Backstory

A few days ago, Andre Cronje released a token called $YFI which essentially can only be earned by using the yEarn yield aggregating tokens. He didn’t keep any for himself and released it into the wild not assuming much. 3 days later the token has a $15m market cap, $250m locked up, $10m worth of rewards to claim and a frenzy of activity around it. He’s achieved the perfect positive network effect flywheel shown below:

Why this is important

As a part of launching Andre opted for community governance from day #1, where $YFI holders govern the protocol and set its future, rather than him dictating the vision. On the surface you’d think that this isn’t such a big deal since everyone’s doing it these days. But if this was a web2 consumer application, seeing this much engagement on a community forum is kind of like seeing Snapchat when it was just released - a crazy experiment with VERY high signal to noise. Is $YFI mainstream? Nop. Is it safe? I couldn’t say so with a straight face. Has it got product market fit? Absolutely.

If you put it in context for what this actually means, Dan Elitzer probably does a great job (not focusing on the incentive part).

Dan Elitzer @delitzer

$YFI @iearnfinance is the latest yield farming crazy, driving insane volume to Curve. Looks like 0 sale to investors, 0 held by (1-person) team, 100% farmed in 1 week. I think @AndreCronjeTech is amazing, but if I were a YFI holder, I’d want him incentivized to keep building.

What Andre has actually validated for every entrepreneur out there is that the gates to create a multi-million dollar network can be achieved by a single, talented developer. I’ve been re-watching some Naval podcasts, and he always says that leverage is obtained via code and media. Crypto enables single developers and small teams to obtain leverage like nobody has seen before. Think about it, any Web2 startup when it scales needs to hire more people as the numbers get bigger. Andre, doesn’t actually have to do worry about scale issues (he has plenty of other issues with yEarn which he’s trying to solve but hiring and scaling AWS is not any of them). More importantly, he didn’t have to:

Beg investors for money
Beg Binance for an exchange listing
Beg the community to be involved via incentives

Instead, all he had to do was:

Code what he wanted to the spec that he wanted
Launch it to the public via `yarn deploy`
Ensure the community could govern it by itself

The rest was left to the open market to decide what to do with it, but also, value it in real time as it got more and more traction. This tweet storm from Kain captures this entire dynamic perfectly, Andre pushed it by raising $0:

kain.eth @kaiynne

So you can now raise a small round, create a coordination game, then have that game produce significantly more revenue for the players than you even raised to create it.

Think about it, $BTC has been stagnant at $9.2k, $ETH has been stagnant at $240 for the past few months. DeFi tokens have outperformed both of them multiple times over. The mental models people had in the past about how crypto works isn’t really true, we’re seeing a macro decoupling which has never ever happened in crypto history. Slowly more investors will start capitulating into DeFi tokens as large-cap pet rocks continue to underwhelm relative to the rest of the market. For large caps to move, you need a crypto-wide frenzy. In a time where the stock market is on an insane bull run, none of that is translating into crypto. I could go on about this but I’ll save it for another edition since there’s a bigger play at hand over here.

YFI - A highly asymmetric investment opportunity

I’ll preface this with what Andre would want me to say: YFI IS MEANT TO HAVE ZERO VALUE. However, in a twisted way it actually does and represents a very crazy dynamic which I don’t think people have thought about much which is:

The expected return from yield farming changes significantly based on the project’s lifecycle and the capital you have.

What does that mean? Well, let’s break it down. Every reward comes with a risk, and the risk list with iEarn is decently long. Here’s just a few:

Code failure (unaudited contacts) - if you didn’t know that please re-evaulate your judgement
Founder risk - Andre gets tired of outspoken DeFi thought leaders attacking him and leaves forever (has happened before)
Protocol risk - Curve, Aave, DAI, USDC, USDT, TUSD go belly up
Liquidity risk - something somewhere down the stack unwinds and things blow up in a way we can’t really see
Governance risk - the farmers governing the protocol make a terrible decision that ends the $YFI game
Competitor risk - alternative more well run ponzis emerge and threaten $YFI’s position
Farmer risk - farmers jump onto the next big thing and leave $YFI with having very little intrinsic value

Okay, so now that you realise that the probability of losing all of your money with $YFI is extremely high we can talk.

