Yearn is a blockchain-native fixed income active asset manager. For 2020 at least, Yearn is the “Bill Gross” of crypto, playing across trading fees, interest maximization, dividend farming, governance rewards, and various other technological innovations that lead to capital appreciation.
The “funds” are called “vaults” or “pools” or “jars” and so on. They are just the equivalent of SMAs or fund interests, synthetically structured through code. The interesting thing is that the whole thing is open source, so in principle, somebody could just copy the code base.
And somebody did! The fork is called Pickle Finance, and had between $100 and $400 million in assets. During the summer run-up of the DeFi markets, forks generated trading returns by simply existing. However, over the long term, it is much more difficult to retain a community and assets. It is hard to maintain a thing that works in the highly adversarial DeFi environment, where protocols are under constant attack. A recent $20 million exploit left Pickle … in a pickle.
The recent news is that Pickle is going to be “merging” with Yearn. Given that the technical architecture is quite similar, and the experience of the developers is comparable, the core part of the merger is onboarding Pickle developers to work on Yearn. This merger is not about the technology. It’s about the people writing code to create the technology. And who pays them what. If the incentives from Yearn cashflows are much higher than the incentives from Pickle cashflows, a lagging protocol can’t last long in an adversarial environment. Attackers prefer to go after those who have the least defense, not those who are most capitalized.
There is a fixed cost to defense, which creates competitive barriers and winner-take-all outcomes. And in a world where capital can move without friction between investment venues, a merger will also pull that community to follow you to the new protocol.
Notably, the governance tokens for Yearn had limited input on this “transaction” — in part because governance is not clearly, legally articulated, and in part because the transaction did not involve the sale and purchase of assets. The assets are open sourced, and people have the freedom and ability to switch what they decide to work on. Not only is capital movement much less restricted, but so is the stickiness of “employees”.
Another announcement quickly followed. Yearn is “merging” with Cream, a fork of Compound and Balancer, making it a combination of lending markets and an automated market maker. In this case, however, it seems that Yearn is delegating to Cream several strategic product developments, like leverage and a pool-agnostic (i.e., collateral agnostic) stablecoin. In traditional finance, we would call this a cash sweep account. The developer teams, again, are merging together. We assume the benefit to Cream is in part driven the lower the costs of potential errors, in addition to higher cash flow.
And another. Yearn and Akropolis. The latter had a $2 million hack earlier in the month, and going forward will play the role of institutional distributor of Yearn products, as well as be part of investment strategy formulation. The same compensatory mechanism of issuing tokens to Pickle holders (i.e., a piece of something that looks like debt) will be applied to Akropolis holders.
Key takeaways
In a world where financial instruments are manufactured by machines on open source rails, it is not the rails that are valuable. Yes, over time, the rails become more sophisticated and are stress-tested by capital and hacking. But what actually holds “value” are (1) the communities that commit assets to protocols, and choose to align economic activity with some particular brand, and (2) the entrepreneurs that have the very rare skill-set of building and securing such protocols.