Yearn Finance Struggles to Find its Footing as Rates Rise

Yearn Finance is being left behind.

Even as other DeFi heavyweights such as Aave, MakerDAO, and Uniswap are outperforming Ether, the pioneering yield aggregator is losing support and value.

This week, as Yearn celebrated its two-year anniversary, the project has fallen out of the public eye as total value locked (TVL) has dropped even in ETH terms by 51% year-to-date, according to DeFi Llama.

TVL Down 86% In 2022

USD-denominated TVL has dropped by 86% in the same time span as depressed crypto prices contribute to the fall.

Yearn’s YFI token hasn’t fared much better as it has underperformed the top five assets in the DeFi Pulse Index as well as BTC and ETH year-to-date, according to The Defiant’s newly released charting feature.

YFI vs top DeFi tokens. Yearn price in grey. Source The Defiant charts.

Yearn Finance has always been an outlier. Launched in 2020 by founder Andre Cronje, it was the first type of protocol designed to maximize profits for investors by automatically shuffling assets across other protocols.

By plugging into other projects, Yearn advanced the idea of DeFi legos and the ability of a team to permissionlessly build a protocol on top of other ones’ smart contracts to create value.

Recent Rate Hikes

But it’s a different world now — interest rates are rising, while the eye-popping annual percentage yields (APYs) in crypto have dissolved.

“Yields across DeFi have collapsed this year while yields in TradFi have risen significantly,” Ryan Watkins, the co-founder of the crypto hedge fund Pangea Fund Management, told The Defiant. “The product isn’t as attractive today as it was when double and triple-digit APYs were the norm.”

Indeed, Yearn’s yields for leading stablecoins like DAI are at 2.14% as of July 19. For USDC, they’re at 1.90%. This comes at a time when U.S. 10-year Treasuries offer 3% return thanks to recent rate hikes.

Cutting Costs

The yield aggregator appears to be tightening its belt — a June 21 governance post by well-known Yearn developer, Banteg, called for a reduction in compensation for contributors by 67.6%.

Bear market compensation.

“The model for how full-timers at Yearn are compensated was set at the height of the bull market and no longer corresponds with reality,” the developer wrote.

Vault Fees

Banteg and six others also authored a Snapshot proposal on June 17 to address the low yields on some of Yearn’s vaults. Fundamentally the proposal, known as Yearn Improvement Proposal 69 (YIP-69), establishes a new team which can tweak fees for the yield aggregator so they don’t exceed, and thus wipe out, yield earned by depositors.

According to YIP-69, if a strategy offers below a 2.5% APY before Yearn’s fee, funds will not get deployed to that strategy. This is because the protocol’s fees would wipe out the yield with nothing left over for customers.

Banteg also published an overall article on building in the bear market. In it he highlighted an overhaul of the current V2, the development of a V3, in addition to pushing for further B2B efforts, launching new tokenomics, and more.

It’s worth remembering that, like MakerDAO, running a decentralized autonomous organization (DAO) at scale has never been done before. Yearn is still in a class of its own, or at least, at the top of its class. At $586M in TVL, DeFi Llama’s “yield aggregator” category shows the protocol ahead of the number two aggregator, Beefy Finance, by 68%.

And Yearn has a resilient treasury. According to a graphic published by The Block, the yield aggregator’s treasury suffered the least percentage change from January to June among major DeFi projects.

Source: The Block

Thinking along those lines, Watkins believes public-facing yield aggregators are here to stay.

“It’s an important primitive in DeFi,” the fund manager said, saying that other protocols will use yield aggregators to manage their treasuries, and users will continue to demand non-custodial yield accounts.

“[I] think they ultimately co-exist alongside custodial and private yield strategies,” Watkins said.