Legend: YFI net asset flows since launch on July 17th. 30,000 YFI tokens were minted and distributed to users. The full token supply was evenly distributed into three pools.
One of the most interesting recent developments in cryptocurrency is the proliferation of decentralized liquidity pools and the distribution of their governance tokens.
Decentralized liquidity pools, like Uniswap or Balancer, work to provide liquidity to DeFi networks through automated smart contracts. This means that anyone can become a liquidity provider and earn rewards – or ‘yield’.
In an effort to incentivize users to provide liquidity, as well as give them a bit of ownership over the protocol, these liquidity pools started giving away governance tokens via “liquidity mining”.
Compound was the first to do this, which kickstarted the DeFi yield farming phenomenon: users, aka “yield farmers”, gaming the incentive systems to maximize short term profits. When a new opportunity arises, the yield farmers “rotate their crops” and move on to the next opportunity.
All YFI tokens went to liquidity providers.
The latest incentive farm is YFI – the governance token for Yearn.Finance. This particular DeFi protocol is a set of smart contracts that move assets between liquidity pools to generate the highest interest – like a very smart savings account.
Users who deposit liquidity in Yearn pools will get yTokens, accounting for their deposits. Those yTokens can then be deposited to Curve, which is a DEX optimized for stablecoin swaps. The resulting yCRV tokens can then be staked to earn YFI, which at the time of writing is worth over $4K per token.
The founder distributed the entire initial supply of YFI to users of the protocol, keeping none for himself. Looking at the visualization above we can see on July 17th that the “new supply” is sent to three separate liquidity pools.
YFI now has a market cap of over $120MM at the time of writing.
Many Yield Farmers are using aggregators.
We can see a lot of YFI tokens being sent to 1inch.exchange. 1inch is an aggregator that splits orders among multiple decentralized exchanges in one single transaction, so users can get the best price on their trades across liquidity pools.
The full supply of YFI was earned within a week.
Often when a token is launched, a large portion (often at least 50%) of the supply is allocated to the project’s team and early backers. The act of giving out 100% of the governance token supply to users who interact with the protocol has proven immensely successful in creating a powerful network effect. It creates a positive feedback loop where the more users interact with the protocol, the more value the protocol has, which causes the price of the governance token to go up, which attracts more users, and so on. It’s much harder for tokens with large initial allocations to VC and founders to bootstrap this sort of community growth.