As a DeFi protocol, Yearn has advantages that other crypto asset management companies cannot obtain, such as Grayscale and Celsius. In particular, its permissionless nature allows integration with other agreements, such as the recent agreement with Alchemix.
Written by: Wot_Is_Goin_On
Translation: Li Hanbo Editor: Edward
Summary
- The asset management industry manages 110 trillion U.S. dollars in assets (AUM).
- Yearn cannot be directly compared with asset management companies in the traditional financial sector, but a comparison with Blackrock helps to understand its source of income and early setbacks.
- There are more than 300 billion U.S. dollars in tokenized assets on Ethereum, and these assets are growing rapidly.
- Yearn is leading the risk-adjusted rate of return innovation, putting it in the leading position and benefiting from the growth of assets on Ethereum. This may cause Year’s AUM to increase significantly over time.
- As a DeFi protocol, Yearn has advantages that other crypto asset management companies cannot obtain, such as Grayscale and Celsius. In particular, its permissionless nature allows integration with other agreements, such as the recent agreement with Alchemix.
Introduction
According to data from DeFiPulse, DeFi has experienced explosive growth in the past three and a half years from a total locked-up volume (TVL) of less than US$2 million in the third quarter of 2017 to US$44.6 billion in the first quarter of 2021. Defillama believes that the TVL of Ethereum in Q1 of 2021 is US$68.5 billion. Uniswap’s transaction volume in September 2020 surpassed Coinbase. The question is no longer whether DeFi will disrupt traditional finance, but which DeFi agreements will become disruptors?
Yearn is an asset management protocol based on Ethereum. In the first quarter of 2021, it managed $1.8 billion in Ethereum, stablecoins and DeFi Tokens. But this was last week, and it is now 2.5 billion dollars.
Yearn allows you to deposit your cryptocurrency into a “treasury”, which automatically uses the DeFi protocol to earn yields. The strategies deployed vary in complexity, from simply depositing your cryptocurrency into a loan agreement, to collateralizing your cryptocurrency and investing the loan in another strategy, or getting unsecured from another agreement Loans to take advantage of the proceeds. The recently launched v2 vaults goes a step further, meaning that your cryptocurrency can benefit from multiple strategies in the same vault.
1. Asset Management Industry
In the traditional financial industry, assets tend to be a few well-known asset management companies. Although this industry is by no means a winner-takes-all, it is highly concentrated.
The asset management industry is measured in trillions and is highly concentrated (data as of June 30, 2020)
In traditional asset management, there is no direct comparability every year. It is not a bank, but it earns income through loans. It is not a hedge fund, but it implements an active strategy.
2. Similarities with Blackrock
Source of income
74% of Blackrock Group’s revenue in the third quarter of 2020 came from investment consulting, fees and securities lending. Yearn’s income can also be classified in a similar way.
Similar sources of income. Different technologies.
One outstanding feature of Yearn’s structure is strategic outsourcing. Incentive strategists are what makes Year’s scalable asset management platform different, not a team, or the first person, trying to keep up with all the innovations of DeFi.
Early setbacks
If I compare Yearn with the world’s largest asset management company without acknowledging the two recent setbacks, it would be my dereliction of duty.
The issue of how to motivate funders has caused controversy in the community leading to 6,666 YFI (over 200 million US dollars) minting quota.
Coincidentally, Larry Fink (Blackrock Group CEO) also experienced similar setbacks in the early days.
In 1994, Fink and his co-founders had an internal dispute over the method of compensation and equity.
Before Blackrock, he lost $100 million at Boston First Bank due to poor risk management.
Two revelations.
Motivating people is difficult and usually requires monetary encouragement. This is true for most organizations, whether it is a company or an agreement.
Risk management is difficult. The losses caused by poor risk management practices are not unique to DeFi on Ethereum, nor are they due to the specific programming language used.
The power of DeFi
- How Yearn handles these issues proves the advantages of DeFi on Ethereum.
- Transparency-Anyone can view the transaction shown in the figure below on Etherscan.
