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DeFi Mania: Yield Farming Builds Plane While Flying
An Ethereum token priced higher than Bitcoin (BTC)? DeFi meme-coins with hundreds of millions of dollars thrown at them? In crypto there’s always a craze, fad. It’s part of what makes cryptocurrency so compelling, but it’s also a significant reason why those who enter the space, without understanding risk, get rekt.
While 2020 very early-on was crowned by crypto media as the year of decentralized finance or DeFi, yield farming is its crack cocaine, fear-of-missing-out, go-to phenomenon at the moment, driving triple digit gains and five digit token prices
As always, the information here is presented for informational purposes only and is not financial advice. Use the links below to continue your own research.
Depending on who is doing the analysis, decentralization is either a tool or ultimate goal within the cryptocurrency space. Governance and fairness are often thrown around in an attempt to describe why moving a crypto project from a single source of potential failure is key.
What constitutes enough decentralization is up for debate, of course. Perhaps no community is more obsessed with decentralization than Ethereum, at least in rhetoric. The world of DeFi is where that obsession is playing out in the formation of development teams, exchanges, tokenization, and more, … all constantly put through a decentralization filter.
This can mean more aggregation, more automation -- less overt human influence and less human decision making (a source of subjective bias). Ever-exotic algorithms, bots, and aggregators are developed in an effort to aid what some believe is an elusive task: organic price discovery.
Prices are sometimes referred to as a language and nearly always thought to be a signal. Producers, investors, consumers use the mechanism of price to aid in decision-making processes when it comes to resource allocation and time.
The legacy fiat finance world traditionally uses banks and governments to determine rules of financial roads, causing outcries of manipulation and politicking in what otherwise might be optimum-seeking, efficiency-maximizing economic arrangements.
The interplay between bankers and government minders result in fat thumbs weighing money scales in their favor and seemingly to the detriment of everyone else.
Economic elements as natural as loans and credit and savings, lifeblood of any modern industrial economy, are largely directed by the whims of politicians and those who seek to influence their actions.
One hope for DeFi, and crypto broadly, is to mitigate against such lingering conflicts, opening up the world of access to capital like never before.
This has led to leveraging the power of smart contracts and programmable money, of which the Ethereum variety is most popular, allowing those with crypto holdings to go from passive observers to active participants, putting funds to work.
The battle for nascent markets resides in traders’ need for liquidity, pools of funds with which to trade against. Traders also want gains, yield, attractive opportunities with as little downside risk (usually attributed to artificial human intervention) as possible. The spectacle of yield farming comes closest to bringing those two elements together.
Because Ethereum is its own interoperable universe, variations on traditional finance themes are blossoming. A crypto holder yield farms by lending out funds, borrowing, trading, and even managing their money through increasingly decentralized platforms, creating pots of value from which to leverage.
According to DeFi Pulse -- a site monitoring each protocol’s underlying smart contracts by pulling the total balance of Ether (ETH) and ERC-20 tokens held smart contracts and creating a metric called total value locked (TVL) measured in US dollars -- TVL in DeFi is nearing $7 billion as of publication.
For perspective, this time last year, all of DeFi TVL barely scratched half a billion dollars, and only a month ago, DeFi TVL was considered to be gaining major traction at just under $4 billion.
Oh, yes, it’s boom time alright.
Leading the charge of late has been the attempt to grab yield farmers’ attention by way of so-called meme tokens. Projects like YAM, Ham, Spaghetti, and others offer creative and viral iterations on the yield farming theme.
As kitschy as they sound, meme-tokens have taken-in boat loads of money at various points in enthusiastic price run-ups.
YAM Morality Tale
YAM is probably the best-known recent example of a meme-token and something of a morality tale. It’s a perfect story of how quickly DeFi can move under the rubric of yield farming. In this case, farmers borrowed from other, more established DeFi projects (themselves relatively new) to lock up hundreds of millions of dollars worth of funds in order to farm YAM tokens.
