Yearning for Yearn

We all know Yearn. It’s the set-it-and-forget-it yield aggregator running on top of DeFi’s yield-generating protocols like Compound, Aave, Curve, and Convex. Users can passively earn with the click of a button. Within Yearn’s Vaults, strategists continually compete to write the top yield-earning strategies as they are rewarded 50% of the revenue. Over time, the protocol has become synonymous with yield and has garnered an industry reputation as a leading risk-minimized yield source.

But what do we not know about Yearn? What’s under the covers? Sure it’s grown 11x in terms of TVL since the start of 2021, but where is this growth coming from? It’s an important question to understand as a token investment is, in traditional theory, valued at nothing more than the discounted value of future cash flows. And future growth is defined at the margin - so who is the marginal depositor for Yearn?

Yearn’s Anatomy

Let’s first break down Yearn’s multiple products.

• Vaults: The flagship protocol used by the majority of users, Vaults account for 67% of Yearn’s TVL. Users deposit into a vault which is defined per asset and the underlying yield strategies are executed to deploy the capital. As the first iteration, V1 vaults were limited to single strategies and have since been deprecated. V2 launched at the turn of the year and offers more complex yield aggregation as vaults can be powered by multiple yield strategies.
• Earn: Similar in nature to vaults but even more simple. It originally focused on stable assets which users could deposit and underneath the assets are shifted between money market protocols depending on which offers the highest yield.
• Iron Bank (IB): IB is a money market protocol focused on servicing users and protocols. Users are able to deposit approved assets as collateral to earn yield from borrowers or borrow other assets themselves. Protocol users can be whitelisted in order to facilitate under-collateralized borrowing.
• Special: This is a catch-all for non-core businesses. It accounts for yGov and yveCurve TVL.

TVL grew significantly from March through May adding over $4B in TVL. Of the new TVL, 68% or $2.8B came from the new V2 Vaults - by far the majority. However, since May, the V2 vaults have been largely flat up until mid-September where Vault TVL again began its upward climb growing over 31% into mid-October.

Here we have two distinct periods of growth in the V2 vaults. One at the beginning of the year from roughly March through May, and another recent move starting in mid-September. As anyone in crypto can surely tell you, these two periods are both times of significant price appreciation in ETH and BTC; begging the question - is this growth due to organic, new deposits or simply underlying price appreciation?

Yearn has distinct vaults for each asset it supports. 7 vaults hold over $100M in deposits and account for over 76% of the V2 vault TVL. Assets supported in these vaults include the top stablecoins like USDC, DAI, USDT, and the top market cap tokens ETH and staked ETH as well as WBTC. Splitting these vaults out between stable assets and volatile assets and focusing on the raw token counts shows where deposits are organically increasing irrespective of price.

Looking at the first phase of V2 growth from March to June, both deposits of stablecoins and volatile assets increased significantly. Stables grew nearly 5x during this time and added nearly $1B in new TVL. ETH and stETH (yvCurve-stETH) deposits grew nearly 3x and added $400k in new TVL.

The second period of growth is noticeably different. Stablecoin token counts in vaults actually declined from mid-September to mid-October while there has been a sharp increase in new token deposits in the ETH denominated vaults - particularly the yvCurve-stETH vault. Over $670M (170k ETH) has been added to the stETH vault between September 15th and October 15th. 6x growth in 30 days.

Breaking out TVL across the top V2 vaults (vaults over $100M in TVL which collectively account for over 76% of the V2 TVL), the recent growth period trend is clear. USDC TVL has decreased 9% over the last 90 days. DAI has modestly increased 2%. ETH and stETH TVL, however, are up over 118% and 109%, respectively, across the same timeframe.

So there we have it. Two distinct periods of growth for Yearn V2 vaults with different underlying drivers - Phase 1 was heavily influenced by stablecoin deposits while Phase 2 was exclusively ETH and stETH driven. However, despite differences in sources of growth, both phases share one distinctive quality - the sharpness of the growth.

Stablecoin deposits went nearly vertical across April. stETH and ETH have been doing the same since mid-September. With such concentrated, rapid growth drivers, another question is raised - are numerous new depositors coming in, or is this the result of a few, large depositors?

To understand the wealth distribution in the top V2 vaults, various cohorts of depositors are broken out into buckets by how much TVL is deposited from the unique address. For example, depositors contributing between $1 and $100k is one bucket, between $100k and $500k another, $500k to $1M, and so forth. Doing so reveals a distinct relationship between the types of depositors Yearn has in its V2 vaults: wealth concentration.

Despite having over 6,220 active depositors in the top V2 vaults, $2.0B or 76% of the top V2 vault TVL comes from the 30 addresses depositing over $10M. $10M being deposited from a single address isn’t neighbor-nextdoor money, it’s protocol money.

