Centered around the values of fairness, transparency, utility, and rapid development, yEarn, an automated aggregator protocol, has become one of Ethereum’s hottest attractions and most promising pillars in 2020.
Currently the fifth-largest protocol in DeFi, yEarn provides easy access automated yield strategies. Among the project’s signature cryptonative products are its Vaults, in which users can deposit an asset and, via various specially-designed DeFi maneuvers, maximize the yield of that asset.
That said, heads turned in the Ethereum ecosystem last week when yEarn launch its highly-anticipated yETH Vault, the first blockbuster ETH-centric yield farming service in DeFi.
How the yETH Vault Works
yEarn’s yETH Vault is certainly a feat of smart contract engineering, but it’s easy to grasp how the system generally goes ’round. A yETH position works like this (and mind you, this is all accomplished through a few easy clicks on yearn.finance):
- A desired amount of ETH is sent into a yWETH vault
- The ETH is deposited into lending protocol MakerDAO
- This collateral is used to back an automated Dai loan via Maker
- The Dai is deposited into Curve to participate in the protocol’s CRV farming campaign
- CRV profits are sold for ETH
The idea here, then, is that users can now easily put their ETH to use to steadily yield farm more ETH. If you’d like a visual sense of how this process works, community member DeFinn recently published an excellent primer graphic.
You’ve voted, I listened. Here it is the “Understanding @iearnfinance ‘s brand new yETH Delegated Vault”.
Special thanks to @tracheopteryx for valuable feedback to make this even more understandable pic.twitter.com/CAsh135rrM
— DeFinn (@DeFinnTheFarmer) September 2, 2020
Understanding the Risks
The yETH Vault employs a debt-based yield farming model, i.e. it’s underpinned by ETH-backed Dai loans, so the product is inherently risky. It has various layers of risk, too.
– Bad code in yVault
– Bad code in MakerDAO
– Bad code in Curve
– Massive ETH price crash
– Massive Curve-supported stablecoin price crash
— StevenSwap (@Dogetoshi) September 2, 2020
As The Block‘s lead researcher Steven Zheng noted on Twitter this week, the yETH Vault was vulnerable to potential code flaws across three projects and volatility in the cryptoeconomy.
Yet it’s precisely because of the risks involved that many investors abstain from participating, which is why the yETH Vault can fetch APY returns that can be well above +60%.
Doing Well So Far
The yETH Vault hasn’t even been deployed for one week yet, but the service has already attracted in an explosive influx of interest and ETH.
Indeed, within 48 hours of launching,nearly 400,000 ETH — or ~0.35% of the total ETH supply — flowed into the new system as users flocked to take advantage of the unprecedented ETH farming opportunity.
The new @iearnfinance yETH vault absorbed 378k ETH since launching 2 days ago
It also just successfully managed risk during a 25% crash
3 Rebalances were called in the past hour leading to 2.7M DAI paid back to its CDP
Cool validation for the product pic.twitter.com/x32At0P8tq
— Andrew Kang (@Rewkang) September 4, 2020
Moreover, in that same span the yETH Vault came to mint +70 million Dai, or over 10% of all Dai currently in existence. In the process, the vault also became the largest open position in the MakerDAO ecosystem and helped push the Dai price down toward $1, after the stablecoin has been trading above that mark in recent weeks.
The yETH vault by @iearnfinance is now the LARGEST vault in @MakerDAO
215k ETH – $95m
🔱 ETH.MKR.YFI pic.twitter.com/6tY8rO1R4I
— mariano.eth (@nanexcool) September 3, 2020
The yETH Vault launch was so popular, in fact, that deposits to the system were temporarily paused to discourage overly hasty growth.
Deposits to yETH have been paused. ~70m DAI minted. Withdrawals unaffected. We will allow deposits again in the future. For now this is a high enough cap to balance between best profits and best risk adjustment. pic.twitter.com/te0Z2g6z7G
— yearn.finance (@iearnfinance) September 3, 2020
A New Major Force on ETH
The rise of the yETH Vault can apply considerable pressure to the ETH price going forward.
That is to say, the service is going to be consistently buying ETH off the open market, and this buy pressure — which will undoubtedly grow as yEarn and DeFi grow — is unprecedented. Over time it’s possible then that the yETH Vault becomes a major fundamental value driver for ETH.
Yeth vault will bring sell side liquidity crisis for eth just like what happened in 2017 with ICOs
few understand.. pic.twitter.com/QSoFjnn095
— Mad Yorkie (@noBS111) August 29, 2020
Additionally, it’s possible to think of yETH’s positive pressure on the ETH price as a precursor to how the rollout of Ethereum 2.0 starting in late 2020 or early 2021 can similarly lead to a feedback loop of ETH buy pressure.
For example, on September 3rd investor, strategist, and professor Adam Cochran wrote a Twitter thread explaining how this exact kind of feedback is likely coming courtesy of ETH2.0.
In April I wrote a thread on the economic theory on how ETH2.0 will drive prices.
Some maximalists & arm-chair economists complained that wasn’t clear correlation.
Thanks to the work from $YFI’s yETH vaults, we now have a snapshot of behavior of what we can expect: pic.twitter.com/TmZzWNEa66
— Adam Cochran (@AdamScochran) September 3, 2020
“If this risky loaning, debt based vault, that is in beta and being tested in production, can convince $150M worth of investments in a few days, imagine the inflow that early ETH2.0 will have,” Cochran said.