In theory, YAM ticked off all the right boxes with claims of fairness, governance -- an experiment in elasticity for the yield farming DeFi masses.
In less than a few days of existence, however, YAM went from a snide Crypto Twitter reference and into DeFi history book infamy. It raised nearly $400 million in no time, topping out at something like $700 million shortly thereafter, only to come crashing down in a grand total of 48 hours.
Critics charged YAM to be a classic pump and dump, a greed-filled curiosity revealing more about credulous crypto enthusiasts than any real advancement in finance. The rapacious need for high yields caused madness of crowds rushing into un-audited smart contracts for the sake of a free lunch.
There is no such thing as a free lunch.
Analysts are still debating about just what happened to YAM and why it crashed. Some say it was due to a bug, others claim it to have been a con game all along.
What’s more is that the YAM story might not be over, as the project is attempting to pivot into a second version and still has hundreds of millions of dollars to play with.
Ethereum pundit Anthony Sassano observed of YAM in his newsletter how he believed it to be a money game and Ponzi-like. Sassano doesn’t really think that’s such a bad thing so long as enthusiasts are wide-eyed and aware of what’s at risk.
“Although these money games rely on ‘ponzinomics’ to work,” Sassano wrote recently in a YAM version 1 post-mordem, “it doesn’t mean that they are a scam or not worthwhile - it just depends on how the whole show has been set up to run.”
YAM’s memetic quality and “ponzi-like mechanics [...] resulted in the fastest formation of a global community that I have ever witnessed and it was all achieved via monetary incentives,” Sassano insisted.
In other words, playing with an idea has value. Trying things out has value. Again, so long as everyone understands what’s going on is experimental and by definition untested and prone to insane amounts of risk, daring investors (yield farmers) can perhaps stumble into something pretty wonderful.
Perhaps an unintended consequence of the YAM fiasco is causing the crypto world to take greater notice of yield farming as a concept. That in turn has maybe enticed investors to seek out projects with less tongue-in-cheek conceptual models … projects trying to solve real DeFi-related problems.
Enter yEarn dot finance (why-earn).
It’s the brainchild of South African Ethereum developer Andre Cronje (krone-yay). Cronje has been around as a developer for a long time and is well-known and respected throughout the cryptocurrency world.
His project actually predates YAM, and it did gather traction almost immediately in mid-July of this year. However, where YAM was taken less seriously by most enthusiasts, yEarn dot finance carried the gravitas of Cronje’s imprimatur.
yEarn dot finance seeks to be its own ecosystem of aggregation, pulling together DeFi lenders like Aave, Compound, dYdX, and Fulcrum in search of the best yield. Farmers farm farming platforms essentially, having their tokens converted into yTokens (DAI become yDAI, USDC become yUSDC, and so on) to allow for rebalancing in order to find the greatest gains. yTokens are geared to earn both lending and trading fees.
Cronje also introduced a governance token, YFI (why-fee), initially given freely to users who provided liquidity to yEarn dot finance. All of it was done without resorting to an initial coin offering (ICO), appealing to a venture capital (VC) team, no pre-mines, no private sales, no shady allocations out of public view.
That’s right. Cronje gave away the platform for free.
A one-man operation billed as an utter experiment, Cronje continually warned those interested his project was not for the faint of heart. He’s so insistent about how what he’s doing is in an attempt to figure out the potential of DeFi through yield farming that his Twitter bio reads, “I test in prod.”
He’s building a DeFi plane while flying. He’s using live ammunition.
That’s brave because he’s not anonymous and has a reputation -- Cronje isn’t hiding from anyone. Instead of making a meme-token joke of the DeFi space, he’s actually trying to push its boundaries in the wild.
By mid-July, his project had $8 million in assets under management (AUM), earning an aggregate 10.58% annual percentage yield (APY). Not bad for a one-man affair.
But of course this is crypto, this is DeFi, and so the story gets only crazier.
Cronje also “gave away” YFI governance tokens for free to those who supported the platform, apparently not concerned with the token itself gaining much value on its own. And, in fact, governance tokens, until YFI, were a dime a dozen, everywhere, so he was right to have low-expectations.
