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 the main gateway for hooking into a large portion of DeFi offerings. At a glance, Yearn may simply be considered an aggregator for yield strategies (e.g. finding the best yield returns across crypto) but we believe it is much more than that and has the potential to become the primary hub and a globally accessible hedge fund of the DeFi economy. In a world starved of yield-bearing products and with the explosion of growth in DeFi liquidity and activity, Yearn seeks to democratize yield strategies to the average user via simple deposits into vaults that automate flows and returns.

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 in reality, is a scenario where Yearn is the powerhouse with all the leverage and is able to essentially make acquisitions that ultimately drive more capital and users to the network. We see this having a monopoly-like network effect over time, as Yearn not only attracts many copycats and hard forks (which is typically bullish for the original protocol), but it is also "eating" other protocols. We believe most of the value will be captured in the YFI token (especially given its ability to capture actual 'cash' flows) and not in the tokens that Yearn "merges" with. For these reasons, we have continued to expand our YFI position, re-balance, and generally consolidate our crypto holdings over the last few months (Note: no selling of core BTC or ETH positions).

In 2021, we 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 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 also think Vaults 2.0 will be a major upgrade, along with Deriswap and other products in the pipeline that will benefit the overall network effect and value capture back into YFI.

When YFI reached the $30,000-$40,000 range in its first major rally, we did lock in some profit given the tremendous upside. After the subsequent price correction (where all of DeFi pulled back substantially), we bought more in early November and over the last 2 weeks. We foresee these "mini cycles" playing out over the next year where price run-ups occur, followed by DeFi and 'small cap' assets correcting ~60-70%. Bitcoin and 'large caps' typically correct less steeply at ~25-35%, as seen throughout prior bull markets.

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, and strong scarcity-based economics, that it can easily be a top 10 crypto asset and is fundamentally undervalued. 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.

A $10B market cap would equate to a price of ~$333,332 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. Given the real adoption and overall strengths of Yearn, this could even be a conservative estimate if a full-blown bull mania occurs. Even today, there are many "ghost chains" and unused networks that are valued >$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 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 captured over time.

When it comes to DeFi, we are still skeptical of the vast majority of projects aside from a few "blue chips," YFI being one of them. And perhaps when it comes to DeFi, we are close to being "YFI maximalists."