Hey, hey, hey… how are my fellow DeFi degens doing today?
I’m back with another piece on my favorite automated yield farming protocol, Harvest Finance (FARM), and oh boy is it a good one.
You’re not going to want to miss it.
If you’ve been following me for a while now, you might have noticed I’ve taken a liking to Harvest and all of the innovation surrounding its $FARM tokenomics. I first took notice of Harvest’s potential back in November and recently highlighted what they’re doing with high-yielding farming strategies, here and here.
Now I've stumbled upon something I just had to share with you.
Just the other day, I was scrolling through the twitters and saw someone mentioning this old post:
You see what’s in the highlighted section?... “Buybacks should be handled in a continuous and automated way...”
Wait a second, isn't that what Harvest Finance is already doing?
Yes. Yes, it is.
When a user deposits assets into Harvest to farm, they receive a yield-bearing version of the asset (ie. fUSDC, fLINK, fETH, etc.). These fTokens automatically appreciate in value earning interest and can be redeemed for the underlying asset at any time.
The interest depositors receive is 70% of the profits generated from farming via Harvest as well as $FARM token rewards. As for the remaining 30% of generated profits, it is converted to USDC and used to buy $FARM tokens off the market en masse.
Yes, that’s right. Harvest has been doing $FARM token buybacks from the get-go. They’re the first yield aggregator to adopt such a system and it has been such a success that Yearn’s about to copy it.
Now, back to Harvest’s $FARM buybacks:
The $FARM tokens bought back from the market are sent to Harvest’s Profit Sharing Pool where they are distributed to Harvest Cooperative members with $FARM tokens staked in the Harvest Profit Sharing Pool. $FARM stakers receive $FARM rewards proportionately to their stake in the pool.
Harvest Profit Sharing Pool - click “Stake” in the header to find the pool (source)
When you think about it, the $FARM buybacks and Profit Sharing Pool incentive structure is genius.
The $FARM buybacks create a natural demand for $FARM and it's fueled by Harvest profits generated by farmers. Therefore, everyone in the Harvest Cooperative has aligned incentives to help Harvest succeed and generate more profits for its humble farmers.
YFI Wants to Keep Up
Banteg, a core dev for Yearn.Finance must have recently realized how great Harvest’s $FARM tokenomics, buybacks, and incentives really are because on January 13, 2021, he proposed a Yearn.Finance improvement proposal titled BABY: BuyBack and Build Yearn.
Also, note that the proposal passed with 99.4% in support just 6 days after being proposed:
The key thing to take note of in this proposal is that Yearn will be replacing staking with “BuyBacks” – an incentive structure that Harvest had since the very beginning.
But wait… “didn’t Harvest launch after Yearn because it was inspired by what they built?”
Well…ya, Harvest devs were inspired by Andre Cronje the founder of Yearn, but they didn’t just copy Yearn’s code and spit out a copycat under the name Harvest…no, no, no.
The team behind Harvest admired Andre’s ability to innovate and create a compelling DeFi product so quickly and were inspired by his ambition to create their own innovative yield aggregator protocol that is Harvest.Finance.
Now, however, it seems things have come full circle.
While Yearn paved the way for Harvest, now it seems like Yearn is taking some ideas from them. It’s a beautiful thing really. Free market competition at work. Creating better and more innovative products through competition.
All tokenomics lead to buybacks?
Crypto investors love buybacks, period. That’s why you see so many projects implement them into their tokenomics. They just have so many benefits that if you could implement them, why wouldn’t you?
After all, buybacks are the crypto form of a dividend in TradFi and traditional investors love dividends.
But when dealing with cryptocurrencies, you can’t really pay out dividends because financial regulatory commissions consider all tokens that pay out dividends to be a security. This is a problem for numerous reasons including increased regulations, fees, and more taxes for investors.
However, cryptocurrency companies have come up with innovative methods to get around this via buybacks and token burns, and/or reward distribution if the token is decentralized.
BuyBacks Tokenomics Explained:
A buyback is when a cryptocurrency company, its protocol, or decentralized autonomous organization (DAO) buys its own cryptocurrency; thus reducing its supply on the open market; which increases demand; translating to an increase in price.
Oftentimes, decentralized cryptocurrencies will buyback their tokens and distribute them to holders via ecosystem rewards. This incentivizes healthy participation in their crypto-economic systems.
On the other hand, centralized cryptocurrency projects will buyback tokens and burn them instead of distributing them to avoid the SEC's breath.
Some examples include:
Nexo (NEXO) – a blockchain-based lending platform – launched a buyback program in December 2020, starting with a $12 million purchase of its NEXO token.
Nexo’s buybacks have a vesting period of at least 12 months and the tokens may be used for dividends, interest or cashback payments, buyback trenches, or to provide liquidity on decentralized exchange (DEX) pools.
FTX Token (FTT) – the native token of FTX Exchange – is bought up and burned by FTX Exchange in accordance to its buy & burn policy where the exchange repurchases and burns tokens equal to 33% of fees generated on FTX markets, plus 10% of net additions to the insurance fund ('Socialized Gains'), and 5% of fees earned from other uses of the FTX platform.
This buyback program is very similar to what BINANCE is doing with BNB’s buyback and burn program.
As seen with the examples above, centralized cryptocurrencies will implement buyback programs that buy and burn their tokens to avoid the SEC's rath, while decentralized cryptos seem to be on the path of buying and distributing to holders who participate and contribute to their ecosystem.
That said, I’m sure we’ll see more and more DeFi projects follow Harvest’s lead.
After all, the $FARM token buybacks and distribution to humble farmers is just too good a system to keep all to themselves.
