Yearn Finance Changes Up its Tokenomics and YFI Soars 85%

It’s been a tough year for many DeFi protocols originating on the Ethereum blockchain. Despite being up in dollar terms, top tokens like UNI, MAKER, AAVE and Yearn Finance’s YFI have bled double digits against ETH in 2021.

There may be respite for one of them. Yearn, the yield aggregator, has introduced new tokenomics and its YFI token jumped 87.1% in the seven days ending Dec. 20, according to CoinGecko.

The apparent catalyst for YFI’s momentum is the token’s revamped tokenomics, according to a post linked by Yearn on Dec. 19. The proposal hasn’t been approved, but it is expected to do so, according to the post, which says the mechanics will create a “black hole “for YFI, meaning supply will come off the market along with a corresponding price increase.

First and foremost among the proposed changes is the ability to stake YFI in exchange for xYFI, holders of which will receive additional YFI which Yearn buys on the open market. The mechanic will directly reward stakers while the purchases push YFI’s price northward.

The second proposed change builds off the first and is modelled off Curve Finance, the automated market maker (AMM). Users will be able to choose how long to lock their YFI up — the longer a person locks, the more rewards earned. This mechanic incentivizes a decrease in the circulating supply of YFI.

Users will also receive veYFI tokens, used for voting, proportional to how long they lock up their YFI.

A visualization of Yearn Finance under the proposed changes.

The third element, building upon the first two, is a gauge system. At a high level this means that users will be able to stake their yTokens, which represent deposits in Yearn vaults, earning further YFI according to how much veYFI they hold.

A fourth and final aspect of the proposal involves “useful work features,” which the writeup says will expand the duties and responsibilities of veYFI voters and their locked YFI in exchange for further protocol rewards.

Positive Movement

Yearn makes money through a 2% management fee, taken as a percentage of a users’ deposited assets and 20% performance fee, taken against the yield generated by a particular vault.

YFI is up a more humble 14.62% on the month, but is the only token with positive movement in that timeframe among all the constituents of the DeFi Pulse Index, DeFi’s top index in market cap terms. In fact, every other token in DPI is down at least 18.29% on the month as of Dec. 20, according to TokenSets, an asset management platform.