yEarn Finance Is Turning Every DeFi Trader into a Whale

A mini-revolution is brewing in DeFi thanks to yEarn Finance⁠, giving retail investors the chance to participate in the most lucrative yield farming opportunities.

From Humble Beginnings

Crypto Briefing spoke to Andre Cronje about the vision and future direction of the yEarn Finance protocol. But before jumping to the future, here’s a brief look at the past.

The first iteration of yEarn Finance came to life when its creator, Andre Cronje, got fed up with manually moving funds between DeFi money markets to secure the best lending rate. So he built a tool that moved these funds automatically. 

iEarn Finance, as it was then called, was released to the public and almost instantly became a hit amongst the DeFi community.

After a multi-month hiatus, Cronje re-surfaced in July 2020 to build out more use cases for the protocol. The YFI governance token, YFI, was announced and distributed in what is considered to be the fairest token launch since Bitcoin.

yEarn’s market cap went from $0 to $500 million in one month, via Coingecko.

What started as a yield aggregation instrument eventually evolved into a platform that supported automated liquidity mining strategies, simple Aave loan liquidations, stablecoins trading with up to 1,000x leverage, and an easy way to short DAI and restore its peg when the stablecoin is trading above $1.

Soon, permissionless insurance will be added to the yEarn Finance machine. Cronje told Crypto Briefing that this is only the beginning. 

Making Yield Farming Inclusive

There’s a simple rule when it comes to making money: the more you have, the more you can make. 

This principle explains why banks control traditional financial markets, and why traders called “whales” control the crypto markets.

In the current iteration of yEarn, the flagship product is its automated yield farming contract, called vaults. Each vault allows users to deposit a particular token, and the protocol yield farms with it (read more about this here).

But yield farming isn’t too complex for someone already acquainted with DeFi. You deposit tokens into a protocol’s contract, receive its native token, then withdraw your collateral and the newly farmed tokens.

But when you factor in the cost of doing business on Ethereum via current transaction fees, ROI for smaller farmers falls dramatically. Yield farming with less than $10,000, for instance, is almost a complete waste of time because of these high fees.

It is with these smaller users that yEarn has found a clear product-market fit.

Several smaller investors can deposit their tokens in yEarn, pooling funds to form one super-investor. Say 100 users with $1,000 each invest in the yCRV vault. The typical process flow is to deposit tokens in Curve’s yPool, then periodically claim accrued CRV tokens.

Instead of 100 different people each paying a $20 transaction fee to deposit $1,000 in Curve, these 100 people are paying $20 to pool their tokens and deposit $100,000 in Curve. The gas cost is reduced from $2,000 ($20 * 100 transactions) to just $20. Each vault investor effectively paid a transaction fee of just two cents ($20 / 100 people).

But this is just for the deposit side of the transaction. The entire process typically includes depositing, withdrawing, and selling the earned token on a DEX. 

Traders are looking at total costs in the range of $30 to $90, depending on prevailing gas prices. 

Funds locked in vaults are expected to exponentially increase as new strategies are added, via Stats Finance.

The value proposition yEarn becomes much clearer with staking tokens. Staking SNX on the Synthetix Protocol is tedious. However, SNX investors who aren’t staking their tokens are getting diluted by inflationary rewards on the protocol.

Adding to these issues, it costs between $30 to $40 to claim weekly staking rewards on Synthetix. If a staker doesn’t claim their rewards for a particular week, it is forfeited and not carried over to the next week. 

As such, it only makes sense to claim SNX if the reward is larger than the fee paid to claim it.

Cronje is working on building new vault strategies for more assets. Strategies around SNX, KNC, AAVE, and other staking tokens are expected shortly, allowing smaller holders to band together to form one large pool and dramatically reduce their transaction costs.

The direct result of this is higher participation in token staking and optimized returns for those playing with relatively small amounts. Thus, DeFi’s many lucrative opportunities will become profitable for everyone, not just whales.

The Future of yEarn’s Governance

yEarn’s plan for the near future is to finish building out the specs for yInsure, a decentralized on-chain insurance product. When asked if he has any specific plans for new products, Cronje said: 

“I think I pretty much covered everything, I don’t really build based on vision, I build based on need. If a new need arises, I’ll be there to solve it.”

The future of governance on the yEarn platform may be that precise need.

At the moment, the protocol’s treasury is controlled by a 6-of-9 multisig wallet. The community is entertaining the idea of migrating control to a DAO powered by YFI, where token holders vote on proposals, and, if passed, the proposal is executed.

.@iearnfinance's $YFI admin key has been turned over to a 6-of-9 multisig that does NOT include it's original creater @AndreCronjeTech, based

Known Signers include@CurveFinance @Daryllautk @bantg @kaplansky1 @devops199fan @Cooopahtroopa @cjliu49 https://t.co/6B0rkFvkdw https://t.co/rqUeQAevvI pic.twitter.com/dpOy1P4JKZ

— ChainLinkGod.eth (@ChainLinkGod) July 21, 2020

A recently approved proposal, however, signals that the multisig will control the protocol’s treasury for at least the next six months. While this is just a temporary measure to ensure yEarn governance runs smoother in its early days, there is still no concrete governance plan in place.

There are two options: burn all admin access and make yEarn 100% immutable, or take on the iterative protocol approach where token holders control most decisions through on-chain governance.

Governance participation in YFI is increasing by the day, via Dune Analytics.

Burning admin access will maximize decentralization but hinders yEarn’s ability to upgrade and adapt its products. Enabling on-chain governance would make yEarn susceptible to capture by whales, especially with YFI’s low token float. Conversely, this tradeoff allows the protocol to continue innovating at a fast pace. 

Cronje acknowledges the tradeoff with the two scenarios and is still deciding with which approach to move forward.

Andre Cronje Is Still yEarn’s Biggest Risk

No financial product is 100% safe, no smart contract is unbreakable, and DeFi is no exception to these rules. This includes yEarn, too.

Code bugs, faulty logic leading to exploits, or general smart contract risks all apply here. And, in all fairness, this has been disclosed extensively on Medium posts, Twitter announcements, and even on yEarn’s interface since the protocol’s inception.

Technical risk aside, the most significant threat to yEarn Finance is what the corporate world refers to as “key man risk.”

The yEarn community is competent and intelligent, but Cronje is yEarn’s soul. If for some reason, he decided to call it quits with DeFi, the market would likely lose faith in yEarn, crashing prices.

When a sensationalist article claimed that Cronje wanted to leave DeFi, the price of the token flash crashed 36% in two hours. Though order was restored shortly after, the market’s reaction is a sign that he is indeed yEarn’s most valuable asset.

DeFi for Everyone

The premise of DeFi is to cannibalize CeFi and make non-custodial, permissionless finance the standard. DeFi enthusiasts envision a future when anyone can access any financial service. 

But more developers, users, and investors must enter the space for this to happen.

The cost of transacting on Ethereum is the primary point of friction for users starting with less than $10,000. Many centralized exchanges have listed the popular DeFi tokens and are a cheaper alternative to DEXes. However, there’s no way around directly interacting with Ethereum for liquidity provision and yield farming.

If DeFi is ever going to cater to the masses, it needs to be financially accessible and affordable.

yEarn is a step towards this future, creating tools that allow those with smaller portfolios to invest in the same schemes as crypto hedge funds with millions of dollars. It’s a future that lets anyone—irrespective of capital—test the waters of DeFi investing.

Investors with sizeable chunks of capital will still make more money than the smaller fish. But the opportunity to profit shouldn’t be entirely theirs.

Disclosure: Andre Cronje is an equity-holder in Crypto Briefing.