Note: All anyone has been able to talk about over the past week is a new project on the scene: Yearn.Finance (YFI). We’ve been taking our time to fully digest the project to provide you some actionable insights but wanted to flag the project on all our clients radar. Just as an FYI, members of our team have purchased YFI over the past week but it is not a sizable portion of any of our portfolios.
YFI has hit the crypto scene hard and fast. The project was launched about a week ago and has an extreme level of interest and participation (just take a look at all the active governance discussions despite the project’s very young age) and has attracted north of $400M in AUM (which places the protocol above Curve’s $342M and right below Synthetix’s $480M in locked capital).
At its core, Yearn.Finance automates the complex world of yield farming by automatically depositing stablecoins in the highest yielding protocols (Compound, AAVE, Curve and others).
A quick token history primer
Creator: Andre Cronje created YFI with no premine and kept no tokens for himself which was unnaturally fair for the community.
Supply: 30k initial max token supply (Proposal 0 has passed allowing for an increase in supply. The specific amount is currently being discussed).
You can earn YFI by:
- Participating in the governance process and then staking to the governance pool for a pro-rata portion of system fees. This is a little complex since YFI token holders currently do not control the voting process. To take part, one has to provide liquidity on a specific balancer pool (98% yCRV and 2% YFI), stake the tokens which are a claim on this pool (BPT), and vote with these tokens. The issue is that stablecoin holders control governance – given the pool is mostly stablecoins vs YFI holders themselves – though there is currently a proposal to change this dynamic. Net, those participating in the governance process will earn some YFI.
- By providing liquidity in the above pool one can earn YFI.
- Liquidity providers in the curve.fi yearn pool who stake their yCRV earn a portion of YFI. The last two bullets are funded by a pool of 10k YFI in token rewards.
Token Price: As our friend Tony Sheng puts it there are ponzinomics at play driving the token price higher (Currently at $2,600 and was $1,500 a day ago)
- This is driven by a limited supply (30k currently distributed to liquidity providers over 7 days) and creative pools (in the 98%/2% DAI/YFI pool users are locking up tons of DAI which rebalances to market buy YFI, driving up the price).
Currently YFI’s governance form is very active, from discussions on Andrew Kang’s idea to convert governance rights to YFI Holders (we agree) to recent discussions on Proposal 0 and beyond. The latter proposal was a decision on whether or not to allow for issuance beyond the 30k initial supply which is necessary to incentivize current and new entrants to use the protocol. Proposal 0 has since passed with 61% voting yes. Ironically, up until the last day the community was in strong favor of capping the supply forever until a few whales stepped in to sway the vote as long term sustainability is more important vs a static supply.
Given issuance is a hot topic, there are active discussions (models on issuance ranging from 10% per year to 25%) and follow up proposals on the best path forward. The latest ideas on YFI’s issuance comes from Substreight with the following proposal ideas:
- Proposal A: 50K YFI hard cap, with 20K issuance going to LPs and Multisig/DAO (75% and 25%).
- Proposal B: Pay Andre 2k YFI over 10 years.
- Proposal C: Distribute LP YFI rewards proportionally to TVL vs equally to existing pools (yearn, balancer, governance). This would do more to reward users and providers to the platform vs driving rewards on pools to drive the token price higher without necessarily incentivizing protocol usage.
Beyond proposal 0 there are currently six proposals open, including proposals to halve the YFI weekly supply the same as bitcoin (YIP 8), apply Adaptive/variable YFI issuance based on proposed formula (YIP 9), Transitionary YFI Only Voting (YIP 10), and reducing the quorum for accepting proposal (YIP 12).
To pass a proposal, currently 33% of existing governance tokens (representing ownership in the yCRV/YFI pool) must vote for a proposal and a majority (>50%) has to be obtained to pass a proposal. If YIP 10 and 12 pass, governance will shift to YFI-based voting (YIP 10) with 20% quorum (YIP 12) to allow more proposals to be approved
Yearn is moving at an unprecedented rate; in 3 days they plan to release v2 of the project’s UX which will drastically reduce gas costs for interacting with the platform (we have witness >$200 fees) and move the protocol away from simply chasing the highest APR yield farming project to a more nuanced active strategy. With V2, anyone can submit their own yield farming strategy which can be accepted by the stakeholders and to incentivize the inflow of winning strategies, proposers can set a percent of rewards they are looking to earn.
My TLDR thoughts below as we know our members appreciate to the point responses
- YFI has an unmatched level of excitement which happened very fast. We would not fight this trend as excitement feeds a virtuous cycle of involvement.
- Be cognizant this protocol is extremely new and faces high technical and execution risk.
- The community has quickly moved from speculators to active governance participants which is positive. With over 10+ proposals being debated to date, community members are interested in evolving the protocol.
- YFI launched with an extremely fair token supply distribution. Andre could have taken a massive stake, but he did not. While bitcoin was also released by Satoshi to the world, YFI’s founder effectively gave up the reins faster since the community was so involved in such a short amount of time. Granted, we don’t know how much YFI Andre owns.
- Andre gave control over to 9 multisig holders. These holders can only elect who can mint, but formal governance by governance token holders is required to decide actual issuance. I’ve personally never seen a creator give up control of a project so quickly, and this allows the community to truly take creative control from inception.
- The project itself makes a lot of sense; automating the complex process of yield farming is essential for efficient flows of capital and can help calm the madness of retail blindly chasing the next best crop. There are risks here such as where capital is allocated (have to avoid fake projects).
- Issuance is the most pointed governance debate today; a 30k initial supply with limited options to acquire initially did drive massive interest. Regardless, YFI issuance needs to be sustainable to ensure liquidity providers and users are incentivized to leverage the platform over the long term. This is in contrast with today where rewards are granted to pools which are effectively just fueling a higher token price.
- If YFI becomes a governance token (remember yCRV has control today and legally may have been a good idea to allow the community to transition governance power to the core token post release), stakeholders can decide a fee flow to holders which is a claim on cash flows, issuance and many other value derived actions which could result in more value for the token itself.
- On the market itself, YFI further cements the idea we are in a DeFi bull market. A week old project attracting enough capital to place it at #5 on DeFi pulse and a more active governance form in a week than some billion dollar layer-1 protocols have is impressive. This means everyone needs to be highly engaged and pay attention as DeFi is sucking all the capital and mental time from every stakeholder in the space which will drive step function improvements in projects and iteration.
- There are only three exchanges to purchase YFI which is driving the illiquid price higher. Users can also leverage 1inch Exchange as well which pool liquidity or effectively acquire through balancer’s pools.
- We are bullish on V2, which could automate more nuanced yield farming strategies with a better understanding of risk vs just chasing the highest APR.
Given how fast YFI hit the scene, we’re honored to be able to actively cover the space. Stay tuned for more updates on YFI as we dig in further.
Thank you to Cooper Turley (who holds one of the nine multisigs) for his thoughts and additions to this Delphi Daily.