Understand the real risks behind DeFi liquidity mining and yield farming before you provide liquidity to pools. Learn how to protect your assets.
When the price ratio of your deposited assets changes compared to when you deposited them, you experience impermanent loss. This can significantly reduce your potential profits.
Example: Providing ETH/DAI liquidity when ETH is $2,000 becomes problematic if ETH rises to $4,000.
Bugs or vulnerabilities in smart contracts can lead to complete loss of funds. Many DeFi protocols have been hacked due to poorly audited code.
Example: The $600M Poly Network hack or $325M Wormhole bridge exploit.
Malicious developers can abandon projects and withdraw all liquidity, leaving your LP tokens worthless. Common in unaudited new projects.
Example: AnubisDAO rug pull removed $60M in liquidity overnight.
High APYs often drop rapidly as more liquidity enters the pool. Your expected returns may be much lower than initially projected.
Example: A pool showing 500% APY might drop to 50% APY within weeks.
The reward tokens you earn may lose value faster than you accumulate them, making your farming unprofitable.
Example: Many yield farmers in 2021 earned tokens that lost 90%+ of their value.
On Ethereum and other networks, transaction fees can eat into your profits, especially for small deposits.
Example: Compounding rewards might cost $50 in gas for a $1,000 position.
Providing liquidity for stablecoin/stablecoin pairs (like USDC/DAI) eliminates impermanent loss risk while still earning fees.
Only deposit in protocols that have been thoroughly audited by reputable firms like CertiK, Quantstamp, or Trail of Bits.
Spread your liquidity across multiple pools and protocols to reduce exposure to any single point of failure.
Consider protocols like Nexus Mutual or InsurAce that offer smart contract coverage for a small fee.
Use our interactive calculator to understand how price changes could affect your liquidity position before you deposit.
Try Impermanent Loss Calculator