Few Understand This

Things got a bit weird this week with internet personalities shilling investments via twitter and more new meme coins than you can shake a stick at. Meanwhile, yearn.finance continues to sit at the center of the DeFi world, reaching $1B in TVL with its YFI token eclipsing the price of bitcoin.

El Presidente

We kicked off the week with Barstool Sports founder, Dave Portnoy, doing his best John McAfee circa 2017 impression. After being reintroduced to Bitcoin investing and the finer points of asteroid mining from the Winklevii last week, it didn’t take long before @stoolpresidente was shilling LINK and OXT to his 1.7M followers, complete with a new sponsorship from BlockFi.

His attempts to pump Link and Orchid were unsuccessful, as he appears to have bought the local top. Portnoy just tweeted that he's sold all of his crypto positions at a $25K loss. Thanks for playing, Dave.

View interactive chart

YFI Soars
As Portnoy’s holdings dumped, yearn.finance’s governance token mooned, eclipsing the price of bitcoin, peaking at over $15,000 before settling down around $14,000.

While 1 YFI > 1 BTC serves for great meme fodder, it's mainly a function of YFI’s small supply, which is capped at 30,000. Regardless, the ascent of YFI has been one of the most captivating stories in DeFi based on a combination of its tremendous growth and unique origin story.

Yearn Finance creator Andre Cronje describes the protocol as a “yield-maximizing robot.” If, for example, you have some Dai to lend, you can send it to a yearn.finance smart contract and the robots will identify which platform (Compound, Aave, etc.) will generate the highest yield. With the ongoing yield farming craze, where protocols distribute tokens to users who interact with them, yearn.finance has become a way to automate and optimize yield farming strategies (e.g., lend Dai on Compound to earn interest + COMP tokens).

So why would anyone be willing to pay between $14-15K for a single YFI token? After all, YFI tokens simply grant holders voting rights on decisions that govern the network. Well, the protocol charges a 5% performance fee and 0.5% withdrawal fees. With over $1 Billion locked in the protocol, yearn.finance is generating serious revenue. Holders of YFI tokens can vote to influence where this revenue goes. Given the limited amount of YFI tokens, some investors equate owning one YFI token to owning 1/30,000th of a yield-optimizing hedge fund (h/t Jack).

Yearn.finance has also developed a strong community based on its “fair launch.” Contrary to many of the largest DeFi projects, which allocated tokens to founders, advisors and early investors, YFI tokens were equally available to anyone who used the protocol (lend/borrow on yearn, earn YFI). Given YFI’s astronomical ride from about $3 to $15,000, this has created a lot of holders with a vested interest in seeing the protocol succeed. This is evidenced by the fact that YFI holders just voted to allocate up to $500K in fees generated by the protocol towards auditing its smart contracts and other operational measures (with any remainder going to token holders).

Yearn.finance and YFI is not without its risks however. Creator Andre Cronje’s Twitter bio famously reads, “I test in prod,” meaning much of YFI’s code is unaudited.

Yearn.finance has been so successful that it’s inspired a litany of experiments that copy YFI’s fair launch but, as far as I can tell, don’t actually do anything useful like optimizing yields.

Yams, Hams & possibly scams

Yams is now on Yams version 2 and heading for version 3. Based.Money. Ham.Finance. Spaghetti Money. These are all things that exist. As with yearn.finance, these tokens were all “fairly launched,” meaning anyone can acquire their tokens via “yield farming.” To try and explain what’s actually going on, I’ll start with this original.

Yams. What are these things? How does one go about farming for yams in the first place? Why would a yam farmer farm for yams to begin with? Well it’s all quite simple.

To farm for Yams you simply send one of eight supported currencies to a Yam smart contract. What does it do from there? It sits there and produces Yams, of course.

So you farmed some Yams. What now? You can participate in Yam governance. Oh and by the way, the amount of Yams you have is going to jump around like crazy as its supply “rebases” every day. Why does it do that? Well because part of the Yam code is based off of Ampleforth — you know, the elastic supply currency designed to maintain stable purchasing power. So is Yam a stablecoin? I’m pretty sure it doesn’t matter.

Ham.Finance, Based.Money, and Spaghetti Money all come in similar flavors. They’re undoubtedly interesting experiments in governance, but unlike yearn.finance, they don’t create anything of economic value beyond producing a hybrid of a governance token and a complicated stablecoin. Mostly, they look like a complex game of chicken with early participants trying to maximize yield out of thin air with the suckers being those who actually buy these tokens on the open market.

So how much interest have these governance experiments attracted? Yam had $750M TVL at its peak before a bug nearly brought the whole house down. Spaghetti Money attracted $200M in 12 hours and is headed $500M. When trying to find the TVL for Based, we were told in a Telegram group that it's “easy to find but difficult to see.” When we pressed further:

While they’re fairly interesting governance experiments, the sheer size and speed in which they’re being generated is cause for alarm. The rise of Spaghetti Money even had Compound founder, Robert Leshner, calling for self-regulation. In general, there’s a growing feeling that this simply doesn’t end well.

Still confused by everything going on within the rapidly changing world of DeFi? Worry not. Few understand this.

- CD

(More to come – Watkins will be releasing a piece early next week that explores the hidden risks of the yield farming craze more in depth.)

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