Yearn, YAM and the Rise of Crypto's 'Weird DeFi' Moment

The Takeaway:

Decentralized finance (DeFi) has made a pivot to what might be called Weird DeFi: a set of difficult-to-parse projects whose larger value to the ecosystem is suspect at best and whose community is at least 20% driven by inside jokes. 

"It is a 'Game of Thrones' by another name," investor and author William Mougayar told CoinDesk. That's his take on this crop of strange, meme-driven coins populating the Ethereum blockchain today.

In an email, Mougayar wrote that the fundamental "bankless" thesis driving DeFi remains correct, but the sector's real value will accrue slowly. And crypto doesn't like to wait. 

"When rational predictions become outdated in days or weeks, something irrational is going on," Mougayar wrote.

DeFi started off imitating aspects of the regular financial world that we all know work: such as saving, borrowing and hedging risk. All this required liquidity and each successive project got very creative about enticing users to stake their crypto assets.

Read more: What Is Yield Farming? The Rocket Fuel of DeFi, Explained

This created a new way to make money in crypto called yield farming. Then Yearn.Finance came along and dropped a smart-contract-governed robo-adviser for yield atop a lot of these projects, one that put users in control. 

Imaginations then caught fire, leading to the oddly food-inspired birth of Weird DeFi, with its YAM, Spaghetti, Tendies and a side of Sushi.

In Weird DeFi (after Weird Twitter), the line between games and finance started getting very fuzzy very fast but, of course, the line between banking and gambling has always been fuzzy.

"If the memes were meant to build a retail market, it's going to get crushed because it's not a retail market game unless you're first to the new meme," blockchain consultant and Crypto Twitter voice of reason Maya Zehavi told CoinDesk.

According to Zehavi, any transaction worth less than $10,000 has been unlikely to be worth it after transaction fees. In short, retail investors need not apply.

Before all this, DeFi had been humming along, quietly tacking on value until this June when lending platform Compound Finance began decentralizing and distributing a token that allowed voting rights on code changes (a governance token).

Read more: A Coinbase Pro Listing and Other Eye-Opening Data Points on Compound’s Surge in Demand

"It feels like there are almost two distinct market regimes. There was before COMP and there was after," Jason Choi, research head at Spartan Capital, a crypto fund out of Hong Kong, said in an interview. People have a bigger appetite for risk than they had, he said, adding, "We are seeing a new memecoin pop up every single day."

These new projects are put together out of pieces of others, largely some admixture of the sector's three leading ingredients: Compound's governance, Yearn.Finance's robo-adviser structure and, lastly, the rebasing mechanism used by the somewhat-stable coin Ampleforth (originally known as Fragments).

DeFi's new breed has introduced all sorts of inventive yield-minting mechanisms that consistently get retail investors excited – at least for long enough that someone makes money.

"The purely yield farming game won't last. I think it will end badly at some point," Ricky Li of token trading desk Altonomy told CoinDesk over Telegram. "We have seen this before."

Explaining each one is easier said than done.

Broader crypto noticed the weirdness starting with the YAM token. YAM seemed to begin the era of "liquidity first, purpose later." (In actuality: liquidity first, get copied, explode and then resolve to carry on. Purpose comes eventually.)

Read more: Deposits in ‘Monetary Experiment’ Meme Token YAM Break $460M

So what do these various memecoins do? Their explainers leave a lot to be desired, but we did our best. Here's the rough TL;DR of a few of the memecoins popping off right now:

It's like Ampleforth, so it trades volatility in price for volatility in supply – which is still volatility. One key difference, however, is that each time YAM expands the supply it automatically buys the revenue-generating coin, yCRV, on Yearn.Finance. YAM is distributed by users putting funds into different liquidity pools, and YAM very much leans into governance.

This one follows the Yearn.Finance script, by creating a pool (or several) that users can put assets into. That pool will seek the best yields it can, even as token-specific yields change. From there, twists ensue. Once a pool is locked it's locked and the rules do what they do; it also distributes a PASTA token whose only value is that it destroys itself aggressively.

Also works like Ampleforth, but it adds some features that amp up game-ability for savvy traders. In particular, the rebases aren't instant. They play out. Also, its initial distribution was designed to undermine whale dominance and at least appeared to reward early entry. At its heart, Based aims to create predictable mechanics that can be played in different ways depending on market conditions, theoretically making it a fun game for those with a clever macro view. (One other weird facet of Based: It explains itself clearly right on its front page. Crazy.)

This one is an automated maker based on Uniswap, but with a governance token built in that really favors liquidity providers who get in early. It also sends up all sorts of red flags.

