Bitcoin of DeFi

VeradiVerdict - Issue #99

  • Yearn Finance is a yield-aggregating protocol on Ethereum. Users can deposit digital assets into the protocol, which will then allocate it across various DeFi lending protocols and liquidity pools to generate the highest returns. Currently, the protocol is centered around four main product offerings:

    • Earn: This is a system of smart contracts where users can deposit assets into a pool, and the contracts search and re-search for the best protocol (in terms of APR) to lend to. 

    • Zap: This is a one-step solution to exchange any digital asset for any other digital asset. For many digital asset swaps, users must go through a series of intermediate swaps which can be hard to manage or expensive. Zap handles these programmatically on the backend, making it simple for users to swap assets, especially in bulk. 

    • APR: This is a breakdown of the APRs across different assets and lending protocols and provides a quantitative high-level overview of arbitrage strategies.

    • Vaults: This is similar to liquidity pools in other DeFi products. Users can deposit assets in these pools, which are then invested in liquidity mining schemes (like Compound’s COMP token), and then exchanged back for the original asset. Yearn Vaults search for the best way to invest liquidity, and are essentially a handsfree way for users to earn via liquidity mining.

  • As of now, Yearn has nearly $850 million in total value locked, making it the 4th largest protocol by TVL on DeFi Pulse. 

  • Central to Yearn’s operations are the arbitrage strategies for various pools and vaults that decide where tokens should be allocated. Yearn takes a decentralized approach to the governance of these strategies, and launched a governance token called YFI, which can be mined by investing assets into Yearn, and then re-investing the output yToken into a governance contract that returns YFI to the user. Each YFI roughly corresponds to a singular voting right in the protocol. There are only 30,000 YFI tokens to be distributed over the protocol’s lifetime. 

  • Yearn calls YFI a “valueless” token that should be earned, not bought, but the token has exploded in value since its initial valuation at $32 to its current valuation of $15,359. Earlier this month, the token eclipsed the value of BTC, the first governance token of its kind to do so. Given the final supply of 30k tokens, the market cap of the token is $477 million. The token is listed for trade on Binance and Uniswap. 

  • Yearn’s founder, Andre Cronje, came up with Yearn initially as a way to maximize returns on his family’s and friends’ assets by investing stablecoins into various lending protocols. As he scaled his investment volume and optimized his arbitrage strategies, he encoded these into smart contracts that could assess the risk and returns of various lending protocols and accordingly move assets. This grew into the modern form of Yearn, a way for users to earn massive returns with little active management.

  • Ultimately, Yearn Finance has become one of the hottest and most promising DeFi offerings today because it provides a handsfree mechanism for everyday users to earn returns on their digital assets, with almost no overhead. Yearn automates the process of identifying the best lending protocols or liquidity pools, and programmatically manages user assets to maximize returns. The massive growth of YFI further demonstrates the promise of the protocol, since the community sees true tangible value assigned to the protocol’s governance. It serves as an excellent model for a new wave of DeFi offerings that leverage the recent boom of liquidity mining and lending, while maintaining an intelligent system of decentralized governance that incentivizes and rewards community participation.  

The Little Engine That Could –– DeFi Edition

DeFi, or decentralized finance, has been receiving a ton of recent interest as more projects in the crypto space open up opportunities for decentralized protocol governance and liquidity mining. Liquidity mining is where users stake digital assets (crypto tokens) as liquidity for another protocol (like Compound), and in exchange, they receive shares of a protocol’s governance tokens. As these protocols grow in popularity, so do the value of these governance tokens, and liquidity mining has resulting in becoming one of the fastest ways to generate massive returns in crypto today. Some liquidity pools (where users can lock tokens as liquidity) even earn over 200% APY

The craze around liquidity mining has begun to demonstrate that governance (tokens, and also more generally, rights) can have real, financial value (much like shares of a company). The appreciation of governance tokens has naturally incentivized more and more folks to get involved with DeFi, given the control and returns they can get from the space. Still, the forefront of the crypto conversation have always been its most valuable tokens, like BTC. Though liquidity mining is profitable, share ownership in a governance protocol was nowhere near as valuable as holding BTC.

That was until August 20, when Yearn Finance’s governance token, YFI, passed BTC in value hitting $16,600. In just two months, liquidity mining enabled this governance token to do what took Bitcoin nearly 11 years. 

What is Yearn Finance?

Yearn Finance is a yield-aggregating protocol built on Ethereum. At a very high level, it’s somewhat like a financial router that looks at various traits (like APY) of different DeFi protocols (Compound, dYdX, etc.) and finds out the best way to invest a user’s assets to maximize returns from lending and liquidity mining. 

This is centered around four key components: Earn, Zap, APR, and Vaults (or yVaults).

Earn is Yearn’s yield aggregator that optimizes for user returns via lending protocols. Users can deposit assets into Yearn, and its smart contracts searches for the highest rate of return on Aave, Compound, and dYdX, and lends to that protocol. The protocol rebalances on smart contract interaction –– that means every time a user deposits or withdraws assets, the protocol reassesses where it can find the highest rate of return, and moves assets accordingly. This is often trickier than it sounds, because it’s not simply a question of understanding which protocol offers the highest APR, but also the volatility and possible changes to APR. Yearn has built-in strategies to assess, minimize, and payout risks. 

Zap is a streamlined protocol to convert between different DeFi assets. Currently, not all assets in DeFi are supported with 1:1 conversion. That means users may have to go through a series of token exchanges, exchanging their initial token for several intermediate tokens before finally receiving their target token. Zap streamlines that process and handles all the interim exchanges on the backend for the user, making it a seamless token swap. 

