How did YFI rise? How will it evolve?

Original title: DeFi! How DOES YFI rise and How will it Grow?

Source: Encrypted Valley Live

In less than three months, Yearn Finance has gone from relative obscurity as a credit broker to one of the prime movers in DeFi, with $670m of capital (peaking at more than $1bn) and at the heart of what is now the industry's hottest trend: yield farming. And forever's dominance in yield cultivation is so convincing that some have turned its Token into an index of yield cultivation. With the rise of YFI, Yearn's future has complex questions of value, influence, risk and opportunity to ponder.

The birth and rise of YFI

Before July 16, Yearn was a simple DeFi credit integration designed to optimize user monetization. It manages $8m in assets and its liquidity providers have combined annual earnings of 10.58% since its launch in January. But most importantly, it doesn't issue tokens.

The next day, July 17, everything changed." Gone forever is Andre Cronje, the founder of "Yearn financial", who has launched a blog called "YFI ". In an effort to transfer control of the hastello.Finance agreement to his users, Cronje devised a plan to give them access to YFI by providing liquidity to the Curve and Balancer pools. This was probably the first real release in years, when Cronje didn't allocate the YFI Token to himself and gave up on any round of financing, team allocation, premining or the like. All of the YFI Tokens have been assigned to users of the Yearn Financial agreement.

A few months later, a so-called "utterly useless Token" reached a total market value of $670 million, and fueled a $770 million "yield farming industry" (which peaked at nearly $1 billion). It makes about $20 million a year for Token holders.

Yield rate cultivation industrialization

Long ago, when Compound introduced a liquidity mining program, speculators piled in, and many called it the DeFi Agricultural Revolution. To put it simply, fluidity mining refers to the process of distributing tokens to users to use the protocol. The purpose of liquidity mining is to distribute control of the agreement and encourage its implementation. The community introduced the term "Yield Farming "because users invested their capital in the work of the agreement to gain tokens, an analogy with farmers working in the fields to gain crops.

In the weeks after the Compound mine was introduced, yield farming was fairly straightforward. You invest your capital in one of several agreements that offer incentives in exchange for liquidity, and then start earning tokens. The first stage of yield farming is similar to artificial field farming. Users must define and understand each policy before entering capital manually. But as more and more protocols run fluidity mining procedures, yield farming becomes more and more complex, and the process becomes more and more complex for many users. In addition, due to congestion on 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 version) deal and introduced yVaults, all that changed.

YVaults' most effective approach is to present a two-way market between funding providers and strategy developers. Policy makers allocate users' capital, and providers of capital choose the policies they want to use. These strategies enable automated yield tillage for users. With the introduction of yVaults, potential farmers now simply deposit their funds into yVault, and their capital will be automatically allocated to the best strategies." The Vaults "not only reduce the risks that users face in trying to understand the different possibilities of yield farming, but also reduce their concerns about gas fees by sharing them with other providers in the pool. So Yearn. Finance has gone on to become the industry's biggest yield-farming project, an example of what it used to be like for mature users.

Flow of funds

YFI is a challenging project. Its main products, Earn(loan optimization) and Vaults(Yield Farming optimization), are along with many different products in its roadmap in the areas of insurance, exchange trading, leverage, venture capital and clearing. In addition, the Token model is being developed by consulting firms Delphi Digital and Gauntlet. However, it is important to understand how YFI is currently making money from its two main products, Earn and Vaults, as they provide insight into its future (from an economic perspective).

Economics is simple. YFI charges 5 per cent of the funds it manages and 0.5 per cent if the user withdraws. The withdrawal fee applies to both the Earn and Vaults products and the management fee applies only to the Vaults products. In particular, for depository products, a fee is charged each time a withdrawal occurs (the sale of a processed asset in exchange for the underlying asset). After the adoption of YIP-36 scheme, it is determined that part of the system cost will be used as working capital each year and 100% of the system cost will be sent to its Treasury. According to YIP, the vault must have a buffer of 500,000 yuan, and all the surplus incentives allocated to YFI are kept in the management pool.

