If anyone thought speculation in precious metals markets was getting out of control, crypto traders have taken that frenzy to new levels.
In DeFi, yield farmers are claiming annualized yields of up to 80% APR on tokenized gold.
If that trade sounds reckless and unadvisable, it is. Constructing a trade to achieve yields 22 times higher than a US Treasury obviously stacks up wobbly risks to toppling heights.
Spot gold and silver are volatile enough in their own right, even before adding tokenization, protocol risks, and a daisy chain of trust in offshore third parties.
Gold volatility implied from options contracts is above 24 and silver tops a staggering 65.
And while that volatility has recently rewarded recent investors to the upside — gold is up 69% since the start of 2024 and silver 129% over the same period — in prior 12 month periods, gold has lost 32% and silver 52%.
Successive annual losses have set investors’ savings back decades within months. In 1980, for example, silver lost three-quarters of its value within three months.
Read more: Trump-linked stablecoin USD1 hits 99% APR on Binance Chain
Dizzying risks in crypto gold yield farms
Achieving 80% APR requires trust in ByBit, which is financially incentivizing Byreal, an exchange on the VC-backed Solana blockchain, which has a pool for the XAUT token requiring trust in Tether and Tether’s unnamed Swiss gold vault custodian(s).
The liquidity pool also requires trust in USDT, a stablecoin with an assortment of unaudited assets.
Moreover, the payouts are variable intraday, so achieving 80% APR isn’t guaranteed for the full year. In fact, it could evaporate within days or even hours.
In addition, the yield farm is inherently leveraged and passes on liquidation and impermanent loss risks to users. It also requires payment of fees in SOL and other tokens to third-party DEXs.
Lastly, the interest payments aren’t in cash but, instead, in a Solana-bridged version of Tether’s tokenized gold token, XAUT.
To get XAUT onto Solana, of course, users must trust Legacy Mesh and LayerZero for bridging.
Add up all of the entities and dozens if not hundreds of trust assumptions per entity, and the attractiveness of that 80% APR claim certainly fades.