This is a straight-up game. It started out with a set supply that it burns aggressively each day. The burns get partially allocated later to the biggest holders (obviously allowing them to get even bigger). That said, it only burns them from the Uniswap pool so if people get aggressive about getting into the top-tier HODLers, less TEND will be burnt. Also, anyone can trigger burns and earn a tiny amount of TEND for doing so. There are a lot of moving parts, but it's 100% all speculative, with no pretense of a value add. Very nice graphics.

Honestly, the best way to describe this one might be as an association or co-op. The intent here seems to be to assemble as much clout on Yearn.Finance as possible so Wifey can use it to push for more yield. It also has probably the most obtuse front-end of any of these projects, which is saying something.

If any of these descriptions are a little wrong, well, look: These projects don't exactly bend over backward to make it easy to comprehend what they are doing (except Based, respect). Apologies. All these websites seem to care about is how fast you link your Ethereum wallet.

To the memecoin creators out there: "About" pages are a thing and consider maybe cogently defining your terms (looking at you, Spaghetti, and your whole "foodbank/treasury" thing).

Kain Warwick, CEO of Synthetix, the decentralized exchange for synthetic assets, told CoinDesk over Telegram the genre is largely about mindshare. He wrote:

And zero-sum games tend to be won by the people who have already done a lot of winning. 

"Yam and Spaghetti and others are being used (whether the teams behind it understand it or not) by whales to pump and dump, and many non-sophisticated retail investors will be hurt," Henry He of crypto e-commerce firm SesameOpen told CoinDesk over Telegram. He predicted in early June that Compound's COMP would open a Pandora's Box.

Each new form of yield requires creating the appearance of value by backing it with another token that has value. Or maybe a token, based on a token, based on another token that has value. All these interlinks have driven some of the critique about the true market value of stakes in DeFi.

"Every level of composability you add increases your risk. It compounds your risk," Choi said. "People should look at things like insurance."

What Weird DeFi captures is "the idea of being able to incentivize any kind of early user behavior," Choi explained. "I'm less excited about any of these vegetable memecoins specifically than I am about what their implications are."

"If a bunch of silly people making a bunch of very silly yam jokes can actually come together and make something useful, it could be a new way to coordinate humans," Scott Lewis, a co-founder of Concourse Open Community, which built DeFi Pulse and DEX.AG, told CoinDesk.

If this sounds crazy, so do all startups in all forms. People have always had a hard time taking startups seriously because their trajectory can be non-linear to the point of appearing illogical.

It's not, though; it just doesn't always work. 

Astoundingly successful investors Peter Thiel and Paul Graham have both said it in different ways: The hard thing about venture investing is remembering that the very best ideas will always sound stupid.

But it gets even worse.

At its core, a startup is a team with an idea about a problem in the world. That team intends to solve that problem first and figure out a way to make money later. As if that's not crazy enough, some real successes have come from companies pivoting so hard that their final form – when they exit for billions – isn't even recognizable from where they started.

Sometimes a podcasting company invents a new form of blogging based on text messages (that's Twitter; $32 billion market cap), or a video game company redesigns internal office chat (that's Slack; $17 billion market cap).

The assumption is that if talented people can stick together long enough, they can make something great. So how can it be made worthwhile for them to stick together?

Venture money is a way to get a small group of super-talented people to stick together. Weird DeFi might be a way to get a large number of regularly talented people together. Either way, it's a lot of talent, and as startup history shows, they can find their purpose later.

"You align a group of people who self-select that they want to be a part of that project," Lewis said – even if that's people who are into memes about yams. "Then what do you all do together? That's kind of the question: What vision emerges?"

Pseudonomous crypto researcher Hasu made a similar point, with skepticism, on the Deribit blog:

Weird DeFi could also just evaporate having made some good points along the way. "At the macro level I think we are in a direct subprime credit expansion (which will pop for sure). At the micro level, I think this is back to the basis of real crypto as an open, self-sovereign and fair launch, etc," Dovey Wan, of Primitive Ventures, wrote in an email to CoinDesk. Wan has been actively involved with the Yearn.Finance fork, YFII.

That last point, Weird DeFi's general preference for so-called "fair distributions" might alone be meaningful, which He credited YFI for kicking off (though, to be fair, prior projects such as the privacy coin Grin have done it too). 

He called it "real fully decentralized governance vs. fake decentralized governance (e.g. COMP model where team and investors control the governance)."

Though he admitted, "It will take a longer time to see which model is better in terms of adding value and making the project better."

It could also, in the end, mean very little – other than the fact that crypto investors are always looking for a new game to play where some win and some lose.

"I think it simply means DeFi guys are more clear about what truly attracts users and provides incentives," Li wrote. "That simply is yield."