General DeFi Risks

Yield farming and using DeFi protocols poses risks. Mainly, there is:

  • Contract risk: the potential for funds to be lost due to code malfunctions. This is universal to all blockchain applications, and mitigated with audits and use over time.
  • Value risk: as with any investment, there is potential for the underlying or reward asset to dramatically increase or decrease in value.
  • Impermanent loss risk: tied to the above risk, liquidity providers specifically face the loss of value (relative to holding) when price ratios diverge,

With this in mind, it is easy to see an ERC-20 stablecoin with an audited contract (and “degen”-like rewards) as a great opportunity with virtually no risk.

Empty Set Dollar Risks

Participating in Empty Set Dollar has its risks. Mainly, it is important to remember that ESD is an early stage monetary experiment whose value is not derived from any collateral, but instead careful incentives, game theory, and most importantly, others’ trust. There is a possibility that ESD’s system fails, which will realize value and IL risk to the fullest (i.e. ESD becomes worthless).

  • Note that some members of the community have proposed partially collateralization in the future (see here).

In fact, a higher APY generally implies more volatility in the system and fewer users, equating to higher risk. Conversely, a lower APY likely implies lower volatility, more users, and a longer time of existence. Given that ESD derives its value from trust and performance, there is lower risk of failure in this case.

To conclude, here is a quote from Dan Elitzer (from this stream):

"Please don't just ape in [as] there is relatively high complexity to participating in the system… I encourage people to really do their diligence" as there are a "lot of very new, unproven things".