- There is no middleman – no need for Goldman Sachs or Morgan Stanley.
When fans of the “Ethereum Killer” talked about what might happen in the future, huge transactions have already taken place on Ethereum to solve real-world problems-in this case, incentivizing contributors to develop protocols.
After the Dai treasury breach incident, Yearn chose to compensate those who lost funds–although there was no contractual obligation to do so. The compensation funds can come from the newly minted YFI exchanged for DAI, or through mortgage loans. Yearn decided to choose the latter, and this transaction once again proved the advantages of Ethereum.
- 155 US dollars can lend 9.7 million US dollars in mortgages
- No paperwork
- No humans are needed, only a purple rabbit is needed.
It is very cheap to take a mortgage of $9.7 million on Ethereum.
It can be considered premature to compare the asset management agreement on Ethereum with the world’s largest asset management company. After all, Year is limited to assets on Ethereum, and Blackrock is not. So let’s analyze the assets on Ethereum.
3. The rise of assets on Ethereum
Ethereum (over 200 billion USD)
Ethereum is currently the largest asset on Ethereum and recently became the top 50 asset in the world by market value.
With a market value of more than $200 billion, Ethereum has become the world’s top 50 assets.
What can you do with ETH, and how does the annualization fit in?
In 2017/18, you can send ETH to a friendly team and they wrote an excellent white paper. If you are lucky, that team is led by Sergey Nazarov (Chainlink), Stani Kulechov (Aave) or Kain Warwick (Synthetix). Most investors are not so lucky, because many teams have not achieved any results except for the white paper.
It is now 2021, and things have progressed. Your ETH has the following options, and each option has its own risk-reward ratio.
- If you think that ETH’s price fluctuations are sufficiently risky, and you don’t need to take additional risks to earn profits, you can store it in a cold wallet or a hot wallet.
- Hold Grayscale’s Ethereum Trust, which allows your ETH price to be exposed in a tax-friendly account, but there is a fee.
- It is held on the central exchange and can be traded at any time
- Deposit it in the ETH2.0 pledge contract and operate the ETH2.0 validator to earn the rate of return
- Deposit to loan agreements such as Aave, compound finance or dydx to earn interest on mortgage loans (and flash loan fees).
- Use it to open a mortgage debt warehouse on MakerDao, and use Dai to earn yield or trade
- Deposit it in Curve Finance to earn transaction fees and rewards in the ETH:sETH pool.
- Deposit it into the steth pool of Curve Finance, and then deposit the Token of the liquidity provider (LP) into the crvSTETH vault of Year to earn the rate of return (consisting of LDO and CRV rewards).
- Combine it with your favorite ERC-20 and earn transaction fees (and liquidity mining rewards) on Uniswap or Sushiswap.
ETH has become a productive asset. But in the future, individuals do not need to regularly assess the risks and rewards of all the above options. People have better things to do, and (on average) everyone new to DeFi knows less than the previous one. They will not devote their time to chasing every income farm that appears.
This is what Year does. Yearn finds the best risk-adjusted rate of return for your ETH (available in scale).
DeFi Token ($93 billion)
DeFi Token is the latest asset type on Ethereum.
Valuable governance token
DeFi Token is mainly composed of DeFi governance Token, and its agreement will generate cash flow. These agreements are at different stages to determine how much of these cash flows should be returned to Token holders.
Each DeFi Token has its own characteristics, because their community tries to find ways to incentivize people to develop the agreement in a way that helps the agreement (and ultimately contributes to the token price). E.g
- Maker(MKR) motivates you to vote to decide which collateral types can be listed and which parameters should be selected.
- Synthetix (SNX) encourages you to mint U.S. dollars on their integrated platform and use them for trading
- AAVE has its security module, which incentivizes you to vote against the listing of assets deemed too risky.
- Compund(COMP) wants you to vote on the interest rate model update
- Curve locks the CRV with a reward of half of the 0.04% transaction fee, and uses the time value of the locked CRV to vote to determine the reward distribution between the fund pools.
- Hegic rewards your fees from option trading, as long as you can bet 888,000 Tokens.