When I came across $YFI, I threw in about $1,000 to farm since I’d be okay to lose that much but also that’s the minimum since gas fees would eat me alive. However, yesterday I came across this thread by Galois Capital:

Galois Capital @Galois_Capital

All things considered, YFI seems undervalued based on total cap and circulating cap relative to other DeFi projects and based on revenue/EBIT cash flow multiples of the underlying protocol net of increases solely due to fair-weather farmers. This is not investment advice.

Rather than thinking about $YFI as a meme, I thought about it in the context of if I was an investor and realised and found the following factors:

Here’s the link where you can find out how much has been locked up: https://etherscan.io/token/0xdf5e0e81dff6faf3a7e52ba697820c5e32d806a8?a=0x0bc529c00c6401aef6d220be8c6ea1667f6ad93e
That amount is currently sitting at THREE HUNDRED MILION DOLLARS. Yes, you read that right. Where would it sit on the leaderboard? Probably just under Curve. $LEND, $SNX, $MKR and $COMP all have $400m-$500m valuations at $500m locked up. You could easily say that the value of a project that has $250m locked up is at least $100m-$250m. Most people don’t make this comparison because they can’t see it on DeFi Pulse, as soon as it does you can expect this alpha to go away.
Now how has $YFI done in terms of price action, pretty decently actually. From $0 -> $1,750 at the peak to $1,500 with a market cap of $19m ($40m fully diluted). But more importantly, there’s no early investors that will be able to sell and send the price down when the liquidity is still so thin. What does that mean? You’ve got the strongest of holders who are actively going to make sure the project succeeds or helps all of them create a coordination game where they all get rich in the making.

Here’s two farmers which represent some portion of farmer psychology.

Exhibit A:
찌 G 跻じ ⚡️ 🔑 @DegenSpartan
i may just be one of the few yield farmers with such absolutely bottom barrel low IQ that i actually sell the $YFI that i farm instead of hoarding it very smol brain 🤏🧠 dont worry about me dumping, my $20 portfolio doesnt generate that much YFI anyway
July 22nd 2020
2 Retweets46 Likes

Exhibit B:
ChainLinkGod.eth @ChainLinkGod
@DegenSpartan Had the same feeling at the beginning but have have since stopped selling and am hoarding all my $YFI now If this doesn't implode, this will be a $1B project
July 22nd 2020
12 Likes

Based on the above price graph of $YFI, if A starts outweighing B, we’ll see the following graph ($COMP). This is what it looks like when opportunistic farmers keep dumping their massive bags and there’s not enough funds as the counter-party.

There’s definitely large whales opportunistically farming $YFI, like the following address with $25m and dumping straight away:

https://etherscan.io/address/0x0d2109a4d1182b98e925c6b4a641b2597ccbcf9b#tokentxns
I wish I had $25m to yield farm with sometimes lol.

Now that I’ve covered a bunch of factors that explain the low-down of what’s going on with $YFI, here’s my core thesis:

If the risk from farming $YFI is the same as buying it, why not just buy it?

If you’re farming with $1,000 or $100,000 your ENTIRE capital is at loss if even one of the risks get exposed (since all the money will be drained). That being said, $YFI represents a Bitcoin like asymmetric opportunity where your downside whether you farm or purchase is the same, but the expected upside is 10x-100x therefore yield farming is actually a more inferior option since it exposes you to both the downside risk and captures very little upside with the capital you farm with.

For Chad farmers with $25m, earning $50k in 8 hours is great. But not many of us have that kind of money to gamble away with and will need to wait longer for $YFI to appreciate.

Closing

This is isn’t investment advice, although I am personally long on $YFI. Whatever money you put into $YFI, truly assume you’ll lose all of it since the risks are extraordinarily high. If you think about $YFI in the context of a limited liability company, it seems like a pre-seed investment which has a very high number of risks but if all the factors go right, represents a very high upside.

The era of crypto networks is here, and the leverage individuals have is greater than any period in history before them. Smaller individuals will have an edge as smaller check sizes can have a more meaningful impact where as larger funds need to invest with at least $50k-$1m to be able to justify to their LPs. DegenSpartan accumulated $SNX at $0.03, a16z accumulated $SNX at $0.30. If that’s not telling of the times we live in, I don’t know what is.

Kerman Kohli

$YFI & The Acceleration of Crypto Networks