[YFI] Collateral Onboarding Risk Evaluation

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  1. Summary Proposed Risk Parameters
  2. Overview
  3. Metrics and Analysis
  4. Risk Parameters

Summary Proposed Risk Parameters

Risk Premium: 4%
Liquidation Ratio: 175%
Debt Ceiling: 7 million
Auction Lot Size: 50.000
Minimum Bid Increment: 3%
Bid Duration: 6 hours
Max Auction Duration: 6 hours
Liquidation Penalty: 13%
Dust: 100 DAI

Overview

Protocol Summary

Yearn.finance (Yearn) is a decentralized protocol initially developed by Andre Cronje, with a primary focus on aggregation and yield optimization. The initial building blocks of the Yearn ecosystem were released in early 2020, and included yTokens and the Curve yPool. yTokens rebalance their lending activities between several platforms to optimize returns, while the Curve yPool uses yTokens as building blocks to help provide stablecoin liquidity providers the highest possible returns.

Ownership of YFI was distributed to users who staked assets in the protocol over 1 week in July. Since shortly after the initial distribution, the protocol has been governed by a community multisig that enacts the votes of YFI holders. There is a plan to transition to fully on-chain governance.

An active community has emerged to build out the ecosystem of Yearn products. These now include yVaults, yInsure, as well as other projects still in development. The majority of Yearn’s income is derived from withdrawal and performance fees from yVaults, with profits distributed to users who stake their YFI in the governance contract.

Metrics and Analysis

Trading volume on CEX & non-custodial venues

YFI is actively traded on several CEX platforms including Binance and Coinbase, as well as decentralized exchanges such as Uniswap, Sushiswap, and 0x. Among DEX platforms, the vast majority of trading volume is on Sushiswap, which has a liquidity incentive program for LPs of the YFI/ETH pair. Trailing 10 day average volume amounted to $50.8 million on Sushiswap, $12.7 million on Uniswap, and less than $500,000 each on 0x and Mooniswap.

Source of data: CryptoCompare (CEX), Uniswap.info, Sushiswap.vision, 0x Tracker, Mooniswap.info

Token Distribution & Issuance Schedule

The current total supply of 30,000 YFI was issued over a 1 week period, from July 17 to 24. Users could participate by staking assets in one of 3 contracts to earn tokens proportional to their value locked. This is essentially a lockdrop mechanism, with the additional feature that the locked assets helped to increase YFI token liquidity (via the 98% DAI or yCRV/2% YFI Balancer pools) and utilization of Yearn’s existing protocol (yCRV and underlying yTokens). A proposal that is currently being considered by Yearn governance would burn the admin keys controlling minting to permanently cap YFI token supply at 30,000.

Token Deposits on Trading Venues

The majority of balances at custodial exchanges are with Binance and Coinbase. Token balances for Huobi and OKEx are relatively low compared with other exchanges, indicating that their reported volumes may be inflated. While Balancer has a relatively high share of liquidity among decentralized exchanges, most is locked in the YFV farming pool. Excluding this pool, Balancer follows Sushiswap, Uniswap, and Mooniswap in terms of usable liquidity.

Source of data: Nansen-d5

Downside Risk

YFI has been trading for less than 3 months, giving limited data for analysis. YFI was not trading during Black Thursday, so its performance during a severe market crash is untested. The largest daily pullback for YFI (from close to close) was -21.4%, which occurred on September 5 during a broad market decline when ETH fell 13%. (Time period reviewed for YFI in the chart below is much shorter than for ETH).

Source of data: CoinMarketCap

Assets Under Management (Total Value Locked)

Yearn had a relatively low TVL of less than $10 million up until the launch of the YFI token. It experienced a short lived spike while YFI was being distributed, followed by a more sustained increase coinciding with the release of the Curve CRV token.

Source: DefiPulse

Revenue and Profits

Yearn derives most of revenue from vault performance and withdrawal fees. Fees amount to 0.5% of any funds withdrawn and 5% of any gains. Any funds remaining after paying for vault gas costs, Yearn treasury operating expenses, and the strategy creator fee (10% of performance fees) are distributed to YFI holders who stake in the governance contract.

The chart below shows cumulative deposits and withdrawals for the yUSD (yCRV vault) strategy. Withdrawal fees have comprised a substantial amount of Yearn’s revenue to date, but could decline as more liquid pools emerge for trading yVault tokens instead of redeeming from the contract. So far, there does not seem to be a drop off in withdrawal volumes and fees.

Source of Data: Dune Analytics

Summary of Notable Risks

  • YFI is a new asset with relatively short trading history and limited data.
  • Admin functions are currently in the hands of a community multisig. An on chain governance system is planned but full details are not yet public.
  • Yearn’s aggregation business exposes users to layers of technical and economic risk. A serious loss of funds could harm reputation. Unaffiliated projects made by Yearn contributors may also cause reputational blowback on YFI.
  • If yields decline for farming opportunities, yVaults may become less attractive and earn lower performance fees.
  • Withdrawal fee income is likely to decline as exchange liquidity for yVault tokens improves.
  • Competitors are emerging in many of Yearn’s business lines, particularly yield aggregation. This could lead to lower fee income and loss of market share.
  • While Yearn has an increasing number of participants, the project is heavily connected to Andre Cronje and might struggle without his continued contributions.

Proposed Risk Parameters

Risk Premium: 4%
Liquidation Ratio: 175%
Debt Ceiling: 7 million
Auction Lot Size: 50.000
Minimum Bid Increment: 3%
Bid Duration: 6 hours
Max Auction Duration: 6 hours
Liquidation Penalty: 13%
Dust: 100 DAI

We use the model described from the governance call here: a credit risk model that estimates the loss distribution of a portfolio of COMP Vaults. Risk parameters are estimated from this hypothetical loss distribution. Inputs to the model are derived from trading data along with stressed input parameters. A link to our model specification with inputs and outputs can be found here. Auction parameters have been selected to mirror those for ETH.

Lead Researcher: @monet-supply

Sources:

15 Likes

@monet-supply thank you for doing this for the community!

I do agree that YFI is slightly suboptimal due to the limited time it has been exposed to the market, but this is compensated by your suggested conservative Debt Ceiling.

NB. I hope you can get yourself onboarded to the Risk team.

3 Likes

Very thorough presentation. I hope Maker adds YFI because it would be mutually beneficial and it would lead to massive growth in DeFi.

1 Like

Looks good, based on analysis provided proposed risk parameters seem reasonable to me. Good work @monet-supply

4 Likes

This is great research Monet. Thanks again for All your hard work and dedication to the Maker Community.

3 Likes