- Sushi wants you to invest in xSushi and earn 0.05% of the trading volume.
- UNI controls the conversion of protocol fees and can force an early transition to an open source license.
In the past year, the value of these tokens has increased significantly because the market has given greater value to tokens that represent a transparent and fair financial system (to the extent that each wallet is considered the same). Anyone with an Internet connection Anyone can use it. Cash flow also helps.
The total revenue of the DeFi protocol recently exceeded 1 billion US dollars (Token Terminal)
Stablecoin
The most popular stable currency stands for 1 U.S. dollar and comes in different forms, such as crypto collateral (such as Maker’s Dai), custody (such as USDC), or algorithm (such as AMPL).
Stablecoins are being transferred to Ethereum, where they can earn money through borrowing, trading, or liquidity mining. When traditional banks pay close to 0% interest, it is difficult to see these stablecoins being exchanged back into legal tender. This partly explains why the supply of stablecoins on Ethereum has increased by 600% in the past 12 months.
People prefer stablecoins on Ethereum to U.S. dollars in banks ( https://duneanalytics.com/hagaetc/stablecoins )
You can now earn stablecoin revenue by providing liquidity to the protocol. Either deposit them into a loan agreement, such as Aave or Compound Finance, or deposit them into AMM such as Curve Finance.
One problem with depositing stablecoins on Aave or Compound Finance is that you may not get the highest rate of return of the two. The original Year agreement solved this problem in early 2020, automatically transferring stablecoins to the lending agreement with the highest yield.
Since the beginning of 2020, Year’s stablecoin strategy has made considerable progress, and now the agreement earns interest from borrowing, transaction fees, curves, liquidity mining rewards and leverage, and converts it into a user’s rate of return. There will be more introductions about these strategies later.
Tokenized Bitcoin on Ethereum (US$10 billion)
Even Bitcoin is looking for a way out for Ethereum. By the end of March 2021, there are more Bitcoins on Ethereum ($10 billion) than Microstrategy ($5.4 billion³) and Tesla ($1.5 billion) combined.
Tokenized Bitcoin on Ethereum ( https://duneanalytics.com/queries/4962/9776 )
The company and the protocol have developed some methods that allow you to exchange your Bitcoin for a tokenized version of Bitcoin.
In traditional finance, another version of the entity is also more practical. For example, I can’t earn a profit rate with 1 pound currency, but I can earn 1% APY from the 1 pound balance in my Santander bank account. With wBTC, the largest tokenized version of Bitcoin, you can earn yield in Year’s wBTC vault. The ability to earn yield by lending your tokenized bitcoins means that people increasingly prefer to own tokenized bitcoins on Ethereum, despite the additional risks involved.
If you want Bitcoin exposure, what options do you have? hodl, tell everyone that hodling uses Bitcoin. Or use centralized services to earn revenue, such as BlockFi or Celsius. Your decision will depend on your risk-reward preferences.
What’s next?
The combination of Ethereum, DeFi Token, stable currency and Tokenized Bitcoin forms a market of more than 300 billion U.S. dollars for the asset management protocol on Ethereum. Are there any signs that other asset classes are also entering Ethereum?
Synthetic stock
The chart below shows why stocks are important. The market value of $95 trillion is 50 times the total market value of cryptocurrencies.
50 times the crypto market value of global stocks
Synthetix is the first protocol to create synthetic encryption and traditional financial indexes. Therefore, for many people, Mirror is here, and they steal the limelight with their Mirrored Tesla (mTsla) synthetic equity on Terra (also Ethereum). Their different methods of creating liquid synthesizers, reducing transaction costs and different protocol risks, make this an interesting showdown.
DeFi on Ethereum has proven AMM and lending protocols. For several years, they have worked fairly reliably on stablecoins and other ERC-20 Tokens. As far as these agreements are concerned, synthetic stocks will be just another ERC-20Token, and will be treated the same as stablecoins, DeFiTokens or tokenized Bitcoins. The foundation has been laid, you can:
- Lend your synthetic stocks for income
- Earn transaction fees
- mortgage
- Redeem
- Give it to Year and let him earn money for you.
