Why Yield Farming Incentives Are a Security Time Bomb

Incentives attract price-insensitive capital that chases the highest APR, not protocol utility. This creates a Ponzi-like dependency where token emissions must perpetually increase to prevent a TVL death spiral.

• >90% of farmed tokens are sold immediately, creating constant sell pressure.
• Protocols like SushiSwap and Trader Joe have spent $1B+ in emissions to retain fleeting liquidity.
• The result is negative-sum economics where only the fastest capital wins.

Yield farming is the primary weapon for protocol-level arbitrage, where new forks drain liquidity from incumbents by offering higher emissions. This forces a race to the bottom in tokenomics.

• Uniswap v2 forks like SushiSwap executed the original vampire attack.
• The threat forces established protocols like Aave and Compound to maintain inflationary token policies.
• Creates a permanent state of economic warfare, diverting resources from product development to bribery.

Farming emissions distribute governance tokens to actors with zero long-term alignment. This leads to vote-buying and proposals that prioritize short-term farmer payouts over protocol security and sustainability.

• Seen in Curve Finance wars, where Convex and Frax battle for CRV gauge control.
• Results in protocol-owned liquidity (POL) becoming a necessity, as seen with Olympus DAO, creating a new centralization vector.
• Real yield protocols like GMX are an implicit critique of this failed model.

Yield farming rewards for lending created a perverse incentive to borrow worthless assets as collateral, enabling the $130M+ flash loan attack. The protocol's own token emissions subsidized its own insolvency.

• Vulnerability: Incentivized borrowing of low-liquidity assets to farm CREAM.
• Result: Attackers deposited manipulated collateral, borrowed everything else, and left the protocol with bad debt.

SushiSwap's liquidity mining program directly siphoned over $1B in TVL from Uniswap in days, proving capital is mercenary. The short-term incentive (SUSHI tokens) worked too well, creating a ponzi-nomic model where sustainability depended on perpetual new emissions.

• Tactic: Higher token rewards to lure LP providers.
• Long-term Effect: Created massive sell pressure and governance dilution, a template later copied by dozens of forks.

A "fair launch" farming pool on Binance Smart Chain was drained of $1.4M in 10 seconds by a bot. The public pool contract and timed start created a perfect MEV opportunity, turning a community incentive into a miner's jackpot.

• Flaw: Transparent, time-locked launch allowed for frontrunning bots.
• Lesson: Naive incentive distribution without anti-sybil or randomness is just a public bounty for validators.

Incentives to provide LP tokens as collateral allowed a logic flaw to be exploited for $7.8M. The protocol's design prioritized TVL growth over security, accepting LP tokens without properly validating the underlying liquidity, enabling a fake collateral attack.

• Root Cause: Accepting LP tokens without robust price validation.
• Systemic Issue: Yield farming pressure leads to lax risk parameters to attract capital.