Wintermute Proposal To Borrow YFI Draws Fire From DeFi Community

A controversial governance proposal from a prominent crypto trading firm has prompted its CEO to clarify the firm’s position.

On Aug. 13, Wintermute asked the Yearn community to consider lending the market-making firm 350 YFI ($2M) from the project’s treasury. The proposed 12-month loan would be uncollateralized and carry a nominal interest rate of 0.10%. Yearn’s YFI token is used for governance and earns protocol fees.

In exchange, Wintermute would use 3M of its newly acquired CRV tokens, used to govern the Curve Finance protocol, to improve liquidity for Yearn’s yCRV wrapper, which is a version of CRV which users can convert into yield-accruing assets.

The proposal has drawn skepticism on Yearn’s governance forum and on social media as the community questions whether the protocol would be getting a raw deal.

“Let us short your project token for virtually no interest [and] in exchange we’ll provide CRV liquidity for one of your vaults,” summarized Danger, a well-known pseudonymous investor.

YFI is down 22% in the past 30 days and flat on the year.

CEO Defends Proposal

Evgeny Gaevoy, co-founder and CEO of Wintermute, took to social media to clarify that his firm doesn’t intend to bet against YFI, but rather improve liquidity for the token.

“We don’t want to buy YFI – we are delta neutral and have no opinion on YFI price in 6-12 months,” Gaevoy said. The Wintermute CEO added that the firm could already short YFI using perpetual swaps if it wanted to. “The simpler explanation [is] us wanting to get our hands on YFI [by borrowing] so that we can simply do our job better - show bids and offers on CeFi, DeFi and OTC,” he said.

As is typical in DeFi, the online scuffle has made public the terms of a deal which would typically remain private in traditional finance.

Locking CRV

The proposal also highlights the ongoing shuffle taking place since the co-founder of Curve Finance, a major decentralized exchange, raised over $62M by selling CRV tokens over the past few weeks.

Wintermute bought 25M CRV, worth $13.2M at the time of writing. The deal required the firm to make markets with 12.5M CRV and lock the other half, Gaevoy said.

One of the ways to lock the token is to convert it to yCRV, which the CEO said is appealing given that Yearn may add voting functionality to the asset in addition to its yield-accruing capabilities.

However, liquidity in the CRV-yCRV pool on Curve is relatively thin, meaning that if Wintermute wanted to exit its yCRV position, it would lose a lot of value due to slippage.

According to Gaevoy, that sparked the idea of asking Yearn for a YFI in exchange for Wintermute converting its CRV to yCRV and depositing it into the CRV-yCRV Curve pool.

Some aren’t buying it — “Forgot to mention they [are] getting an uncollateralized loan below the market rate,” said one observer.