$1.5B or 57% of all the TVL in the top seven V2 Vaults come from 18 identified partner protocol integrations. External protocol partners are directing significant TVL towards Yearn’s vaults in order to repurpose the generated yield as a design component in their protocols.

Alchemix is the largest Yearn depositor contributing nearly $600M in TVL across the yvDAI and yvWETH vaults. Alone it contributes over 76% of the DAI TVL and 44% of the yvWETH TVL.Alchemix protocol takes collateral deposits which are by and large deposited into Yearn’s yield bearing vaults. Yield generated on this collateral is automatically applied as payments to a user’s outstanding loan debt in Alchemix.

Sushi’s BentoBox is the second-largest protocol contributor with over $583M deposited across the yvUSDC, yvUSDT, yvWETH, and yvCurve-stETH vaults. BentoBox is a protocol under the Sushi umbrella that acts as a base-layer protocol for other protocols to build on top of. Its key feature is to allocate idle deposits towards yield-bearing strategies - one of which is Yearn Vaults. BentoBox is the largest depositor in the yvUSDC vault, contributes a third of the yvWETH TVL, and nearly half of the $674M TVL in the yvCurve-stETH. The ETH and stETH deposits are most notable as they can be largely tied to one meteoric protocol building on top of the BentoBox app Kashi - Abracadabra. Both yvWETH and yvSTETH are two of the top three collateral assets utilized in Abracadabra to back its stablecoin, MIM.

In fact, Abracadabra (via Sushi’s BentoBox) and Alchemix play significant parts in the two phases of growth identified previously. Alchemix, initially launched in March with its DAI vault, is largely responsible for the massive expansion of DAI in Yearn during the first period of growth. Abracadabra has increased its TVL by 5x from mid-September and is the driving factor for the second phase of Yearn’s growth which is largely made up of new deposits of stETH and ETH.

Another linkage between these two protocols is their association with theDeFi 2.0 narrative. It’s important to understand the mechanisms driving this narrative in order to understand how Yearn is growing its influence across the ecosystem.

Outside of the protocol-controlled value (PCV) features, protocols that are commonly associated with the DeFi 2.0 narrative largely utilize Yearn’s yield-bearing vault tokens (yvTokens) as a design aspect to make existing processes more efficient. Abracadabra uses yield-bearing assets to back collateralized debt positions. Alchemix uses Yearn yield to self-repay loans. Frax uses Yearn yield to collateralize its stablecoin. Ribbon uses Yearn yvUSDC as collateral to sell structured option strategies against.

Yearn has effectively grown out of being the peoples’ yield aggregator and moved into the role of being the dominant yield partner for other protocols. One could argue Yearn has found the bulk of its growth and product-market-fit as a Yield-as-a-Service protocol (B2B), not as an end-user protocol (B2C).

This isn’t entirely without design. Back in March, prior to the first growth phase, Yearn announced the Yearnpartnership program in which protocol partners who contribute capital to Yearn vaults can earn back half of the revenue generated (after the strategist 50% revenue).

Success with the partnership program comes down to how Yearn is positioned in the ecosystem. Yearn is able to offer a single, trusted integration point to other protocols for yield so that time is not wasted and integration risk is not introduced managing and maintaining strategies themselves. It serves as a capital allocation protocol fully at the disposal of users and protocols alike. However, Yearn differs in the magnitude of the value provided to the two different parties which is manifested in the sources of Yearn’s growth figures. To users, Yearn and its yield is the end goal. To protocols, yield is a means to an end, a tool utilized in the creation of a new product - something that creates additional value and efficiency.

The Next Phase

Where Yearn grows from here is largely dependent on its V3 UI, multi-chain strategy, and the defensibility of its position.

Yearn’s V3 UI was recently released as a beta in September and introduced a number of key changes focused on improving user experience, scalability, multi-chain adoption, and B2B integrations. The bulk of the updates in the V3 UI are on its back-end architecture. A new SDK is introduced which simplifies data aggregation of on-chain and off-chain data within Yearn. It simplifies the integration process for not just Yearn, but also its partners.

Multichain is a huge benefactor of the new V3 UI architecture. Now architecturally feasible in the back-end, Yearn was able to announce in early October it would be deploying on Fantom followed by numerous other EVM chains (provided they have safe, dependable yield sources).

So far Yearn has been able to defend its position in DeFi as the dominant yield aggregator. This is evidenced by its ability to command an industry-leading 2/20 fee model which has generated the fourth largest DeFi protocol revenue in the last 180 days without any liquidity incentives.

Maintaining its dominant Ethereum position while expanding into leading positions across ecosystems with potentially new yield sources, new protocols partners, and new competitors will be the next question to address for the protocol.

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