By the end of 2021, you may be able to combine any ERC-20 Token into a synthetic Tesla with a yield rate derived from mTsla/Tesla transaction fees on Curve, borrowing on Aave, additional incentives for Ironbank leverage, and Yearn’s earnings.
Tokenized stocks (non-synthetic stocks)
Tokenized stocks are one step closer to the “real” thing, because you own the ownership of the stock.
The tokenized stocks provided by FTX are backed by stock shares and managed by CM-Equity. At present, FTX does not allow these tokens to be used outside of its platform. However, the comment that “in the future, there may be other ways to extract tokens from FTX” indicates that this situation may change. Obviously, SBF’s preference will be that they are withdrawn to Solana, but the DeFi protocol on Ethereum has the most traction, so at least there may be a bridge there.
An example of tokenized equity already on Ethereum is wCRES Token: “wCRESToken is a simple ERC20 Token, which transfers the equity rights of CrescoFin to Token holders. There are no restrictions on transferability and no need to accept KYC. Check.” Coincidentally, they are also in the profitability business, and Aave, with Stani Kulechov as a consultant, is likely to be their first choice for profitability.
These tokenized stocks will bring another asset type to Ethereum. Some agreements may accept custodial tokenized shares, and other agreements may accept their synthetic counterparts. This and arbitrage opportunities will create exchange demand from one to another, and this is exactly what Curve can achieve. Then, it will be up to the asset manager on Ethereum to find a way for you to earn transaction fees and any additional rewards available in DeFi. This is what Yearn does best.
IPO on Ethereum (slightly guessed)
Tokenizing existing stocks is a big step in increasing the addressable market for asset management companies on Ethereum. But what about the new stock?
The cost of an initial public offering (IPO) is high. The underwriting fees reported by PricewaterhouseCoopers are shown below. Note that there is no quotation for transactions under US$25 million. Welcome to traditional finance. The column on the right shows the number of intermediaries that can be removed one day using Ethereum.
IPO underwriting expenses in traditional finance
During 2017/18, there were many deceptive ICOs. The reason there are so many is because they are very cheap, and there are many people who have spare money and are willing to take a gamble.
But there are many scams that do not explain all the problems. It is now possible to conduct an IPO on Ethereum at a lower cost.
Many ICOs in 2017/18 turned into illegal securities, but the technology is also applicable to legal securities. So, what will be the first high-profile IPO on Ethereum?
So far, there are only two (I can find), both of which are related to Ethereum (a fund and a trading platform). Ethereum is still considered risky, so don’t expect stable companies to launch an IPO on Ethereum anytime soon. But for a small company with a greater preference for risk, an IPO on Ethereum may be the best way to raise funds.
Bonds too?
Bonds are less risky than cryptocurrencies and stocks (measured by historical volatility). There are more than 100 trillion U.S. dollars in bonds. No one bothered the Synthetix committee to synthesize a 30-year US Treasury bond, sTMUBMUSD30Y, locked in an annual yield of 2.4%. However, there are signs that large traditional financial players are testing the waters.
History of bond issuance on the blockchain (Binance Research, Coindesk)
These institutions and companies are testing this technology because it is cheap. If it is cheap, it can save them money and give them an advantage in the competition with competitors.
Like most assets, the borrowing and trading of bonds incurs interest and transaction fees respectively. In traditional finance, most of the interest and transaction fees are given to middlemen. But imagine that a tokenized version of a 30-year Treasury bond is deposited in the Year’s treasury to earn extra income from people shorting and trading bonds. This may sound illusory, but the technology already exists, and as far as Ethereum is concerned, the bond will be another ERC-20Token (well, maybe there are some technical issues that need to be resolved). The loan agreement first needs to accept bonds as collateral, then Curve Finance (or another AMM) needs to create a liquidity pool where transactions can take place, and finally Year needs to establish a strategy for the bonds.