Boy was he wrong.
YFI went from a price of $0 to more than $2,000 in nearly no time, about two days give or take.
While Cronje was focusing on finding the best way to farm yield farmers through bots and automation, building DeFi liquidity pools, the YFI governance token gained in speculative value faster than anyone predicted.
As of publication, one YFI governance token is priced at more than $15,000 -- beating the per unit price of crypto grand-daddy, Bitcoin (BTC).
The only way previously to get YFI was to actively participate in the yEarn pool, to be part of the experiment. Users. Depositors. Not team members. Not fat-cat VCs. Participants in yEarn got YFI (and, at least so far, Cronje has refused to issue more).
That means, at least in theory, greater decentralization. No large stakeholders are in control. And holding YFI means a say in governance, in how yEarn is run, how decisions are made. It’s all out there, on chain, public -- no back room board members with mounds of YFI waiting to dump on unsuspecting late-comers and noobs.
Cronje stated it plainly enough last month when he announced YFI and how in “further efforts to give up this control (mostly because we are lazy and don’t want to do it), we have released YFI, a completely valueless 0 supply token. We re-iterate, it has 0 financial value. There is no pre-mine, there is no sale, no you cannot buy it, no, it won’t be on uniswap, no, there won’t be an auction. We don’t have any of it,” he stressed.
And that’s often the gap in ICOs, even those not considered scams necessarily: there’s the white paper hype, the biz dev marketing team hype, and then there’s reality waiting to be discovered later through hacks or theft or short-selling.
YFI’s roll out was novel for a bunch of reasons, but maybe the most attractive aspect of it is Cronje and his perceived honesty. In a sea of scams and grifters, the honest person just might have an advantage.
The monster Cronje created, however, soon left the lab and is presently growing in front of our eyes.
In fact, YFI and yEarn are now diverging and clashing with regard to incentives and purpose. Yield farmers, Cronje’s intended target audience, were expected to be all about the experiment, decentralization and “the tech.”
Token investors, those who purchased YFI as a passive investment, it appears, have greater interest in future returns on the token itself rather than decentralized finance as a concept. YFI holders are already barking about capped supplies, questioning its wisdom, for example.
They’re also wondering about YFI’s sustainability over time. Is it reasonable to have one man basically at the helm? Do you even decentralize, bro? Shouldn’t he have a team to help build out the yEarn platform?
Token speculators have also begun to question Cronje’s ultimate motives, wondering aloud if he is who he says he is.
The platform’s gov dot yEarn dot finance portal is filled with active forum discussions, proposals, questions, and concerns.
Cronje had at one time complete control over the platform and pools. He could’ve minted a zillion more YFI at any moment. And before handing off sizeable amounts of the project to the yEarn community through a multi-sig wallet contract, he could’ve easily drained tens of millions of dollars from pools (if not more).
Looked at another way, the governance model is more-or-less attempting a coup d'etat against Cronje.
And while Cronje continues to help hammer-out notions of fairness and governance within the extremely complex ecosystem of yEarn dot finance, putting out fires and taking interviews and answering questions and building, YFI the token continues to reach new price highs.
It’s anyone’s guess as to where all this ends up, whether DeFi and yield farming accomplish more than giving experienced and well-capitalized crypto speculators new challenges. DeFi and yield farming utility in the real-world for non-technical, non-trading experts appears to be a long way off.
What’s clear is that DeFi might be more than hype and yield farming looks to be more than just an experimental playground. Real people are earning real money. Whether that means it implodes as a crypto subculture and sector is still too early to tell.
In the meantime, it’s probably best to end with Cronje’s pinned tweet: “Disclaimer: when I build software, I build it for myself. If you do insist on interacting with it, please use caution, there will be bugs. Interfaces are built to make my life easier. I will make mistakes. If you don't understand it, please don't use it.”
Special thanks to Naomi Brockwell for inspiration, editing, and a great video (embedded, above).