Investors hopeful new Yearn Finance token model can ‘kickstart the flywheel’ on deposits

Yearn Finance’s long-awaited token revamp went live last week, and investors say they’re hopeful it can create a sustainable way to attract deposits to the yield aggregator that has been beaten down by the long crypto winter.

The new token structure, dubbed “veYFI,” requires investors to lock YFI, Yearn’s governance token, in the protocol to earn boosted rewards and vote on which yield strategies receive the protocol’s revenue.

Just like other “ve” — or vote escrow token models — the more tokens a user locks up, the bigger sway they have over where the protocol’s revenue goes. Others include Curve Finance, Balancer and Velodrome.

The hope is the veYFI model will incentivise YFI holders, and those who want to maximise their yield from Yearn’s yield aggregation strategies, to lock up YFI in the protocol. However, such a model may fall flat if it can’t get enough users to deposit assets in the first place.

Off to a strong start

“The incentive to lock YFI is way stronger than for other ve tokens,” Hubert Mahiu, a contributor at StakeDAO, told DL News. StakeDAO is a large YFI token holder and builds a liquid locker for YFI.

Mahiu explained that unlike other ve tokens, veYFI is weighted toward boosting existing revenue rewards — up to 10 times what users can earn without locking tokens. He also noted that Yearn’s model is more sustainable than other ve models because incentives come entirely from protocol revenue, and not newly minted tokens.

So far veYFI is off to a strong start. Token holders have locked over 1,726 YFI into the protocol. That’s about 4.7% of the entire 36,666 YFI token supply.

Yearn Finance is a yield aggregation protocol. It automates strategies for maximising the returns on crypto assets which can produce a yield, such as Ether and Curve Finance’s CRV token.

‘About time’

Yearn’s transition to a new token model has been in the works for almost two years.

On Yearn’s 2020 launch, the protocol gave out YFI tokens as incentives to those who deposited assets to its yield aggregation strategies. These incentives worked well, and helped the protocol amass over $6.7 billion worth of deposits at its peak in December 2021.

However, once these incentives dried up, DeFi users looked elsewhere for better yields and deposits started to fall. This, combined with the ongoing crypto winter, saw Yearn’s deposits fall to around $320 million today — a 95% drop.

The new token model could help make up Yearn’s recent shortfalls and create new incentives for users to deposit assets.

“About time,” Yearn Finance founder Andre Cronje told DL News, declining to elaborate further.

0x7d54, a pseudonymous YFI holder and active community member, told DL News he’s confident the new token model will help attract deposits and grow Yearn’s revenues. “I wish it had launched a year ago, but otherwise it is an extremely robust system,” he said.

Creating a ‘positive flywheel’

While ve token models have worked well for other DeFi protocols, getting users to initially deposit funds to make them work can be challenging.

According to Marco Worms, a Yearn Finance contributor, the new veYFI model aims to create a “positive flywheel between the success of the protocol and token holders.”

This so-called flywheel works by incentivising users to deposit assets to Yearn. The more assets deposited to the protocol, the more revenue it earns. Those who lock up YFI can direct this revenue to their preferred yield strategies, making them more attractive for new depositors.

The Yearn protocol uses its revenue to buy back YFI tokens from the market. Those who use Yearn’s yield strategies receive dYFI — a token which allows them to buy YFI from the protocol at a discount. Users can boost the amount of dYFI given out by locking up YFI tokens.

This model aims to create a circular economy that incentivises users to deposit assets to Yearn and buy and lock up YFI, aligning the incentives of Yearn, its users and its token holders.

But, Worms said, the model is not without its risks. Because of the ongoing crypto winter, there may not be enough demand or usage to drive meaningful rewards and incentives to veYFI holders.

Currently, only a few of Yearn’s strategies can receive boosted yields from the veYFI model.

“The real growth will happen after the launch of Yearn’s new v3 vaults,” 0x7d54 said.

Yearn v3 is a new version of the protocol that allows anyone to create and deploy yield-generating strategies, similar to how anyone can create trading pools on decentralised exchanges like Curve and Uniswap.

Mahiu said the reason for the slow rollout is that Yearn’s developers want to test the new model on their own strategies before enabling it for everyone.

“They have a very cautious approach to their deployment,” Mahiu said. “Just need to kickstart the flywheel.”

Tim Craig is DL News’ Edinburgh-based DeFi correspondent. Reach out to him with tips at tim@dlnews.com.