It’s fair to say that it’s been a slow past few weeks for the decentralized finance space. Due to a confluence of trends including but not limited to DeFi becoming crowded, venture capital firms launching “industrial-scale farms,” and Ethereum-based coins dropping, the yields offered through the top “farms” have plunged.
Case in point: Yearn.finance‘s yCRV/yUSD vault, one of the protocol’s most popular products, now offers an annualized yield of around 15 percent — far below the 60-100 percent offered just weeks ago.
That’s not to say 15 percent is bad — it’s at least ten times the yield you could get at a traditional bank. But, some fear that YFI could decline because its valuation is somewhat dependent on high yields.
DeFi yields are dropping: Is Yearn.finance threatened?
At launch, YFI was a coin with zero intrinsic value. But the market rapidly bid the coin to the point where it traded as high as $44,000 per coin at recent highs. The reason why the market was so bullish on Yearn.finance was because fees were implemented that would effectively allow holders to obtain dividends on their coins.
But as these yields have dropped, so have those dividends.
That’s an issue when many in the space were buying YFI in hopes of using it as a yielding investment.
According to Andrew Kang of Mechanism Capital, though, dropping yields aren’t a pressing concern.
He noted in a recent Twitter thread that Vaults, currently the product that Yearn.finance is known for, is only one of many products inside an ecosystem being built by the Ethereum protocol’s developers.
Lead developer Andre Cronje is currently working on StableCredit, yInsure, yTrade, and others, which will enable YFI holders to capture yield through fees charged on decentralized trading, insurance, and lending.
A common misconception is that @iearnfinance is reliant on high DeFi yields which obviously taper off. Remember that:
1. Vaults are only one product alongside stablecredit, yinsure, ytrade, etc
2. Vaults have yet to expand to IL strategies, asset backed yields, basis, etc etc
— Andrew Kang (@Rewkang) September 22, 2020
Kang continued by noting that it currently is only early days for Vaults, meaning the strategies being used to farm yield are relatively secure and simple for testing’s sake:
“We’re still in an early era of yield generation in crypto. There tons of lending platforms & AMMs about to launch that will introduce even more areas for yield. For those that don’t want to be rotating crops daily, Vaults are a perfect solution. The LM rewards are a cherry on top.”
Lou Kerner, a partner at CryptoOracle, also isn’t worried about Yearn.finance’s dropping yields.
Kerner recently released an extensive blog post in which he asserted that Yearn.finance is the “future of DeFi.” He added that by extension, this means it is the future of finance, referencing the oft-touted sentiment that DeFi will take over traditional financial mechanisms in the coming years and decades.
Like Kang, Kerner is extremely optimistic about Yearn.finance’s other products such as StableCredit. The investor thinks that this product could act as a “black hole” for Ethereum-based liquidity, driving YFI higher if the proper incentive structure is set up.
DeFi set to rebound
Another thing to consider is that all of DeFi is set to rebound moving forward, making a YFI recovery a matter of if the rest of the space bounces back.
Synthetix’s founder Kain Warwick recently asserted in a Twitter post that from how he sees it, DeFi and crypto are in the earliest innings of a growth cycle as opposed to near the end of one.
Kang has echoed this, noting that DeFi may still be undervalued relative to fundamentals or at least not at the point of a bubble.