YFI: a good investment? Probably not

An article on why you should not put your savings in it.

This research assumes that you are familiar with some DeFi concepts, as well as some basic economic concepts. The article is a rebuttal of the investment thesis written by Mechanism Capital (here). I analyze their wrong assumptions, valuation models and conclude that the target price they have in mind is bogus.

Guys at Mechanism Capital came out with the following price range:

Conservative scenario: 13500$–16000$

Base case: 50000$-55000$

Aggressive scenario: 240000$–315000$

Valuation and PE table used

The main problem with this model is that circa 75% of the valuation come from withdrawal fees, you read that right! Apparently YFI is supposed to rise in value while people are withdrawing assets from its pool. Yes, they might pay a one-time fee of 0.50% for it, but a protocol whose value mostly come from people withdrawing from it has not a bright future in front of it. For this mechanism to be sustainable, new inflows should outnumber outflows. Is it the case? The info-graphic below from DeFi Pulse shows the real picture: constant and relentless net outflows of capital.

The other source of income for YFI holders is an alleged 5% performance fee charged to users investing via yVaults. Now, let’s see under the hood to see whether this is really the case. The FAQ page of YearnFinance comes handy as it provide an answer.

the 5% fees is applied only to Level 3 transactions.

As you can read, there are 3 levels at which yield are extracted: most of the income is realized at Level 1, a small part at Level 2, and an even smaller part at Level 3. However, the 5% fee which goes to YFI holders is charged only on interest earned on interest (Level 3), and I let the reader figure whether a 5% fee on 7% (average APY) of the 7% is a big number or not (hint: it is not).

These are major flows that invalidate most of the analysis carried by the investment fund, as well as their price targets. Their model wrongly assumes that 1) inflow grow constantly and withdrawals fees are sustainable 2) 5% performance fees is charged to all generated yields.

The reality is that with rapidly diminishing Asset under Management and fees which are perhaps too small, YFI future does not seem so green.

Other risk factors to keep in mind but that I did not consider in this analysis are:

  • Smart contract failure risk
  • Income too dependent on limited number of pools (eg. CRV)
  • Competition risk from other open source protocol
  • Governance failure / small participation rate
  • Introduction of deleterious monetary policies
  • Unknown risks (obviously)

Furthermore, to bring some “old-finance” perspective, you can appreciate below a comparison of YearnFinance VS BlackRock in terms of AuM, Market Capitalization and their ratio.

Yearn Finance | AuM 522M $ | Market Cap 310M $ | ratio 1.68

BlackRock | AuM 7.4T $ | Market cap 90B $ | ratio 82.2

Generally speaking the equity value of an Asset Management is at least an order of magnitude less than the assets it is currently managing.

I conclude by saying that in the long-term the most likely outcome for YFI in terms of value is already out there, and it has been written by Andre Cronje — the developer behind YFI- itself.

quote from YFI developer about its fair value

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