Part I. veYFI
A long time ago, Curve invented the ve (vote-escrow) model. Many protocols followed and adopted this model into their tokenomics, calling themselves veXXX. Now, the largest DeFi yield aggregator — Yearn Finance — is one of them. So, why would Yearn adapt to a new token model and what benefits (potentially) will they get?
About ve Model
You may start wondering: what the h*** is ve model and why people like it so much?
The general objective of ve model is:
- Offering greater incentive alignment across protocol participants by offering rewards to people who lock their tokens
- Changes supply and demand dynamics to improve the token price by locking most of the token
- Encourages long-term-oriented decision-making, by giving more voting rights to people who lock in for long team (generally up to 4 years)
Currently, Yearn has about $420m in assets under management (AUM, the peak was $6.9bn). Even though Yearn retains its position as the largest DeFi yield aggregator, its token price has underperformed against the market — from 30 ETH/YFI in Jan to around 5 ETH/YFI now.
The reason Yearn is lagging behind most of the other “DeFi 1.0” projects ($UNI, $COMP, $SNX) is not only the market condition but also its high management fee and performance fee (2% & 20% generally). To make Yearn juicier for large funds, on Dec 21, YIP65: Evolving YFI Tokenomics was proposed, outlining a four-step plan that boosts voting power and rewards YFI to Yearn participants.
The proposal outlines a four-step plan:
- Staking Vault (xYFI): Distribute bought back YFI to the staking vault as rewards
- Vote-locked YFI (veYFI): The vote locking is similar to Curve. Voting power and rewards depend on lock duration (up to 4 years). Early exits have to pay a penalty fee which is distributed back to locked token holders
- Vault Gauges and Voting: YFI rewards are distributed through gauges, where yVault depositors stake their yVault tokens (yTokens). Gauges receive YFI to emit based on bi-weekly veYFI holder votes, and YFI lockers earn rewards based on their veYFI weight and deposit balances
- “Useful Work” Features: Expand the scope of veYFI, in terms of protocol control/rewards. Pending the TBC v3 vault design
The initial release will start with just veYFI and move to vault gauges and voting shortly thereafter.
How the System Works — From Messari Report
Yearn’s new token model is about two things: vote-locking and vault gauges. Any YFI holder can lock their YFI for veYFI, representing the governance power and their stake on protocol earnings. With the introduction of vault gauges, veYFI lockers with yVault deposits are the ones really in a position to use veYFI to maximize rewards.
The whole mechanics are quite similar to other veToken Models. holders can lock their YFI into non-transferable veYFI. The lock can be for a minimum of one week and a maximum of four years. The longer the lock duration, the higher governance power and YFI are rewarded in exchange for their long-term commitment. There is one difference from other veToken models which is that veYFI holders can exit their lock early but with a penalty.
In exchange for locking YFI, veYFI holders get:
- Bought back YFI, through boosted yield on yVault deposits and a share of all, unearned gauge rewards
- veYFI lock early exit penalty fees
- Governance rights, including gauge weights and deciding how staking rewards are distributed across yVaults
From Yearn’s perspective, the protocol gets:
- The long-term health of Yearn — YFI holders closely align with the protocol’s interest
- Minimise YFI selling pressure, better support on YFI performance
- Filter out less convicted holders
veYFI has fundamental differences from other ve models — most of the veToken model is used by DEXs with aggressive emission-based liquidity mining programs as rewards, while Yearn, as a yield aggregator, uses bought-back YFI as a reward. Another difference is that the YFI token itself has a capped supply and all tokens are circulating.
So, the fixed YFI supply will eventually move from less convicted holders (selling on the market, withdrawing locked YFI early) to long-term lockers as the buyback YFI will be distributed into long-term lockers’ pockets.
veYFI builds a flywheel loop through three factors: veYFI yield, protocol earnings, and deposits. Compared to other ve models built off fixed emissions, where the rising TVL depresses yields, Yearn’s model responds with proportional increases in yield.
ve-Aggregators and Bribing Protocols
Wherever ve models have been introduced, aggregator and bribing protocols have been followed, especially for protocols like Yearn. An ecosystem of aggregators and bribing protocols will likely rise when veYFI is launched, not to mention that Yearn’s gauges can go up to 10x.
