If you clicked on this piece, it probably means that you are familiar with Balancer - an Automated Market Market (AMM), which is the second biggest in the industry after Uniswap or YFV - a tweaked version of YFI.
Now, let me tell you something quite interesting.
There are a bunch of ‘Liquidity Wars’ occurring behind the DeFi curtains.
Let me pull the curtain back a little for you to take a peek…
You see, DeFi protocols are now aggressively competing with each other at staggering speed for liquidity. They are battling to convince liquidity providers to choose their own protocols by lowering their gas fees, providing better farming incentives, and providing more liquidity pools to choose from.
Today we are going to explore the case of YFV Pulling $150M From Balancer in 24 hours.
However, to fully understand what and how it happened, we need to go back in time to the start of 2020, before the DeFi boom even started.
1. Before YFI
Before Yearn Finance (YFI) even came into existence, DeFi had already started to shine mainly through two platforms: Compound Finance and Aave. These are lending platforms that allowed users to deposit their tokens (such as ETH, DAI, USDC, etc.) to earn interest. The interest earned is determined by the current
Annual Percentage Yield (APY) at the time.
However, yield hunters were never satisfied and would always switch their liquidity between Compound and Aave, depending on which platform provided the highest APY. The only problem was that they had to swap their liquidity manually and pay the Ethereum gas fees on each action.
Current APYs for Compound Finance
Current APYs for Aave
This comparison is here to give you an idea of how these numbers differ and how it can be difficult for yield hunters to choose the best yield that is here to stay.
2. The Birth and Rise of YFI
Enter Andre Cronje - a programmer from South Africa who gave birth to Yearn Finance (YFI). Initially, Cronje managed money for himself and some friends as he switched their stablecoin assets between the highest APY on Compound and Aave.
He found that manually checking for the best APY on the platforms was a time-consuming process to keep up-to-date with. On top of this, the fees he kept paying when switching protocols kept adding up.
As a result, he was forced to find a solution for himself to combat these issues.
This is what motivated him to create Yearn Finance and the whole 'y' ecosystem. Initially, it was designed just for his own private use, but he eventually came around to making the protocol public and let others take advantage of his creation.
Yearn Finance helps users by automatically finding the best APY and switching between the protocols without any manual interaction. On top of this, as more yield hunters added their own liquidity to Yearn Finance, the fees involved in swapping between protocols were shared between everybody - resulting in lower costs for everybody as a whole.
3. After YFI
After the success generated from YFI, it was inevitable that other teams would fork the project and tweak it a little.
First came YFII in July 2020. This fork was created after the YFI farming stopped on July 26th to prevent a sharp drop in the pools' liquidity. A proposal, called YIP-8, was made on YFI to introduce a weekly halving model on yield farming. Unfortunately, this proposal did not pass. As a result, an anonymous development team decided to fork YFI and create YFII with this proposal already integrated.
The integrated YIP-8 on YFII provides an opportunity for late-comers to earn rewards while encouraging active participation from day 1 farmers.
The second fork came in the form of YFV in August.
4. The Rise of 'YFV' (today's: Value DeFi)
The motivation for YFV came because both YFII and YFI were not attractive to small scale farmers as gas fees were so high. These farmers would make small deposits into YFI/YFII and still not earn a profit since they had already lost so much in paying for gas fees.
As a result, YFV was created. It provided a stable-coin only pool that allowed small-scale farmers to join and earn a yield, which would result in profit (as they were not paying such high fees in stablecoins).
It also introduced an on-chain voting system to allow users to vote on the supply distribution rate, which would be executed automatically depending on the votes counted.
On top of this, farmers would also be farming two new elastic supply tokens called vUSD and vETH whilst earning the YFV token simultaneously. These tokens had an elastic supply that would increase or reduce the number of tokens in everybody’s wallets depending on where the current price was in relation to the target price.
YFV started to gain traction very quickly due to the fact that small-scale farmers were involved. There were many of these farmers who, in turn, would introduce YFV to many more small-scale farmers to increase the network effect of YFV through word of mouth.
As a result, YFV managed to lock up $3 million in total value locked (TVL) within an hour of launching. It even hit the top trending searches on CoinGecko;
And reached top 3 in volume traded on Uniswap;
There was a serious hype developing behind this project.
5. YFV Rebrands to DeFi Value And Takes on Balancer
Today, YFV is totally different from YFI and YFII, as they have officially started to rebrand from YFV into VALUE.
YFV officially stopped being just a “better version” of YFI and moved into their own lane as they are now an AMM, which provides a novel way to “go away and farm on other LP tokens” through their one-click interface.
This new mechanism comes through their Value Liquid protocol, their new AMM.
Typically, farmers do not discriminate between protocols; instead, they are simply hunting for the best possible yields. In response to this, YFV created Value Liquid, an AMM that allows for flexible farming.
In a single-click, farmers have the option to rotate their liquidity out of Value Liquid to deploy them on higher-yielding strategies. Put simply; it allows farmers to quickly covert their VLP pool ownership token (the token you receive AFTER providing liquidity) into other tokens such as UNIv2 (Uniswap), SLP (SushiSwap), or BPT (Balancer).
During their migration phase, they introduced something known as “automatic migration,” which would allow farmers that provided liquidity to YFV pools on Balancer to switch over to the new VALUE platform automatically.
Those that were farming for YFV on Balancer in pools such as KNC/YFV would automatically see their liquidity migrated over to the new Value Liquid AMM - without the need to do anything on the farmer’s side.
As a result of this mechanism, VALUE managed to suck over $150 million worth of liquidity from Balancer in under 24-hours. This drop in the liquidity is apparent on the TVL charts for Balancer;
And it was automatically migrated over to the new Value Liquid AMM;
As you can see, the Liquidity Wars have started, and we can only expect this to continue as these protocols are determined to ‘steal’ liquidity from each other. At this moment in time, it is apparent that Value Liquid has the upper hand.
