If you’re reading this post, you’re probably familiar with Yearn’s governance token (YFI) price history — from the fair launch distribution, to the parabolic ascent that captured lots of headlines, to the dramatic decline as DeFi Summer ended, to today’s apparent stability. Since it’s been a thrilling ride, let’s look deeper into some events that took place between mid-September and early November, 2020, as YFI declined over 80% in a few weeks. This story can shed some light on DeFi dynamics and offer hopeful thoughts for Yearn’s future.
To make for a better story, lets step into the shoes of wallet 0x0000000484f2217f1a64eb6d24b5cee446faeae5. EAE5 was one of Yearn’s earliest yield farmers beginning on July 18, 2020. When YFI was still an unproven protocol, AAE5 dedicated a lot of time and resources to farm YFI by providing liquidity and staking tokens in the protocol as originally intended.
But DeFi is tough and EAE5 is always on the look for more alpha. As YFI’s price started going parabolic, a significant opportunity came up as YFI could probably become a profitable short. As a matter of fact, several factors made it that way. Despite a great initial design to support decentralization, YFI’s market value had increased greatly, concentrating significant wealth in a handful of people. In addition, at the time a significant part of YFI’s supply was locked in the YFI yVault that followed strategy.Cream. In essence, this strategy lent out YFI in cream.finance to borrow stablecoins and use them for farming. The strategy was profitable, but it exposed YFI to significant risk — YFI could be borrowed and market sold, artificially lowering its price and forcing liquidations across the space. The profitability of this strategy could be increased by placing leveraged shorts in several exchanges that supported YFI futures. Knowing that the price would most likely fall, a big enough player — or coordinated effort — could potentially drag down the price.
In early September YFI’s price started to decline, and EAE5 began to profit from YFI’s downfall. He started doing arbitrage between centralized and decentralized exchanges. He borrowed some YFI in Cream and repaid when the price decreased. In addition, he sent large transactions to another address -0x7d83a60145efe956510215678c9ce042eecfaa75- that subsequently sent them to Binance in large batches likely to market sell them (although this last statement can’t be verified within the blockchain). Volatility increased significantly and a lot of people sold their YFI, driving the price down for a couple of weeks.
Around early November, sentiment started to change. There was value in Yearn after all — a significant part of TVL had been maintained, the team and community were working well together and building sustainability into the protocol, large VC funds were signaling interest (although they would need to buy their way in like everybody else), and a lot of potential existed to continue building. Some YFI team members decided to make a longer term commitment to the project and made large YFI purchases — Banteg and Tracheopteryx are the ones I can point to, but surely others followed.
Some lessons were learned. YFI tokens in the yVault are now safely staked in governance, and will likely never be jeopardized again now that safer options are available. The team has kept on working towards building a better product, building partnerships to release synergies and enhance the DeFi ecosystem.
Throughout this difficult time, development in Yearn never stopped.
By the way; thank you YFI Pulse for the reference in yesterday’s newsletter. Your email is one of the best resources for keeping up with latest developments in the Yearn Ecosystem.