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DeFi yearn.finance DeFi Digest OKEx Insights

Yearn.finance proposes trade off between future development and Bitcoin’s ideology

2021.01.25 Matthew Lam

OKEx Insights' DeFi Digest is a weekly examination of the decentralized finance industry.

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The pressure from sellers continued this week and decentralized finance was not immune. The total value locked in DeFi products dropped to $21.92 billion on Jan. 21, although it regained losses over the past three days to reach $25.81 billion by press time.

Additionally, the weekly average trading volume of decentralized exchanges plunged by 11% and stands at $1.79 billion, as of the time of this writing. Uniswap continued its leadership among DEXs with a 41% market share.

The total borrowing volume in the DeFi lending sphere also dropped by 4% as Compound maintained its market dominance in this sector with a 48% share. Curve retained its leadership as the largest liquidity pool — posting in a 17% weekly increase, with its total value locked amounting to $1.32 billion.

Weekly average trading volumes on DEXs saw a notable decrease. Source: DeFi Pulse and DeBank

Sharing Bitcoin's fixed-supply ideology

It has been a hectic week for DeFi yield aggregator Yearn.finance after the community discussed a recent funding proposal regarding the minting of YFI tokens. The argument presents a tradeoff between the protocol's original vision and its future development.

Yearn.finance is a suite of DeFi products that provides lending aggregation, yield generation, and insurance on the Ethereum blockchain. The protocol has a governance token, YFI, and has generally shared a similar supply philosophy as Bitcoin by fixing the total supply at 30,000 tokens, with no pre-mine, team allocation or founder rewards. This scarcity of YFI led to a massive return of 35,000% in the first week of its listing on Uniswap.

In September 2020, Yearn.finance founder Andre Cronje proposed the prevention of future issuance of YFI by setting a hard-cap of 30,000 tokens. However, the proposal was not enacted — despite the fact that it gained over 90% approval. According to Yearn developer "Tracheopteryx," Cronje did not make an official yEarn Improvement proposal, or YIP, for the YFI token supply. There was no binding vote to burn the YFI minting keys. As a result, there is currently no hard-cap on the total supply of YFI.

Retaining Yearn developers

The discussion regarding the total supply of YFI was brought to the table once again when the Yearn community began debating on the future development of the protocol. Community member "yfi_lit" expressed concern over retaining Yearn developers and proposed minting 1,000 YFI tokens to incentivize development. However, 60% of voters went against the proposal.

The Yearn community seemed to form a consensus on rewarding developers through the YIP-56 proposal — Buyback and Build Yearn. The so-dubbed "BABY" proposal would not mint new YFI and has two key objectives:

  1.  Replace YFI staking rewards with YFI buybacks
  2.  Retire the YFI governance vault

The individuals behind the proposal believe that the low annual percentage yield of YFI made it uncompetitive for holders. This could dissuade YFI holders from participating in governance. If the proposal is enacted, the YFI buybacks would benefit every YFI holder — instead of only those staking the governance tokens. The capital appreciation through YFI buybacks could be taxed less than dividend income through staking rewards. Moreover, the retirement of the governance vault would allow users to participate in governance — even if they supplied YFI on liquidity pools in other DeFi protocols. 

The proposal passed with over 99% approval.

Minting new YFI

On Jan. 22, eleven core developers and community members put forth a proposal called "Funding Yearn's future" in an effort to mint 6,666 YFI — a third of which would go to core contributors two-thirds of which would be put in the treasury managed by the Yearn community.

The Yearn team believed that the latest funding proposal consolidates the vision of the BABY proposal while still retaining core contributors. They acknowledged that the reward packages to developers are not competitive and some contributors are poached by other projects' teams. In particular, Yearn.finance had an operational treasury of only $500,000 and zero tokens allocated to the team — making it nearly impossible to compete with rivals such as Uniswap and Compound.

ProtocolsTreasury size (USD)Tokens allocated to teams (USD)
Yearn.finance$500,0000
Uniswap~$2 billion~4 billion
Compound~176 million~580 million
Yearn.finance has struggled to retain talent due to limited treasury resources and lack of token allocation to teams. Source: Yearn.finance

To retain core developers, the Yearn team has stated that minting is the only reasonable way to bridge the gap between the protocol and competitors. After gathering feedback from the Yearn community, the team decided that a ~20% increase is the minimum viable amount to provide a competitive plan for developer retention. As such, they proposed the aforementioned mint of 6,666 YFI — 22% of the current total supply.

A compensation working group would be set up to finalize compensation packages and vesting terms for eligible developers. The working group will also be responsible for the recruitment of new contributors.

Funds in the treasury, meanwhile, will be deployed into various use cases — such as future contributor incentives, liquidity mining programs and protocol mergers. Additionally, the minted YFI can also support the ongoing expenditures set forth in YIP-54.

An engaging Yearn community

While the Yearn community agreed with the latest funding proposal in principle, they held different views on the YFI minting amount and the proportion of YFI allocated to the core developer team. At the time of writing, the proposal has gained 70% approval and a formal vote is expected to be conducted via the governance tool.

While the recent proposals surrounding the minting of YFI have sparked rancorous debates, the Yearn core team has largely expressed delight at the community's engagement. Cronje stated in a tweet earlier this week that the debates have been fascinating to watch and that he believes that this is a solid example of community governance. 


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Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.

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