Disclosure: Delphi Ventures and employees of Delphi Digital hold YFI
yEarn Finance was the hottest DeFi project in the last few months, owing to near-immediate product market fit for yVaults and YFI’s meteoric price appreciation. But as the DeFi sector started to cool down following triple digit percentage gains, yEarn’s ability to generate cash flows deteriorated.
YFI’s value comes from two distinct sources. The first is from governance – the ability to shape the protocol by holding YFI and voting on proposals. YFI’s financial value, however, comes from the cash flow it generates via fees.
There are two fees yEarn charges: a 5% performance fee charged on profits generated by a vault and a 0.5% withdrawal fee. It’s worth noting that the withdrawal fee is only applicable if the vault has utilized all its funds. If the vault has free liquidity that isn’t deployed, there’s no fee on withdrawals up to that amount.
When DeFi yields simmered down, performance fees generated by the protocol dwindled. And as the AUM of yEarn started to reduce, future projections for withdrawal fees also fell. Putting these two together, the decline in YFI’s price starts to make sense.