In less than three months, Yearn Finance has grown from a relatively unknown credit matchmaker to one of the main drivers of the DeFi market, with a capital scale of US$670 million (peak value of more than US$1 billion), and it is in the industry today The hottest trend-the core position of yield farming. Yearn’s dominance in yield farming is so convincing that some people use its Token as a yield farming index. With the rise of YFI, Yearn’s future value, impact, risks and opportunities and other complex issues are worth considering .
The birth and rise of YFI
Before July 16, Yearn is a simple DeFi credit integration designed to optimize user profitability . It manages $8 million in assets, and since its launch in January, its liquidity provider’s profits have combined annual revenue of 10.58%. But most importantly, it did not issue tokens.
The next day, July 17, everything changed. Andre Cronje, the founder of “yearn.financial”, published a blog post called “YFI”. In order to transfer control of the yearn.finance protocol to his users, Cronje developed a plan to allow users to obtain YFI by providing liquidity to the Curve and Balancer pools. This may be the first real press conference in many years, when Cronje did not allocate YFI Token to himself and gave up any round of financing, team allocation, pre-mining or similar things. All YFI Tokens are allocated to users of the yearn.financial agreement.
A few months later, the total market value of a so-called “completely useless Token” reached 670 million U.S. dollars, and drove a 770 million U.S. dollar “yield farming industry” (at its peak, nearly 1 billion U.S. dollars). And it earns about 20 million U.S. dollars for Token holders every year.
Industrialization of farming
A long time ago , Compound launched a liquidity mining program, and speculators poured in. Many people called it the DeFi agricultural revolution. Simply put, liquidity mining refers to the process of distributing Tokens to users using an agreement. The purpose of liquidity mining is to distribute control of the agreement and encourage the implementation of the agreement. The community introduced the term “Yield Farming” because users put their capital into the work of the agreement to obtain tokens, which is analogous to farmers working in the field to obtain harvest .
In the weeks after Compound mining was launched, yield farming was fairly simple. You invest your capital in one of several agreements that provide incentives in exchange for liquidity, and then start earning tokens. The first stage of yield farming is similar to an artificial farmer. The user must first define and understand each strategy before manually entering capital. But as more and more protocols run liquid mining programs, yield farming becomes more and more complicated, and this process becomes more and more complicated for many users. In addition, due to the congestion of the Ethereum blockchain, gas fees have risen sharply, and many retail investors no longer participate in yield farming. When yearn.finance launched the v2 (second edition) protocol and introduced yVaults, everything changed.
The most effective idea of yVaults is to present a two-way market. On the one hand, it is the fund provider and the other is the strategy developer. The strategy builder allocates the user’s capital, and the capital provider chooses the strategy they want to use. These strategies have achieved automated yield farming for users. With the launch of yVaults, potential farmers now only need to deposit funds in yVault, and their capital will be automatically allocated to the best strategy. “Vaults” not only reduce the risks faced by users trying to understand the different possibilities of yield farming, but also alleviate their concerns about gas fees by sharing with other funding providers in the capital pool. Therefore, Yearn.finance has become the largest profitability farming project in the industry, and it has made a case that only mature users can participate in in the past.
Circulation of funds
YFI is a challenging project. Its main products Earn (Loan Optimization) and Vaults (Yield Farming Optimization), as well as many different products in the areas of insurance, exchange trading, leverage, venture capital and clearing in its roadmap . In addition, this Token model is still being developed by consulting companies Delphi Digital and Gauntlet. However, it is important to understand how YFI currently makes money from its two main products, Earn and Vaults, because they can make people understand its future (from an economic perspective).
The economy is simple. YFI charges a fee of 5% of its managed funds, and if users withdraw cash, a 0.5% withdrawal fee is charged. The withdrawal fee applies to both Earn and Vaults products, while the management fee only applies to Vaults products. Especially for depository products, every time there is a withdrawal (sale of processed assets in exchange for underlying assets), a fee will be charged. After the YIP-36 plan was passed, it was determined that part of the system cost would be used as operating capital each year, and 100% of the system cost was sent to its treasury. YIP stipulates that the treasury must maintain a buffer of 500,000 yuan equivalent, and all the surplus rewards allocated to YFI are placed in the management pool.
