Mergers Position Yearn Finance as the Amazon of DeFi

Yearn Finance looks like it could assemble the Amazon of DeFi. If it does it, it will get there like everything else in crypto: way faster.

AccessTimeIconDec 14, 2020 at 1:19 p.m. UTC
Updated Dec 11, 2022 at 2:00 p.m. UTC

Yearn Finance looks like it could put together the Amazon of decentralized finance (DeFi). If it does it, it will get there like everything else in crypto: way faster.

For context: At an event in 2012, Amazon founder Jeff Bezos sat on stage with his CTO, Werner Vogels, and famously said his company is not built around change, it's built around what won't change. 

That is, consumers who want low prices, fast delivery and vast selection.

"The effort we put into those things, spinning those things up, we know the energy we put into it today will still be paying dividends for our customers 10 years from now," Bezos said.

If customers will always care about prices, speed and choice, then what will the equivalents be in DeFi? How does that translate onto the blockchain? Maybe: low fees, high yields and a wide selection of risk profiles?

This framework makes Yearn's recent moves easier to understand. 

The company has recently either acquired or partnered with a bunch of DeFi projects, such as fellow yield seeker Pickle Finance, hedging protocol Hegic, money market CREAM and institutional DeFi portal Akropolis.

Further, Yearn is building whole new wings onto itself, with products like the Keep3r Network and yGift. This might be important. For years Amazon made most of its money off Amazon Web Services, hosting infrastructure it built internally and then opening it up to the world.

Understood through an Amazon-like framework – focusing on the principles of low fees, high yields and risk profiles – these moves all start to make more sense. 

Yearn's integrations will no doubt become even more legible over time as its creator, Andre Cronje, and his cohort build interfaces to make it easy for users to take advantage of all these integrations without really thinking about it.

Blockchain consultant Maya Zehavi agreed. "It's aggregating DeFi services so as to reduce the costs across protocols, in my opinion," she told CoinDesk over WhatsApp. 

The allure

Yearn has been incredibly seductive. Not only has it drawn in lots of users willing to entrust their crypto assets to it, it's already done phenomenally well with attracting code contributors.

In Electric Capital's 2020 developer report, DeFi was the standout category and Yearn was the standout within the standout. DeFi's developer pool is up 110% since 2019, according to the report.

Yearn is the largest of the ecosystems that were new for 2020, already joining the relatively small cadre of DeFi projects with more than 25 developers. In fact, Yearn has more developers at this point in its life cycle than any other project so far.

This may be due to creator Andre Cronje's so-called "fair launch" of the YFI governance token.

"It sort of makes intuitive sense that a more fair launch would draw more active participants," Ken Deeter, a partner at Electric Capital, said in an interview. "I would consider that anecdotal at this point."

What is Yearn?

Yearn is a portal for decentralized finance, a single user interface where someone can take their assets and go earn returns; what's colloquially known as yield farming.

To that end, it operates under certain principles. The first and most salient principle across all its products: Yield is realized in the asset invested.

That means that if a user puts in DAI and Yearn decides to invest that DAI on Compound (for example), which then earns COMP, the user can guarantee that Yearn won't miss the opportunity to withdraw the COMP and use it to goose their yield. However, the user won't get COMP; the yield will be realized in DAI.

In fact, in its earliest iteration, Yearn (then iEarn) was entirely a way to maximize profits on stablecoins by moving them around between lenders like Compound, Aave and dYdX.

While it has expanded since then, Yearn has continued to favor stablecoins. Its most popular vault, yUSD, is devoted to them. 

This stablecoin inclination has made Yearn the protocol equivalent of BFF-Forever with the automated market maker (AMM) Curve, which specializes in stablecoins.

The integrations

Each of Yearn's DeFi "mergers" fills a specific niche in its march toward Amazon-status.