Within a week of implementation, the vault had accumulated more than $463,000 in revenue and more than $21 million a year. At $390m at the time, this meant a price to profit ratio of about 20 times, also known as a price to profit ratio given that the agreement had no costs other than revenue from the Treasury.

YFI's price-profit ratio means that if all YFI holders take stake, they get about 5 per cent in annual return (only YFI holders in the corporate governance pool get cash flow). Since about 12% of YFI is now in the pool (a large proportion is in other pools), YFI participants can earn an annualized return of about 40%, which means a PE ratio of 2.4 times. It is best to think of these ratios as a range. Currently, YFI holders participating in the management pool get about 40 per cent annual returns, but if everyone takes a stake, they will get between 5 per cent a year. 5% can be seen as a limit based on the current price and profit per Token.

Market movements

And forever's yield strategy has been so successful that it has begun to move the market seriously. And remember, forever's Vaults isn't just automating users' policies, it's unifying them. Therefore, some users will sell tokens, others will hold tokens because they prefer to keep them or not pay gas, rather than all yVault users doing the same thing. And when this is done systematically to sell tokens, taking into account managed Token assets can have a significant impact on this Token. A recent example is the Compound based decentralized lending agreement CREAM, which recently launched a liquidity mining program. Since the launch of YFI vault, the Treasury has increased its holding of CREAM and sold profits to obtain additional YFI. Essentially, this strategy benefits from CREAM speculators, who auction off 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.

As long as this trend continues, the Yearn system will harvest ever more of the total profits from all the most profitable yields. So the question is, is this sustainable?

sustainability

The main reason why Yearn is generating so much cash flow is that it is so profitable. Yields are high for a reason, and they are high because of speculative enthusiasm backed by an agreed scheme of liquid mining. Farmers earn triple-digit yields because speculators keep buying new tokens on the exchange. In short, speculators pay for the "yield" that farmers get.

It is not clear how long the enthusiasm for yields will last. It could last well beyond next year, or it could end overnight. Once interest wanes, however, Token holders will need to look for more sources of funding. This could be due to an increase in AUM to compensate for lower "yields", or an increase in products to provide an alternative source of income for the Yearn system. Equally important to YFI Token holders is the current usage of trace. Yearn's 5% fee means the highest rate of any DeFi agreement. That may be reasonable given the value that Yearn provides to the providers of capital. Even Cronje himself does not believe that YFI Token holders will simply benefit from capital providers.

Moreover, under the current system, Yearn does not pay the strategic author to work. It is as if asset managers do not pay their portfolio managers. If Yearn serves as a decentralized asset management platform (some have likened it to a target-free/arbitrage-oriented automated management platform), it will eventually have to compensate strategy developers, resulting in increased costs.

YFI outlook

Perhaps no project is better suited to reflect the growth of yield farming than YFI. YFI now offers liquidity incentives of $7.3m a day, up from $2.6bn a year. YFI has hitched a ride on yield-farming.

But while YFI is now a leader in yield farming, it is not the only company vying for the yield pie. Not only are several (and often questioned) YFI forks appearing in the market, but new yield aggregators such as Apy. Finance and asset management platforms such as Set V2 will increase competition. Moreover, as noted earlier, the gains from current rate of return farming will not last forever. Speculators eventually stop buying as many new tokens as possible, which leads to lower returns. While the successful launch of insurance, exchanges, leverage and clearing products in Yearn's project is likely to diversify YFI's revenue stream and provide option value to YFI holders.

For now, YFI remains one of the most exciting experiments in decentralized governance. The fair launch of YFI has created a large, diverse and enthusiastic community that is very interested in the success of the agreement. Cronje's expertise and leadership helped forever bring an impressive launch. Few deals have been as quick to launch new products as Yearn. But while the search has gone smoothly, the challengers are moving into the market and the risk is far from zero that the company will launch a number of new products. In the months ahead, it remains to be seen whether this nascent community can continue to work its magic and benefit all stakeholders.

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