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Token Daily Newsletter #44



By Mohamed Fouda

$YFI’s unit price may have recently eclipsed Bitcoin’s, but that’s no indicator that the YFI token has better economics or stronger fundamentals than BTC. It is, however, a fascinating case study in financial engineering:

Step 1) Launch a token with a small total supply

Step 2) Declare it worthless

Step 3) Allow market hype to push token price to astronomical heights, fueled by fierce competition and small float

As $YFI’s price rallies, it’s reasonable to rebase (virtually expand) the supply and let the meme continue its magic:


At the current supply (30K tokens) and price ($15k+ at the time of this newsletter), the YFI token has exceeded a market cap of $450M, landing in the top 40 tokens by market cap.

YFI and Yearn Finance 

Before we can discuss the YFI token at length, it’s necessary to understand the underlying project, Yearn Finance. The Yearn Finance ecosystem’s governance token is “$YFI” and for all intents and purposes can be thought of as a replacement to equity/shares in traditional businesses.

According to DeFi Pulse, the Yearn Finance product has more than $700M locked in the protocol. This puts the market cap to AUM ratio of Yearn at about 64%. This is an unexplainable ratio, especially when compared to traditional financial institutions. For instance, JP Morgan Chase has more than $2.6T in AUM with a current market cap of about $300B. The market cap to AUM ratio, in this case, is 11.5%. What’s more, most top-tier banks have similar ratios

This comparison may seem like comparing apples to oranges, or centralized apples to decentralized apples, if you will. DeFi protocols cannot be compared to centralized organizations! you might say. These banks have hundreds of employees and wealth managers who are rent seeking! Still, if we look at Yearn’s underlying mechanics, we can easily see it’s largely an aggregator of other protocols. The main product is a yield aggregator that connects to other lending protocols such as Compound, Aave, and dYdX to return the highest yield to protocol depositors. Even with merciless shilling, it’s not that clear why the governance token of an aggregator protocol would have a market cap that exceeds 60% of the AUM in the protocol.

If speculation on the project’s growth potential largely drives $YFI’s price, then it’s not all that different from various ICO tokens that skyrocketed in value in 2017 only to plummet back to irrelevancy just as quickly. 

Early speculators will make millions of dollars while latecomers could be left holding the bag. Eventually, if these DeFi protocols offer comparable services to centralized alternatives, their market cap to AUM ratios will drop to reasonable levels. Unless these projects succeed in capturing significant market share from traditional players, this will mean significant losses to investors - especially since these projects mainly cater to speculative crypto investors at the moment, leveraging memes and complex financial engineering schemes.

Skepticism aside, there is a good chance I could be under-indexing on a key component here. Who knows, maybe Yearn actually achieves AUM in the trillion-dollar range and each of the original YFI tokens exceeds $1M in value. The discussion here mainly aims to investigate the value capture mechanisms of DeFi tokens to begin to understand frothy DeFi token valuations.



Long Reads

🔹 Eth2 Medalla Testnet Incident: Raul Jordan, a lead developer on the main Eth2 client Prysm, explains the issues discovered in the Prysm client that resulted in a complete halt of the Medalla testnet. Raul shares the lessons learned from the incident. While the Prysm team believes that the incident won't affect the timeline of the Eth2 phase 0 launch, it's highly probable the launch will be pushed to 2021. 

🔹 On DeFi Frontends:  Zach Brown discusses an important nuance in DeFi's decentralization spectrum. Zach discusses how new projects such as Handshake, which enables decentralized domain names, coupled with decentralized data storage could replace centralized frontends. 

📌  Polkadot Transferability and Redenomination Public Notice: Several cryptocurrency exchanges are opting to implement Polkadot redenomination (a split of each DOT into 100 smaller units) before official protocol support is made available on Friday August 21st. Polkadot founder Gavin Wood has tweeted in opposition of these exchanges, accusing them of defrauding the community. 

📌  Understanding Crypto Credit Markets: The first of a 3-part series, Meltem Demirors discusses the emergence of the crypto debt market, why it's reduced the cost of capital for crypto startups, and how it's paved the way for Yield Farming.



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Disclosure: Volt Capital and/or its partners may have exposure to some of the cryptocurrencies mentioned in this newsletter.

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