Yearn Finance Unveils New Token Model to Regain Former Status
Yearn Finance has launched a revamped token model, aiming to rejuvenate the yield aggregator’s standing in the crypto space. This new initiative, known as “veYFI,” has been under development for nearly two years. Yearn Finance’s founder, Andre Cronje, expressed his anticipation for the rollout, stating, “About time,” in a conversation with DL News.
The introduction of the veYFI model is seen as a potential game-changer for Yearn Finance, which has suffered during the prolonged downturn in the cryptocurrency market. Investors are optimistic that this new structure will foster a more reliable method for attracting deposits to the platform. Under this model, users are required to lock their YFI tokens, which serve as the governance tokens for Yearn, in order to gain enhanced rewards and participate in decision-making regarding the allocation of the protocol’s revenue.
Similar to other vote-escrowed token models like those used by Curve Finance and Balancer, the veYFI structure allows users to exert greater influence over the protocol’s revenue distribution based on the amount of their tokens locked. The primary goal is to motivate YFI token holders and potential investors to commit their tokens within the protocol, although the success of this initiative hinges on its ability to attract sufficient asset deposits initially.
A Promising Launch
The feedback regarding the veYFI model’s launch has been largely positive. Hubert Mahiu, a contributor at StakeDAO—a significant holder of YFI tokens—highlighted that the incentives for locking YFI tokens are substantially more compelling compared to other vote-escrowed models. He pointed out that veYFI prioritizes enhancing existing revenue rewards, potentially allowing users to earn up to ten times more than they would without locking their tokens. Furthermore, Mahiu emphasized that the sustainability of Yearn’s model is superior to others, as the incentives are derived entirely from the protocol’s revenue rather than through the issuance of new tokens.
As of now, the veYFI model has made a noteworthy impact, with over 1,726 YFI tokens locked into the protocol, equating to roughly 4.7% of the total YFI supply of 36,666 tokens. Yearn Finance functions as a yield aggregation protocol, automating investment strategies to maximize returns on various crypto assets, including Ethereum and Curve Finance’s CRV token.
Long-Awaited Transition
The shift to the new token model has been a long time coming, with discussions and planning spanning almost two years. When Yearn Finance was launched in 2020, YFI tokens were distributed as rewards to users who deposited assets into the protocol’s yield strategies. This approach successfully attracted significant investment, reaching a peak of over $6.7 billion in deposits by December 2021.
However, as the incentives diminished, decentralized finance (DeFi) users began to seek better yield options elsewhere, leading to a drastic decline in deposits. Currently, Yearn Finance’s total value locked has plummeted to approximately $320 million, representing a staggering 95% decrease. The introduction of the new token model is anticipated to address these declines and provide fresh incentives for users to deposit assets into the platform.
In response to the launch, a pseudonymous YFI holder known as 0x7d54 expressed optimism about the new model’s potential, remarking, “I wish it had launched a year ago, but otherwise it is an extremely robust system.”
Establishing a Positive Feedback Loop
While the ve token models have proven effective for various DeFi platforms, a common challenge lies in securing initial deposits to make them operational. Marco Worms, another contributor to Yearn Finance, described the veYFI model’s objective as establishing a “positive flywheel” that links the protocol’s success with the interests of token holders. This mechanism incentivizes users to deposit assets into Yearn; as more assets flow into the protocol, the revenue generated increases.
Users who lock their YFI tokens can choose to direct this revenue toward their preferred yield strategies, enhancing their appeal to prospective depositors. Additionally, Yearn Finance utilizes its revenue to repurchase YFI tokens from the market. Those utilizing Yearn’s yield strategies are rewarded with dYFI, a token that enables them to purchase YFI at a discounted rate, with the potential for increased dYFI allocations for users who lock their YFI tokens.
This structure aims to cultivate a circular economy that encourages users to deposit assets, acquire, and lock YFI tokens, aligning the objectives of Yearn, its users, and its token holders. However, Worms cautioned that risks remain; the ongoing crypto market downturn might limit the demand and usage required to generate significant rewards for veYFI holders.
Currently, only a handful of Yearn’s strategies are positioned to benefit from the enhanced yields offered by the veYFI model. Nonetheless, 0x7d54 noted that substantial growth is expected following the introduction of Yearn’s new v3 vaults, which will allow anyone to create and implement yield-generating strategies, akin to the way trading pools operate on decentralized exchanges like Curve and Uniswap.
Mahiu elaborated that the gradual rollout is due to Yearn’s developers wanting to carefully assess the effectiveness of the new model using their own strategies before making it available to the broader community. “They have a very cautious approach to their deployment,” Mahiu observed, adding, “Just need to kickstart the flywheel.”
