Just Another Week in DeFi
VYSYN VENTURES Weekly Insights #36
This was originally published on the VYSYN Ventures Website.
No week in crypto goes by without another milestone. ETH has finally hit a new all-time high with the asset breaching previous heights on Tuesday. The sentiment is certainly bullish with Fundstrat’s Tom Lee raising his ETH price target to $10,500.
In the meantime, the market attention has turned to DeFi. Total market capitalisation of all DeFi projects is just above $30 billion, less than 3% of the combined cryptocurrency market capitalization. Many analysts believe this significantly undervalues the DeFi space, given its rapid growth and utility in the Ethereum ecosystem.
This week’s VYSYN release provides updates on some of the exciting developments in DeFi, from the YFI minting debate to Cream’s Iron Bank announcement. While price action is important, we prefer to focus on the new products and use cases in DeFi. This is what will bring more people into the ecosystem and supercharge adoption.
Yearn.finance: to mint or not to mint
Over the last few days, the community at yearn.finance has been debating the proposal to mint 6,666 new YFI tokens with the aim to reward core contributors and build out the Treasury. At the time of writing, that’s over $200 million worth of tokens and would increase the total tokens outstanding by 22%.
There are a couple of reasons why the debate is contentious. YFI launched in the middle of the DeFi summer and followed what is popularly known as the “fair launch” concept. There was no pre-mine, no team allocation, and no Treasury allocation. This strategy was great at creating an exceptional community following and decentralizing ownership of the protocol. At the same time, it left a lot to be desired when it comes to rewarding and retaining talent as well as giving the Treasury enough ammunition to fund future growth.
Based on one of the community members’ analysis, top-tier DeFi projects have set aside between 300 million and $2.1 billion for team members. This represents between 20% and 30% of the total token distribution. Some of the newer projects like Cream, Badger and Sushiswap tend to have a broader range, but in general, allocated between 10% and 25% of all tokens to the core team and early contributors. This analysis shows that Yearn has limited ability to incentivise contributions and retain talent with no core contributor incentives.
Another piece of the puzzle is the percentage of YFI supply controlled by the Treasury. Treasury funds, usually under the control of community members, are typically used for future incentive programs, contributor compensation, and other growth initiatives. Yearn Treasury currently has roughly $500,000 of funds. For comparison, Uniswap has close to $4 billion Treasury funds and other top-tier projects have between $200 million and $570 million. As a percentage of market cap, most comparable projects have at least 10% in their Treasury, while few, like Uniswap, have more than 20%.
Based on this information, it is indeed reasonable that the community wants to fund core contributors and the Treasury. The main argument against doing so is along the ideological lines. When yearn.finance launched, the total supply was set at a fixed amount of 30,000 tokens. This aligned with the scarcity narrative that was increasingly cited throughout 2020 as one of the key reasons to buy BTC. According to some investors and community members, increasing the supply by 22% would undermine that storyline.
The most recent proposal can be found here. At the time of writing, it looks likely to pass and convert to the formal YIP with snapshot voting. Meanwhile, nothing has changed regarding the Yearn product roadmap with developers shipping v2, permissionless pools, and the “buyback and build” proposal.
Cream introduces protocol-to-protocol lending
Over the last few weeks, we have also seen some exciting roadmaps and product announcements in DeFi. On January 14th, Cream introduced the Iron Bank, a protocol-to-protocol lending platform without collateral requirements. We are quite excited about this development as it can significantly improve capital efficiency in DeFi and accelerate growth. A comparison here would be the size of the corporate debt market relative to the peer-to-peer lending market. While peer-to-peer lending supports around $70 billion in loans, the corporate debt market is more than $10 trillion.
Emergence of the new financial system
If we are to create a new financial system on public blockchains, we will have to have some tough conversations. The yearn.finance debate is unquestionably one of those. However, with the discourse occurring in the public sphere and the community patiently working through the issues, we believe that this experience will set the right tone for governance in the crypto space.
At the same time, product innovation is accelerating. Capital efficiency and credit expansion are some of the areas that we believe will unlock substantial growth in the space. With the introduction of the Iron Bank, Cream is addressing capital efficiency through its zero-collateral protocol-to-protocol lending.
Cream is just one example. BadgerDAO is on track to release DIGG and three new vault strategies. Alpha Homora v2 will take leveraged yield-farming to the next level, not to mention their AlphaX product. We could go on for a while. This level of continuous product evolution and near-infinite white space for innovation is what makes us excited for what’s to come in 2021.