DeFi investment is risky, so it is advisable to research carefully before investing in DeFi. Many DeFi projects have collapsed lately, and many more platforms may be on the brink of collapse. The lessons from the gut-wrenching event surrounding the collapse of the high-yield DeFi platform, Midas are explored in this article.
What is Midas Investment?
Midas investment was a high-yield DeFi platform paying incredible returns on investments in major cryptocurrencies. Investors in Midas earned returns on their Bitcoin, Ethereum, Polkadot, and stablecoins. Investments in Midas paid around 17% APY which attracted a lot of investors. Investors could also withdraw their tokens whenever they wanted after paying a small fee.
Their DeFi Investment Strategy
To pay such high returns, Midas used quantitative research and trading, which involved the application of complex technical and mathematical techniques to profit significantly, irrespective of market conditions.
Moreso, Midas invested a huge amount of funds in liquidity pools across DeFi. They also built options and trading algorithms that yielded above-average market profits. A part of the deposited crypto went to the platform’s non-custodial wallet, after which it was distributed into a range of vaults.
Each vault had a unique DeFi trading strategy deployed across DeFi liquidity pools and platforms to generate profit. These strategies paid out returns in relatively stable yields similar to what is obtainable in the DeFi industry.
Subsequently, Midas invested in undervalued projects and low-cap cryptocurrencies. They handled this algorithmically, by deploying buy and sell orders at appropriate times on identified opportunities. Before deployment, the platform back-tested the strategy doubling profitable positions while exiting unprofitable trades.
Additionally, Midas used a combination of tokenized long and short positions in the lending market to mitigate risks. These strategies included leverage lending using DeFi protocols for higher profits and short selling using leverage. Like most others, the platform’s focus with this strategy was to increase its BTC earnings since BTC was its core asset.
The Balance Sheet Revelation
Midas received a lot of deposits from investors during the bull rally in the last quarter of 2021. Their asset under management grew from about $3.3 million in July 2021 to over $14 million in October 2021.
Similarly, deposits skyrocketed between January and March of 2022 as investors moved to stable interest protocols to mitigate the risks of downtrends. The asset under management grew by a jaw-dropping 352% to $262 million. The platform equally expanded its DeFi management operations to over 70 protocols.
Conversely, the expanded exposure and positions increased the risk beyond tolerable levels as market conditions worsened. More deposits of about $78 million from customers were followed by a further market decline leading to a loss for the Midas team.
However, the team did not disclose this to investors on time and instead kept on accruing yields to their balances. The accrued yields were just numbers on the screen, and investors kept depositing money to the platform.
Hence, in March 2022, the platform failed to generate sufficient yield on its $318 million asset under management. In reality, Midas’s liabilities and asset value started to diverge, and its investment at the ichifoundation resulted in a $15 million loss. The platform responded with a rate decrease, slashing the BTC and ETH APR by around 50%, from 19% to 9% and 9.5%, respectively. Stablecoin APR also fell to 13%.
By the end of June, the company was down $40 million, with users withdrawing a third of their deposits from the platform. At this time, it was clear to users that there was a problem with the platform. It could no longer pay the reduced interest rates; a token’s prices soon fell. Midas also lost $1.5 million in the Harmony blockchain hack and $10 million to negative cash outflows.
Altogether, Midas had a total asset liability of $115 million in BTC, ETH, and other assets, while their assets were worth $51.7 million. The deficit or difference between the amount Midas owned and the amount they had was $63.3 million. In response, the company announced closure and a refund plan notifying investors that it would be investing in something else.
How To Cautiously Invest in DeFi
There are many ways to invest in DeFi without getting hurt. Note that as an individual investor, the situation will be quite different from that of Midas, although there are important lessons to learn.
First, a larger DeFi investment portfolio should be kept in stable assets. Gains from yield farming should be converted into stable assets like USDT or USDC. To keep these assets making money, investors can put them in stablecoin pools paying decent APR.
Second, investments with some links to real-live solutions and businesses always outdo pure DeFi investments in the long run. This is because most DeFi investments are driven by speculation with little focus on the solutions they provide. Flexible and stable interest assets like Pandora NFT Securities are a top pick for DeFi investment in this category.
Third, when adding DeFi yield farming as a part of a DeFi investment plan, always farm in projects with a genuine intention and concern for investors. Weigh the long-term commitments as well as the plan for the community. Also, check that the project has sound tokenomics with a strict issuing schedule followed over time.
Lastly, investors must look out for genuine projects that have a committed and consistent team and do not pretend during a downtrend. Instead, such projects launch products like the Pandora NFT Security, backed by institutional investment during a bear market. Projects that do things like this have the best interest of investors in mind and will stay through the downtrend.
Conclusion
In conclusion, Midas investment is gone, but like Celcius, and centralized exchange, FTX, the platform was not transparent enough to warn investors. Great DeFi projects are built around the community, and there must be updates and plans for users during bear markets. Without proper transparency, DeFi projects will lose investor trust, and a lot can go wrong with the project as soon as it fails to win investors’ trust.
To stay safe in DeFi as an individual investor, a large portion of your investment should be in stable assets with lower APR. For example, an investment in a stablecoin pool could yield around 1% APR, which is still higher than what you get from most banks.
The next thing to invest in should also be stable and connected to real-life investment guaranteed to yield returns. Pandora NFT Securities are a sure bet on stable investment assets. Investors can also try launchpads and high APR yield farming as the market recovers. Gains from this investment can get pretty insane, but they are riskier than stable investments. Investors must also ensure that the platform they invest in has a committed and consistent team and that the ecosystem has sound tokenomics.
These materials are for general information purposes only. They are not investment advice, a recommendation, or solicitation to buy, sell, or hold any digital asset or engage in any specific trading strategy. Some crypto products and markets are unregulated, and you may not be protected by government compensation and/or regulatory protection schemes. The unpredictable nature of the crypto asset markets can lead to loss of funds. Tax may be payable on any return and/or on any increase in the value of your crypto assets, and you should seek independent advice on your taxation position.
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