Pickle Finance also started with a focus on stablecoins, but with the goal of helping to keep stablecoins stable. Over time, it placed more emphasis on what it calls "Jars," which function much like Yearn's vaults. 

So, in the end, this acquisition will make Yearn a portal with more strategies for Yield. Pickle should be fully integrated when Yearn V2 goes live.

So, more yield. ✅

Next up: SushiSwap, made from a fork of Uniswap.

Users love Yearn because it creates easy access to very advanced strategies for earning yield through its vaults. 

One problem, though: There's not a vault for every token on Ethereum. With an AMM in-house, Yearn can build many more options for "zapping" from one token straight into a chosen vault, batching transactions and saving users on gas.

Yearn constantly needs to swap earned tokens for each vault's native token. With an AMM under the developers' control, they should be able to reduce the number of transactions needed to exit, lowering gas costs.

So, lower fees. ✅

SushiSwap will also help Yearn to build Deriswap, a platform that will put an AMM in the same tool that allows users to offset impermanent loss. With an already functional in-house AMM, Yearn could kick off with a base of users and capital.

Deriswap will also enable risk management as well, which helps to explain why Yearn has partnered with Hegic, a platform built to make options easier. Options are a lot of things, but at their core they enable advanced investors to hedge their bets (that is, manage their risk).

So, more risk profiles. ✅

Further on the risk-profile front, Yearn's acquisition of Cover allows users to hedge the risk of smart-contract failure, and the Hegic partnership enables users participating in Yearn's debt markets to protect themselves from making the wrong "long" bet.

What Andre wants

Cronje seems to be the most excited about another project that shares some attributes with Deriswap but is also its own thing: StableCredit It relies on another one of Yearn's new mergers, CREAM. CREAM is built off a fork of the original Ethereum-based money market, Compound.

"Honestly, I think StableCredit is one of these new primitives that we haven't seen before," Cronje said on an FTX podcast posted in September.

Cronje has been talking about this for the last few months: StableCredit basically puts MakerDAO and Compound in a blender and Uniswap comes out the other end. But StableCredit can also do all the things MakerDAO and Compound can do.

For consumers, this will mean the ability to serve as a liquidity provider for an AMM with only one token. What does that mean? No impermanent loss.

(Impermanent loss is when liquidity providers lose gains in dollar terms when a pool with two tokens, such as on Uniswap, sees a major shift in its ratio, because one token becomes much more valuable than it was when the provider first deposited. It's impermanent because the loss might evaporate if the provider just waits longer before withdrawing.)

Everyone in DeFi hates impermanent loss.

So, again, more yield. ✅

Yield in the end is what Yearn is all about. Cronje has referred to himself several times as "Yield Batman."

Many happy returns

So far, Yearn is going extremely well, proving out the model of an organization running on the blockchain without any formal structure.

The organizational team just released its first financial report on GitHub, for the third quarter of 2020, showing that Yearn generated $3.8 million in net revenue over the quarter.

Its operating expenses in that time have been covered by a very small portion of people making unusually large withdrawals. It's a fee paid mainly by whales, but the quarterly report indicates that in version 2, vaults will charge a fee structure familiar to those in traditional finance, the classic two and twenty hedge fund model (2% of assets under management and 20% of returns).

And this is where the Amazon comparison admittedly breaks down, in that Yearn is increasing fees in one way, very much in line with the fee schedule seen in traditional finance. 

But Spencer Noon, a longtime Yearn fan, felt that on balance it would be for the best. 

"Yearn is only as good as its Vaults, and Vault strategists need to be adequately compensated or else they'll go work someplace that compensates them better," he told CoinDesk. 

Higher yields are obviously more important than lower fees, especially if the yields solidly justify those fees. 

Yearn is about to get far more complex. It is also likely to continue to attract coding talent. The real question then becomes whether a user will be able to open the portal and make its many new and more complex opportunities comprehensible.

After all, Amazon is one thing that Yearn isn't yet: Amazon is easy.


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