If it turns out that issuing bonds on Ethereum is cheaper (and all other advantages), and the perception that using Ethereum is too risky will change over time, then it is highly likely that more issues will be issued on Ethereum Bonds.
These agencies will not fight over the $1,000 GAS fee.
Yield-seeking assets
Today, there are more than 300 billion US dollars in assets on Ethereum, and there may be more assets. Yearn is fully capable of becoming the preferred asset manager for those who are willing to take on the additional risks of interacting with more agreements to seek higher yields.
4. Yearn is leading the innovation of risk-adjusted yield.
Previous cryptocurrency yields
Cronje is not the first person to realize the importance of yield in encryption technology. BlockFi provided the rate of return on institutional lending in 2017, and then Mashinsky introduced CELToken as an incentive mechanism (and distributes the benefits more fairly among depositors).
However, these are companies. They are centralized.
The challenge faced by DeFi entrepreneurs is to find a way to trade, borrow, and borrow in a censorship-resistant way that replaces middlemen with code. Even if these models replicate traditional finance, they will have the advantage of transparency, no middleman, and anyone with an Internet connection can use it.
Crypto yield history
Compound Finance’s lending agreement is the first DeFi agreement that allows you to earn revenue. However, it wasn’t until the launch of COMP Token in June 2020 that the usage rate rose sharply.
Synthetix deserves special mention, because they are the first DeFi protocol that uses their Token as an incentive mechanism to develop the protocol (unlike many protocols, even after 2 years, they only give away tokens for fixed investment and then sell them immediately). In other words, Synthetix is partly responsible for APY quotations that are ubiquitous in DeFi – sometimes referred to as yield farming, liquidity mining, or just earning rewards.
At the beginning of 2020, Aave popularized flash loans and used fees to increase the rate of return for depositors. Flash loans allow you to borrow money without providing collateral, as long as you repay within the same block (13 seconds). Many vulnerabilities use flashloans to give them bad reviews within a few weeks after each vulnerability, but they are a useful stress test and make DeFi more powerful in the long run.
Earning rate of return in encryption technology has seen 6 innovations in 7 years. Then Cronje.
When Cronje started developing Year v1, people had to overcome several problems to interact with the DeFi protocol. Even as simple as switching funds between maximum lending agreements, you need to:
- Enough ETH to cover the gas fee every time the interest rate of the lending agreement changes.
- Understand how the basic loan agreement works.
- Understanding of the risks involved
- It took a lot of time-both to check the rate of return and to trade.
Yearn helped solve the DeFi problem
Initially, Cronje conducted these transactions manually. By aggregating capital, gas fees can be shared, instead of everyone needing to understand the details of all agreements, you can deposit your funds and let one person do the work. The challenge is how to automate this process.
Automated innovation
First, Andre must figure out how each loan agreement calculates the rate of return, he explains here. Then he encountered some problems, which he explained here. But soon Yearn moved the funds to the loan agreement with the highest yield.
Then he found a way for the agreement to earn additional transaction fees by providing liquidity to Curve Finance.
When the COMP Token was launched, the prelude to the yield farming in the summer of 2020 was kicked off, which means that Year must include the price of COMP in the yield calculation.
When Curve introduced the “booster” concept of locking CRV, Year found a way to incentivize people to lock CRV indefinitely in order to earn the regular rate of return of the stablecoin pool (3CRV), thereby increasing the rate of return for Yearn depositors.
But Cronje is still not satisfied. Where he sees there are still problems of capital inefficiency, such as capital being idle in Cream Finance (a type of lending agreement in the Year ecosystem). Suppose there are 10 million Dais in Cream Finance that are not loaned out (so there is no income), and Year has a strategy to earn 10% APY on Dai, even for a short period of time. What if Year can borrow Dai at a lower interest rate, earn 10% APY, and repay the loan when the strategy no longer generates excess returns or when the depositors of Cream Finance want to return Dai? This is what Year does-not for its own benefit, but to increase the rate of return for depositors. This is the first agreement-to-agreement unsecured loan.
Yearn’s rate of return innovation
Source link: wot-is-goin-on.medium.com
