Overview Overview
This article will explain the recent popularity of Harvest Finance at the product level.
Report report
The recent popularity of Harvest Finance is obvious to all. The lock-up volume rose from 151.48 million USD to 1.08 billion USD within one month, an increase of 7.13 times. Became the 5th ranked DeFi project on DeFi Pulse. This article will explain what Harvest Finance did right and the hidden dangers of the project itself.
Figure 1: Ranking of DeFi Pulse locked positions
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Harvest Finance Product Principles
Simply put, Harvest.Finance has nothing new in the product composition itself. Its functions and routines are exactly the same as YFI, which is to solve the core needs of users to obtain high returns. Secondly, it reduces the user's search cost for high-yield strategies and reduces the user's gas fee cost.
In fact, Harvest Finance's strategy is very simple, basically including two types: CRV strategy and Uniswap strategy. The CRV strategy is to use the income of the Curve platform's own liquidity mining products plus the platform cash flow token FARM subsidized by the Harvest Finance project itself to achieve a rate of return exceeding YFI. The Uniswap strategy is to increase FARM rewards on the basis of Uniswap liquidity mining products.
Uniswap’s liquidity mining has been thoroughly analyzed by many articles in the industry, so I won’t repeat it here. Let's mainly study another CRV strategy with very high operability.
The picture below is the transaction record of the entire block of the CRV strategy. The idea is as follows:
Users exchange their USDC/USDT/DAI stablecoins for fUSDC/fUSDT/fDAI marked by Harvest Finance
The platform transfers the acquired stable currency to the Curve platform to provide liquidity
On the basis of providing interest, Curve issues governance tokens CRV as additional rewards
The remaining 70% of DAI is transferred to the Curve platform to continue liquidity mining
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The Nature of the FARM Token
By intercepting the cash flow of asset management income, this method can give the platform a stable and direct support. However, whether it is Yearn Finance or Harvest Finance, their income comes from participating in liquidity mining. Therefore, once market liquidity becomes no longer scarce, liquidity mining revenue will decline, resulting in a decline in platform profitability. Once platform profitability declines, users will lose and go to platforms with higher interest rates, which will further lead to a decrease in platform cash flow , the value of platform tokens supported by profitability will also decline, causing a vicious circle.
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Harvest Finance Product Logic Crisis
When Harvest converts the stablecoin into fAsset, it has the exchange rate of the deposited underlying assets. This exchange rate increases with each success in collecting profits. There are also events that negatively affect the exchange rate. When using a platform like Curve, take into account the slippage associated with withdrawing a single asset, as well as withdrawal fees. These fees will currently be socialized across the fAsset pool when a user exits Harvest, but in the near future will be charged directly to the user, triggering slippage. This means that fAsset's pool value will no longer be affected by these negatively affecting transition events.
However, it is a pity that this exchange logic has been challenged and has been proven to have great hidden dangers. Just two days ago, an attacker used "flash loans," a technique that allows traders to leverage at scale without any downside risk, to manipulate the prices of stablecoins on DeFi platforms for profit. This vulnerability caused Harvest’s platform currency FARM to plummet by 65% in less than an hour, and the total value locked (TVL) of the project also fell from US$1 billion before the vulnerability to US$406 million as of the time of publication. The funds were eventually exchanged for Bitcoin (BTC).
Harvest Finance’s USDT price started to drop as the attackers swapped tokens back and forth. The attacker then exchanged the discounted USDT for the stablecoin withdrawn from the flash loan. The attacker performs this action multiple times. Every successful exchange is converted to Ethereum (ETH), then subsequently converted to WBTC and renBTC, and then BTC to cash out.
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The Temperament and Future of Liquidity Mining DeFi Products
Finally, let’s discuss several important qualities that make liquidity mining products popular:
Fair launch: The main goal of new DeFi projects now is to distribute most tokens through some objective criteria, rather than through direct token sales. This ensures that everyone gets the distribution equally.
Proposed decentralization: The main goal is to gradually achieve community ownership and minimize fund management, allowing the community to self-govern the project, thus allowing the community to gain greater autonomy.
Growth Marketing: The main goal is to incentivize specific user behavior over a period of time.
The emergence of these unique temperaments is mainly due to the following reasons:
The ICOs of 2017 taught retail investors a huge lesson. A large number of private placements of tokens were sold to investors, and the withdrawal of these investors made the entire project look like the purpose of cutting leeks. Liquidity mining has largely leveled the playing field, allowing both institutional and retail investors to have equal opportunities to own protocol tokens.
The benefit of liquidity mining is that token holders are more likely to be protocol users, and they are more involved in the project, with higher loyalty and activity. Users with protocol ownership are incentivized to help the protocol succeed. By sharing potential financial advantages early on, yield mining projects strengthen community engagement and help protocols launch or transition to community governance.
In DeFi, liquidity = availability. Yield mining projects lead to more capital inflows, creating a positive cycle when tokens appreciate in value, lowering barriers to entry for teams launching new projects and gaining traction in the market. This would also lead to a downward spiral in the opposite direction - just as Bitcoin miners shut down their platforms when the price of Bitcoin falls below a certain threshold, so too do liquidity miners withdraw funds from AMMs or lending pools when the economics no longer make sense withdraw their funds. This cycle accelerates the pace of innovation, which ultimately benefits the industry as a whole, for reasons already mentioned.
At the same time, sustained high inflation rates could destroy the value of all token holders. Additionally, high inflation could exacerbate governance-related attack vectors, which could have implications for the broader DeFi ecosystem. For example, if a token X with an unlimited supply and adjustable inflation is accepted as compound collateral, a malicious actor could vote to mint an unlimited amount of token X and steal the compound collateral. One solution is to hardcode the low inflation tail into a community managed vault, or hardcode the option to include the final inflation, with an initial setting of 0% and an inflation cap.
Conclusion
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