Yearn Finance (YFI) – Overview/Thesis

Yearn Finance (YFI) – Overview/Thesis

As mentioned in our previous Crypto Fund update, we acquired a substantial position of Yearn Finance (YFI) back in July 2020, shortly after its launch.

We believe Yearn will be a primary gateway to hook into a large portion of the top DeFi yield strategies. With the traditional finance world starved of yield-bearing products and with the explosion of growth in DeFi liquidity and activity, Yearn seeks to democratize yield strategies to any user via simple deposits into vaults that automate flows and returns. The team is actively working on ways to simplify this user experience, maximize yields, and reduce fees, which will likely become the main focus points this cycle.

The origin story of Yearn is unique and the distribution was basically as fair as possible in the current environment. YFI's serendipitous inception gives it the good karma and positive community sentiment required for a decentralized network to thrive, along with favorable economics without endless dilution or too much VC cash vesting on the sidelines (none, in fact).

Yearn is also on a spree of "merging" with other DeFi projects which will help bring network effects and eventually capital flows and value accrual back into YFI. The developer team is undoubtedly one of the most talented across crypto and once a proper treasury and incentives are built out for core contributors, that talent will shine even more.

In 2021, we also believe DeFi valuations will start looking more at P/E ratio and other metrics of actual value output and performance, rather than trying to value based on TVL (total value locked) which is important but can be misleading and not tell the full story. This would make valuing Yearn quite different because from that perspective, it's still undervalued.

We believe with YFI's current all-star developer talent, ability to attract new talent with grants and openness, aggressive growth, potential for monopoly-like characteristics in the long run, and strong scarcity-based economics, that it can easily be a top 10-20 crypto asset. Additionally, assuming a bull market plays out across crypto, we can see YFI hitting a ~$10B market cap as more value is locked across the ecosystem and as demand continues increasing for DeFi "blue chips" that have stronger fundamentals. There will be countless competitors and other yield aggregators that may temporarily steal the show, but staying power ultimately falls on the quality of the team and that is where our conviction for YFI comes from.

A $10B market cap would equate to a price of ~$275,000 per YFI, which sounds outlandish, but is not actually farfetched based on previous bull market valuations where we saw things like "NEM" hit a $16B valuation with hardly any usage. If anothr major melt-up in DeFi occurs, these kinds of valuations are reasonable given real value locked and usage of these protocols. Even today, there are many "ghost chains" and unused networks that are valued well beyond $1B. We agree with Galaxy Digital CEO and investing legend Mike Novogratz that "the top 10 market cap coins will look 50 percent different in 18 months."

As with any of these assets, there is always tail risk and in this case, a risk of smart contract exploits, hacks, or broader DeFi liquidations. We do believe the core developer team is very strong and prioritizes security and audits but the rapid pace of development always has the possibility of backfiring. We have some strategies in place to play defense and hedge this risk.

Major props to Andre Cronje, banteg, and the entire Yearn global developer ecosystem. So far, this is rapid open-source iteration and collaboration at its finest. We are excited and proud to be early adopters of the project. Many aspects of this ecosystem still feel early and undervalued despite price run-ups and we envision much broader applications, usage, and value capture over time.