentralizing the protocol, and gradually entrusting it to the community, as well as totally revamping the user interface so that investors have the most dynamic and sophisticated metrics available to guide their decisions.
A closer look at these updates will soon follow, but first the team is delivering an important lesson in Don-key Education: Copy-Farm Risk Management.
Quite simply, risk management begins with knowing what the risks are; and broadly speaking, they are external platform risks, impermanent loss, reward type risks, and algorithmic stable coins risks.
External Platform Risks relate to risks associated with the external protocols that strategy funds are sent to. These risks are external to Don-key and depend on security and the contract safety of different platforms.
When evaluating risks, Don-key considers the following:
- Has the protocol been audited and by who? Audits done by reputable sources result in a lower risk rating. If the audit highlights protocol flaws that are amended this also contributes to a lower risk rating.
- How new is the protocol? Usually established farms are less risky than newer farms.
- What is the TVL in the protocol? Usually higher TVL protocols are less risky
- Have there been any security compromises in the past? How were they dealt with? No security compromises and responsibly managed security breaches result in a lower risk rating.
- Do known aggregators use this protocol like Autofarm, Swamp, Beefy, etc? Aggregator usage results in a lower risk rating.
Impairment loss risks are caused by token price volatility between tokens involved in a strategy. Although investors only deposit one type of token, farming normally requires several token types and multiple trades to generate yield. If high price volatility occurs, then the ratio of relative worth changes, and this can result in temporary fund loss for as long as the price deviation occurs. In order to estimate the risk of impairment loss we have to examine the following:
- Is the strategy exposed to just one token — the deposited token? In this case there is no chance for impairment loss
- How many tokens are involved? The fewer the better, with one token type holding no risk for impermanent loss at all. Single asset farms are rare, which means the below factors need to be considered.
- If tokens are swapped according to the strategy plan, what are the tokens’ market cap? Do these tokens have high liquidity? Higher market cap tokens have less price volatility, and therefore less impairment loss. This results in a lower risk rating. Also, tokens swapped with high liquidity carry a lower price impact, which makes them less risky.
- If tokens are swapped according to the strategy plan, what is their correlation to the base token? Most yield farming is done in tokens pairs; the more closely token pair prices are correlated, the less impairment loss occurs. This results in a lower risk rating.
Reward Type Risks relate to the method of reward distribution. While most farming strategies give instantly claimable rewards, others can give out vested rewards which vary according to time. While token investment is not at risk, the value of tokens is subject to risk according to the following factors:
- What is the vesting period? Shorter (or no) vesting periods equate to less exposure to price deteriorations and result in a lower risk score.
- At what rate are rewards distributed? The daily APR shown is average and may mislead users, as the rewards distribution can be non-linear and offer the most rewards only after a period of time. The shorter this time, the lower risk the strategy is. APR can also be misleading if a strategy’s yield is composed of trading fees, which can fluctuate wildly.
Algorithmic Stable Coin risks occur within strategies that contain algorithmic stable tokens, which can be very risky despite being classified as a stable coin. Risk assessment concerns the following questions:
- Has the coin been audited and by who? Audits by reputable sources result in a lower risk rating.
- How new is the coin? Established coins are less risky than newer farms.
- What is the market cap of this coin? Higher market cap coins have less price volatility and less security concerns and result in a lower risk rating.
- What is the historical price range of this coin? Less price volatility results in a lower risk rating.
- Is there sufficient trading liquidity to the coin, which allows for large swaps with a minimum slippage? Higher trading liquidity allows for swaps without slippage which results in a lower risk score.
Know Your Risks
When Don-key’s copy-farming platform is opened up with the strategy builder, risk metrics in each category will be detailed so that the community can invest with sufficient information to make wise decisions. The team recommends having a passing understanding of each category, so that the risk metrics can be properly taken advantage of.
About Don-key Finance
Don-key.finance is building the first social trading platform for yield farming, bringing together liquidity providers and yield farmers alike. For this reason, the community refers to Don-key as the eToro of Yield Farming, which is a title the team embraces wholeheartedly.
The goal of the platform is to eliminate yield farming’s infamous complexity and replace it with a seamless retail experience, streamlined to offer the most profitable and adaptive product on the market.
With just one-click users can route their liquidity — in whichever token they chose — through professionally designed strategies that are updated to chase the highest available APY while minimizing risk.
Competitive Yield Farming is a full-time job; Don-key does it, so you don’t have to.