This post explores the bull case for YFI in a broader crypto bull market. The intention here is not simply a price prediction but to aid in analysis by crypto investors.
Warning: This is a post about the bull case for YFI. The bear case is $0 e.g. with a severe smart contract bug. Please do your own research and never invest more than you can afford to lose. Take this warning seriously.
At the time of starting this post, YFI was around $5000. Currently, it is $12,000 and climbing, just zooming past Bitcoin. That’s right, currently 1 YFI > 1 BTC in terms of price.
Before diving further, let us get the basics out first. YFI is a token from the yearn/iearn ecosystem of products launched by Andre Cronje, a DeFi prodigy famous for “testing in production” (there are risks but he moves at a pace unseen in the rest of the DeFi world).
YFI is often called the “Bitcoin of DeFi” for good reason. Unlike most VC-backed projects that aim to dump on retail investors after the initial hype, YFI has its hands clean. There are no VCs to answer to. There was literally no pre-mine. There is no allocation for developers or future team. There was no allocation even for Andre, the developer! (Satoshi vibes anyone?)
You could farm YFI at launch, so the most active DeFi traders who were early into yield farming were the ones who got their YFI. Many of course soon bought on exchanges as well. YFI remains one of the fairest launches and is a really well distributed token. You can read more about YFI token in our earlier post.
YFI Token Economics
Before diving into the earnings and revenue model, let us first look at the token economics of YFI.
YFI token economics is simple: The maximum supply of YFI is 30,000 tokens. You cannot farm for more YFI anymore.
This has been decided via a governance vote, which is a major strength of the ecosystem. The initial indication was that you could continue to farm YFI but the community decided against it. So the maximum YFI supply has been reached for now.
The other important thing to keep in mind is that YFI is a dividend paying crypto token. The dividends do not come from inflation, but rather from earnings that the protocol generates.
Lastly, YFI is a governance token. The holders of YFI have a real say in what proposals are considered by the community and what gets implemented.
YFI Business Model
With the above information, you can treat the YFI protocol and ecosystem very loosely as a company for the purposes of our analysis. The business model of YFI is asset management. To this end, the YFI ecosystem has several products launched and several in the pipeline.
For now, consider just the y-vault. y-vault is a two sided marketplace for capital providers and capital deployers. Let us understand the motivations of both these groups of people to understand how YFI holders ultimately benefit.
Capital Providers to y-vaults
For capital providers, y-vault provides an easy way to gain exposure to the highest yield opportunities in DeFi without having to worry about managing all the details themselves and without having to pay a ton of gas fees at every step.
As an example, consider the following simple situation: you have some idle capital that you want to put to use, say in USDC. You decide to lend it out on Compound for a measly APY but also some COMP rewards. You could probably do better, but you are not that sophisticated in DeFi yet.
Instead, you can simply deposit your USDC to the y-vault and it will automatically shift your money into the highest farming strategies. For example, it may move your money to Aave or continue to farm on Compound, but it might also move your money to Curve yPool and earn CRV to get a higher yield.
As another example, consider a more sophisticated DeFi investor who keeps up with all the latest trends and yield opportunities. Say you discover Curve CRV mining is the optimal strategy for you. However, you only have a few tens of thousands of USDC, so you pay a ton of gas in claiming CRV each time and selling CRV for USDC each period. This fee can be significant over the life of your investment.
Worry not – if you deposit your USDC into the y-vault, it will pool all the capital and make these gas-expensive transactions once for everyone, so you pool the transaction fees as well, thus saving you a lot of money in the process.
Therefore, capital providers to y-vaults have two primary motivations:
- Not having to worry about finding the best yield strategy and instead letting y-vault give them the best yield over time.
- Not paying for gas fees with the optimal yield strategy that can significantly lower returns otherwise.
Capital Deployers to y-vault
Capital deployers develop “strategies’ that determine how the capital is deployed. Their job is to come up with better yielding strategies over time with similar or lower risk, so that capital can move towards their strategy. The more capital deployed in a strategy, the more the creator of the strategy makes.
Currently, Andre the founder is creating all strategies and giving them away for free. In the future, you could have more sophisticated capital deployers and strategies across multiple protocols and across spot and derivatives markets.
Strategies can be somewhat complex. Here is a flowchart of how the LINK vault works to maximize yield, courtesy of ChainLinkGod.
This of how efficient it is for someone to just lock up their LINK in this LINK vault and not worry about the strategy and instead just get more LINK over time from yield and protocol incentives.
Once you understand the above business model, it should be obvious how attractive YFI can be. YFI holders get fee from this model. Currently, the fee is set at 0.5% withdrawal fee and 5% “gas action” fee but this can be changed in the future via governance. Over time, y-vaults can become fully functioning crypto-asset managers in a completely decentralized and community-driven way.
YFI Price Model
We model the bull case in this spreadsheet where you can change your assumptions and arrive at a price.
In a crypto bull market, there is a lot going on for a product like y-vault and the holders of YFI get immense benefits from all the yield farming hype. Remember, even the currently simple strategy for farming CRV on curve has over 100% APY.
- AUM (Assets Under Management) grow exponentially in an exponential crypto market. If SNX goes 10x, then the SNX locked in the SNX vault goes 10x too, so the 0.5% withdrawal fee is worth 10x.
- Gas performance fee goes very high as new yield farming opportunities arise. Whenever the protocol harvests a governance token or another yield farming token and sells for the vault’s underlying token, the 5% fee is charged. This can be substantial.
- Low overhead for the protocol. Andre is a prodigy and his work directly benefits YFI holders.
- New product launches. There are talks of insurance products. There are talks of a venture-style investment product. Some contracts are already deployed. All these benefit YFI holders in the end. The DAO can be wrapped up within the yearn ecosystem and YFI holders reap the fees.