The opportunity cost of not doing lock-up is so high that we can expect to see a robust ecosystem around Yearn. yVault Token holders will look for greater yield through ve-aggregators and deposit with them rather than deposit directly to Yearn gauges.
Although ve model is not a new thing for people, we are excited to see how Yearn’s veYFI will play out with its unique characteristics: buyback YFI as rewards, capped supply, fully circulating token, and 10x high boost up. A combination of the above might play out differently than other DeFi protocols.
Curve and its ecosystem are still standing because its token can create value for the entire ecosystem and the core of ve model is to maintain the protocol value instead of creating value in the first place. Yearn, as one of the DeFi 1.0 protocols, its token YFI has gone through a rough time. Implementing ve model and combining its unique characteristic doesn’t sound to be a bad idea. Hopefully, veYFI will enable Yearn to increase protocol usage and the value of its native governance token.
Part II. Market Updates
IRS Expands Key US Tax Language to Include NFTs
The U.S. IRS has made a move this week to clarify at least one question for crypto investors: how taxpayers account for non-fungible tokens (NFT). The tax division of the Treasury Department released an updated draft for its 2022 instructions for form 1040 filers that swaps the old category for “virtual currency” with broader new language on “digital assets,” including an explicit recognition of NFTs.
Hong Kong promises its cryptocurrency stance is separate from mainland China’s, considers direct retail participation
Hong Kong is moving to reassure businesses that the city’s official stance on cryptocurrencies is separate from that of mainland China, and it is now considering letting exchanges and other intermediaries sell directly to retail investors as it seeks to bring back fintech businesses.
MakerDAO on course to custody 1.1 billion USDC with Coinbase for rewards
MakerDAO, the issuer of the stablecoin DAI, appears set to move forward with a proposal to onboard an account to Coinbase prime and transfer roughly 33% of its USDC ($1.1 billion) into custody. The ongoing vote ends Oct. 24, and as of press time, 88.19% of voting MKR tokens are in favor of approval.
Gavin Wood is stepping down as CEO of Parity
Polkadot co-founder Gavin Wood is stepping down as the CEO of blockchain infrastructure company Parity. He will be replaced by fellow Parity co-founder Björn Wagner. Parity is a key development firm behind the Polkadot blockchain ecosystem.
TradFi policies ‘inadequate’ for treating DeFi, claims EU Commission
The European Commission is investigating proposals on how to supervise decentralized finance with a new report published this week. The report will inform and potentially shape future proposals from the European Commission on regulating DeFi.
Part III. Fundraising News
Mercury — College sports NFT startup
Raised $7.5M in a seed funding round led by Multicoin Capital. Other investors include North Island Ventures, Crosslink Capital, Brevan Howard Digital and others.
Eluune — Auto-chess battler Project
Raised $5M in a seed funding round led by C² Ventures. Other investors include Polygon, 6MV, Lightspeed, Everyrealm, Morningstar Ventures, Avalaunch and others.
Airstack — Web3 API platform
Raised $3M in a pre-seed funding round. Investors include Animal Ventures, Polygon, Fenbushi, Genblock Capital, NGC Ventures, WWVentures and others.
Spindl — Web3 analytics company
Raised $7M in a seed funding round led by Dragonfly and Chapter One. Other investors include Multicoin Capital, Polygon Ventures, Solana Ventures, Tribe Capital, FJ Labs and others.
Arcade2Earn — Solana-based gaming platform
Raised $3.2M in a seed funding round led by Crypto.Com Capital. Other investors include Solana Ventures, Shima Capital, KuCoin Labs, LD Capital, Merit Circle, BigBrain and GSR.
About TKX Capital
Note: TKX Capital do not offer any financial advice for retail investors and we have no affiliation with projects in this research.