APR is an informational dashboard where Yearn tracks the current APRs for various DeFi tokens across different lending protocols. This is designed to be informational and keep the user in the loop about the best arbitrage strategies, at a high level. 

Vaults are another way for users to earn returns on Yearn, much like the Earn product, except that Vaults employ unorthodox methods (not strictly just investing in the highest APY protocol) to generate returns, like liquidity mining. yVaults (whose predecessor was yTokens, a similar concept) are essentially liquidity pools. Users can deposit crypto assets in those pools, and the pool will grow as the Yearn protocol allocates that liquidity in the most profitable way. The protocol tracks each user’s share of the overall vault, and a user’s individual returns are commensurate to the vault’s returns and their particular share. One new development of yVaults is the concept of delegated vaults. In delegated vaults, users can deposit the LINK token which Yearn will allocate as collateral to the Aave protocol. In exchange, Aave credits Yearn with stablecoins like USDC, which can grow in liquidity pools. Finally, Yearn can trade the increased amount of USDC back for LINK, growing the user’s amount of LINK.

Yearn is growing their efforts in tons of ways, including other, new tokenized financial offerings. One particularly exciting product in development is, which is a tokenized models for insurance. LPs (who act as an insurer) can deposit tokens into a liquidity vault. LPs are compensated via the premiums paid by the insured, in exchange for locking their tokens in. Claims are paid out of that vault as well. Customers can provide assets to an insurance vault, where they trade a token like USDT for a vault token like yiUSDT, to insure their USDT. The protocol deducts a fee from the customer’s balance (like a premium) weekly to pay insurers. Customers can stake yiUSDT to submit an insurance claim, and LPs can vote on claims based on their share of the insurance vault. 

How does Yearn handle governance?

Governance is a central topic to any protocol like Yearn, because it fundamentally sets the arbitrage strategies for the protocol. To that end, Yearn launched a governance token, YFI, which is to be earned for community members to propose changes and vote on referenda relating to Yearn’s governance. 

YFI was intended to be first and foremost a voting token, not a financial asset. Yearn itself recommends that users earn it, not buy it. The token can be earned simply by depositing assets into a Yearn, and invest the output yToken into a distribution contract, which will return shares of YFI. Users can think of 1 YFI as corresponding to 1 vote in the protocol. 

The protocol describes YFI as “valueless.” In reality, the token inevitably would develop value due to its constrained supply and high demand –– Yearn only plans to distribute 30,000 YFI tokens over its lifetime, much smaller than other token distributions (like the 21 million of Bitcoin). As Yearn’s popularity and total value locked grew, so did the perceived value of the YFI token. Binance and Uniswap both listed the token on their exchanges; Binance’s listing increased the token value by 50%, while Uniswap’s listing bumped it by 4000%. YFI started trading at $32, but is currently at $15,359.70, higher than the value of BTC. With the expected final supply of YFI, this roughly translates to a market cap of $477 million.

What made YFI grow so fast? It’s like a combination of the token’s limited supply (30,000 tokens is a markedly small amount, especially for a DeFi governance protocol) and the total value locked of the Yearn protocol, which is fairly dependent on its popularity and performance. As of writing, Yearn Finance has $847.9M locked into the protocol, the 4th highest total value locked among all protocols on DeFi Pulse. Altogether, YFI has grown in value because the Yearn protocol has delivered real value to its investors, and there’s many incentives to become part of the governance of this protocol. 

How did Yearn get started?

Yearn’s wiz founder, Andre Cronje, actually started out in law before developing a fascination with computer science and financial technologies. Prior to Yearn, Cronje received attention in the DeFi space for reviewing the code and architecture of several protocols and commenting on their security and prospective success. He started Yearn as a personal project, where he managed investments from friends and family, and attempted to find the best way to invest stablecoins across DeFi protocols. As he gained maturity with allocation strategies, he began to code them into smart contracts and introduced the idea of yTokens (the output token of an investment in Yearn) which would re-query for the most promising APR and accordingly allocate user assets. Slowly, he generalized the system and opened it up to the public.

One of Yearn’s strongest competitive advantages is its token allocation strategies, which generate some of the highest returns across DeFi right now. Naturally, as volume and diversity of offerings scale, it becomes intractable for Cronje to manage the best investment strategies for all Yearn pools. This naturally suggested the idea of decentralized governance, where owners of the YFI token could vote on strategies and guardrails for the protocol, allowing to scale better with the interests of its users. 

Final Thoughts

Yearn has built a layer on top of DeFi lending protocols and liquidity pools that maximizes returns a step further. The insane growth of the protocol to over 800 million USD locked into its contracts demonstrates that the proper arbitrage strategies that deliver huge returns to users who want to invest in DeFi protocols and pools. The genius of Yearn is that the experience is completely seamless for the user. They simply have to deposit their asset and collect their returns; all the algorithmic calculations, token allocations, and currency exchanges and programmatically handled for them in the background. 

Most interestingly, however, Yearn has demonstrated that governance has tangible value –– and that value is massive. The crypto community has become increasingly interested in decentralized governance after seeing the returns from liquidity mining and just how fast governance tokens can appreciate. Still, no governance token has ever appreciated as fast as YFI, eclipsing the value of BTC in a few months. This is even despite the founder calling the token “valueless.” A singular vote on Yearn’s protocol effectively costs $15k at time of writing; participation rights in these governance protocols are high in demand, especially given Yearn’s immense total value locked. YFI in many ways legitimizes the idea of crypto-enabled governance, setting a new standard of decentralized finance, governance, and lending.

- Paul V



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Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. The firm invests in equity, pre-auction ICOs, and cryptocurrencies on the secondary markets. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.