Join Delphi Research today and immediately get access to our full Member Portal!
Join Delphi Research today and immediately get access to our full Member Portal!

yETH: Now Do You Understand?

Sep 2, 2020 · 8 min read

By Anil Lulla

“Few understand”. “Oh my”. If you’ve spent any time on crypto twitter over the past few weeks, you’ve probably seen these memes a lot (mostly thanks to @learn2yearn).

Today, I wanted to use my Daily to help all our subscribers finally truly understand the following things:

  • What is yETH and how does it work?
  • What assets is yETH bullish for?
  • What risks are there?
  • How has yETH done since launch?
  • Why yETH perfectly demonstrates how powerful YFI truly is?


If I do my job well enough, you should end this post with a feeling of “Oh my”. Let’s begin.

If you need a refresher, it might be worth reading our team’s initial coverage of YFI from July here


What is yETH and how does it work?

yETH is the newest yVault strategy everyone is excited about. yVaults are essentially token containers which then use those tokens to farm based on optimum strategies available to generate the highest-APY yield for the tokens deposited. Basically these vaults act like a roboadvisor (think Betterment) for DeFi.

So what strategy does yETH deploy? It’s easier if I show you.

TLDR: The vault grabs your ETH, locks it up in MKR, generates DAI, puts that DAI into yCRV token, farms yield using the strategy that fits best, uses that yield to buy ETH on the open market for you.

This is great for ETH holders who want to earn high yields while still having exposure to ETH’s upside. The best part of all this is it demonstrates just how composable protocols within Ethereum’s ecosystem have become. MakerDAO’s CDPs are essentially used as a bridge for ETH to be used for farming in DeFi. yETH essentially makes idle ETH an extremely productive asset.


What assets is yETH bullish for?

There’s a reason why yETH has been so celebrated on Twitter. It has been immediately viewed as bullish for three huge communities in crypto: ETH holders, MKR holders, and YFI holders. As you probably realized in the flow chart of yETH’s strategy above, CRV ends up being sold off to buy the ETH that is making yETH users so happy. Immediately, one would think this is extremely bearish for CRV. It’s not as bad as you think.

Let’s break down what this strategy means for each of the assets involved.

The impact yETH has on ETH, MKR, DAI, and YFI is pretty straightforward and should be easy to follow. The impact on CRV, on the other hand, could be more than what meets the eye.

On Monday, there was a signalling vote on whether to introduce an admin fee (to be distributed to those who lock $CRV aka veCRV holders). A 0.02% admin fee received over 97% of the votes. Let’s see what this would look like by annualizing CRV’s volume yesterday and applying that fee for the current distribution of veCRV holders.

While this quick back of the envelope math doesn’t factor in the yield veCRV holders receive from CRV’s liquidity mining incentives, it’s clear the rewards aren’t anything to get too excited over. Additionally, this doesn’t even account for the significant increase in CRV’s supply that will unfold over the next year (from said liquidity mining and unlocking).

Given this, I think it’s safe to say that yETH is still bearish for CRV in the near term since the selling pressure from this strategy will be a lot more than the fees it will help accrue for veCRV holders. It was still worth doing this exercise as an important thing to think through here is how YFI is able to bootstrap protocols. The volume it is directing to CRV has enabled it to get deep liquidity which means more users, which in turn means more fees for Curve holders. Despite the basic math above not painting a bullish picture for CRV right now, you can see how this does have some positive effects for Curve’s protocol.

What risks are there?

Before you run to your wallet to send all your ETH to these vaults, it’s important to remember that there’s no such thing as a free lunch. With these great returns, there are also some risks that we want all our members to be aware of.

First things first, let’s look at a key risk the strategy takes actions to mitigate against: Liquidation Risk. Like every cryptocurrency, ETH is an extremely volatile asset. It can go up and down very quickly in a short amount of time. As most of you know, when locking up ETH into a MakerDAO CDP, you need to have enough collateral to back the DAI you borrow in case the value of ETH decreases. The collateralization ratio users get liquidated at is currently set at 150%.

The strategy mitigates this risk in a clever way. It attempts to maintain a 200% collateralization ratio while being natively integrated with Maker’s oracles so it can effectively know what the price of ETH is going to be for MKR in the following hour. If its Collateralized Debt Position needs to be rebalanced, there are incentives in place (a small commission) for anyone in the community to call the rebalance function on the yVault. Interestingly enough, we’ve already seen this play out with the yWETH vault (the same thing as ETH but wrapped to work better with ERC20 tokens). Another clear benefit is that only one transaction is needed to liquidate the vault position. Compared to Black Thursday, it will be easier to fit in one liquidation transaction with a high gas bounty vs. many transactions with medium-high gas bounty. That being said, not all risk is mitigated. There’s a chance Dai isn’t available at a reasonable price when the vault needs to deleverage.

Due to the composability Yearn leverages between projects, there is significant smart contract risk. Just from yETH’s strategy, you are inheriting the risk of the following contracts: MakerDAO, the yDAI vault, CRV, and obviously Ethereum. Additionally, since yDAI uses yyCRV for yield farming – there’s also exposure to USDT/USDC/TUSD. Fortunately, most of these are heavily scrutinized by community members and have undergone multiple audits. There was even an independent audit on Yearn’s code, documentation, and more published just today.

While audits shouldn’t be taken as a sign to go full degen, they are comforting. What I’m trying to get across here is that most of these are all still giant experiments and to be cautious when depositing a significant amount of your capital to these contracts.

With that out of the way, let’s move on.


How’s yETH currently doing since launch?

You can view the CDP for yETH here. A few key takeaways below:

  • It’s only been a day, and there are already ~137k ETH locked in the yETH vault.
  • At the current ETH price ($444), that’s ~$60 million!
  • As you can see above, the current collateralization ratio is sitting right above 200% with a liquidation price of ~$322 (a 27% decline from where ETH is now).
  • The amount of DAI that can be created from ETH via Maker CDPs is currently at 94% utilization (so only ~25 million more ETH will be able to mint DAI).
  • This means MKR holders will have to vote to raise this limit. An executive vote has already been added to raise ETH’s debt ceiling from 420m to 540m.


It’s pretty impressive to see how much ETH has already been locked up. Our analyst Alex Gedevani did a great job predicting this in his Daily earlier this week, “A Collection of ETH Supply Sinks”.


Why yETH perfectly demonstrates how powerful YFI truly is?

Lastly, I wanted to briefly touch on why YFI and the creation of yETH is so fascinating to our team. The ETH yVault was the first community-developed vault. Developers who submit new strategies that are implemented get 10% of the 5% performance fee YFI charges. As you can see in the tweet above, a simple proposal can generate significant income for a strategy dev.

While Andre is just one man, what YFI has achieved with its brilliant incentive alignment here is tapping into a global network of hungry and talented developers.

It’s hard to give just one reason why our team is so excited about YFI. There is clearly product-market fit. It’s easy to use, especially with the efficiency it achieves for fees. The yields are attractive and it generates revenues for token holders without dilution. But most importantly, it’s been able to build one of the strongest communities we’ve seen in a short amount of time due to its fair launch. This is likely just the beginning for YFI.

Oh my…

Join Delphi Research today and immediately get access to our full Member Portal!

Join Now  or  Sign in