Within one week of implementation, the treasury had accumulated revenues of more than 463,000 U.S. dollars, and annual revenue of more than 21 million U.S. dollars. Based on the market value of US$390 million at that time, this means a price to sales ratio of about 20 times. Considering that the agreement has no cost other than the income from the finance department, it can also be regarded as a price. Profit ratio (price to profit ratio).
YFI’s profit-to-price ratio means that if all YFI holders take stakes, they will receive an annualized return of about 5% (only YFI holders participating in the corporate governance pool receive cash flow). Since about 12% of YFI is currently placed in the pool (a large percentage of YFI is placed in other pools), YFI participants can get an annualized return of about 40%, which means that the PE ratio is 2.4 times . It is best to understand these ratios as a range. Currently, YFI holders participating in the management pool can get about 40% annualized income, but if everyone buys shares, they will get ~5% annualized income. 5% can be seen as a limit based on the current price and profit per token.
Market trend
Yearn’s profitability farming strategy is very successful and has begun to seriously promote the development of the market . You know, Year’s Vaults not only automates user strategies, but also unifies these strategies. Therefore, some users will sell tokens, and some users hold tokens because they like to hold or not pay gas fees. It is better to say that all yVault users are doing one thing. And when this matter is the systematic sale of Tokens, considering the Token assets under management, it will have a significant impact on this Token. The most recent example is CREAM, a decentralized lending protocol based on Compound, which recently launched a liquidity mining program. Since the launch of YFI Vault, the Vault has increased its holdings of CREAM and sold profits to obtain additional YFI. Essentially, this strategy benefits from CREAM speculators who auction the newly received CREAM Token and transfer it to YFI.
The yCRV warehouse below shows what this process looks like from the inside. There are some differences with this warehouse, but the general logic is the same. Replace yCRV with YFI and YFII with CREAM, and the screen will be very similar.
With the implementation of yVaults, as long as this trend continues, the Year system will collect more and more total profits from all the most profitable yield farming. The question then is whether this is sustainable.
Sustainability
Yearn can now generate such a high cash flow, mainly because of its very high profitability . There is a reason for the high rate of return, and the reason for the high is that there is a speculative and enthusiastic support for the agreement of the liquid mining scheme. The reason why “farmers” can obtain a “yield rate” of three digits or higher is because speculators continue to buy new tokens on the exchange. Simply put, speculators pay for the “rate of return” that “farmers” obtain .
It is unclear how long people’s enthusiasm for yield farming will last. It is likely to last until after next year, or it may end overnight. However, once interest diminishes, Token holders will need to find more sources of funds. This may be due to the addition of AUM to compensate for the lower “yield”, or the addition of products to provide other sources of income for the Year system. For YFI Token holders, equally important is the current usage rate of Year . Yearn’s 5% fee means the highest rate of all DeFi agreements. Considering the value Yearn provides to capital providers, this fee may be reasonable. Even Cronje himself believes that YFI Token holders will not simply get income from capital providers.
In addition, under the current system, Year does not pay for the work of strategy authors. It’s as if asset management companies don’t pay their portfolio managers. If Year is used as a decentralized asset management platform (someone compares it to a goalless/arbitrage-oriented automated management platform), it will eventually have to compensate strategy developers, leading to increased costs.
YFI Outlook
Probably no project is more suitable to reflect the development of yield farming than YFI. Currently, YFI provides liquidity rewards of US$7.3 million per day, which requires US$2.6 billion a year. YFI took a ride on yield farming.
However, although YFI is currently the leader in yield farming, it is not the only company competing for the “yield pie” . Not only have several (often questioned) YFI forks appeared in the market, but new yield farming aggregators such as APY.Finance and asset management platforms such as Set V2 will also intensify competition. In addition, as mentioned earlier, the benefits of current yield farming will not last forever. Speculators will eventually stop buying as many new tokens as possible, which will result in lower returns. Although the successful launch of insurance, exchange, leverage and liquidation products in the Year plan may diversify YFI’s income sources and provide YFI holders with option value.
Currently, YFI is still one of the most exciting experiments in decentralized governance . The fair launch of YFI has created a large, diverse and enthusiastic community who are very interested in the success of the agreement. Thanks to Cronje’s professionalism and leadership, Year’s product launch speed is impressive. Few agreements can launch new products as quickly as Year. However, although the current situation in Year is relatively stable, challengers are entering the market. Yearn has to launch many new products, and the risk is far from zero. In the next few months, whether this new community can continue to exert its magic and benefit all stakeholders, we will wait and see.
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