Yield Farming Risks
Specific yield farming risks — rug pull, APY inflation, smart contract exploit.
Yield farming promises high returns but carries a combination of risks that can result in losing all invested value.
Risk categories:
1. Smart contract risk • Bug in code → exploit → drain funds • Examples: Poly Network ($611M), Wormhole ($320M), Ronin ($625M) • Mitigation: audited protocols, Insurance (Nexus Mutual)
2. Rugpull • Newly launched protocol with high APY • Team withdraws liquidity and disappears • Mitigation: Team doxxed, timelock, audit, track record
3. APY inflation • High APY paid in protocol token • Token is inflationary → APY value drops quickly • Real APY << nominal APY • Mitigation: calculate APY in dollars, not native token
4. Impermanent Loss (LP) • In volatile pools IL can exceed fee income • Mitigation: stablecoin pools, concentrated liquidity Uniswap v3
5. Oracle manipulation • Flash loan attack manipulates price • Protocol thinks asset is worth more → overcollateralized borrowing • Mitigation: Chainlink, TWAP oracle
6. Governance attack • Attacker buys governance tokens → malicious proposal • Beanstalk protocol: $182M governance attack
7. Admin key risk • Team can upgrade contract and take funds • Mitigation: timelock (24h+), multisig admin