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What are the risks and rewards?

Learn more about the risks involved with yield farming, as well as the rewards offered for taking such risks.

Written by Artem Wright
Updated over a week ago

You can only participate in Yield Farming if you become a Liquidity Provider to a pool, which in turn carries relatively higher risk than many other activities in decentralized finance. Some of these risks include:

  • Loss of custody of the wallet used for depositing into liquidity pools and earning LP tokens

  • Volatility of token prices and any resulting impermanent loss

  • Smart contract vulnerabilities and bugs

  • “Rug pulls” by the developers of fraudulent projects that attract investors

  • Regulatory risks

Such risks can be minimized (by, for example, backing up your recovery phrase, depositing more stable liquidity token pairs, working only with fully audited DEXs, keeping up to date on news, etc.) but cannot be completely eliminated. With greater risk, however, comes greater rewards (for example, liquidity pools that include more volatile tokens often have higher Liquidity Provider fees, and thus can often earn higher APYs for liquidity providers).

Yield farming can help add to the potential rewards in this calculation, but yield farming rewards are not guaranteed, as only qualified liquidity pools will earn rewards for liquidity providers (as described above). One of the most important tasks of a liquidity provider is weighing the risks and rewards. If you access the SundaeSwap DEX through the SundaeSwap web interface, you can review the terms and risk disclaimers here.

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