A Detailed Explanation of the Improved Version of YFI Token Economics Can Yearn Win the Turnover Battle?

Unpacking the Enhanced YFI Token Economics Can Yearn Emerge Victorious in the Turnover Battle?

Author: Samuel Haig, The Defian

Translation: Felix, LianGuaiNews

Recently, the veteran DeFi yield aggregator Yearn Finance announced a successful improvement to its token economic model, adopting a voting lock mechanism that will use YFI accumulated through buybacks to fund a new rewards program. This article takes you through the specific changes in Yearn Finance’s token economic model.

Staking for Tokens and Voting Rights

Yearn stated on the X platform that the veYFI flywheel brings higher rewards and returns to veYFI holders and Vault depositors. By locking YFI into veYFI, stakers can earn YFI rewards (in the form of dYFI), which can be exchanged for discounted YFI. Additionally, stakers also gain voting rights. These voting rights are used to determine which pools receive the largest distribution of dYFI rewards. veYFI is now the exclusive voting token for Yearn governance.

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YFI stakers can lock their funds for a period ranging from one week to ten years, with longer lock-up periods resulting in more rewards. While it is possible to lock funds for up to 10 years, locking funds for more than 4 years does not convert to additional veYFI. If the set time exceeds 4 years, it can be reset to 4 years at any time.

If stakers wish to exit their lock-up earlier, they can do so but will face penalties. The penalties will be distributed to other veYFI holders. The maximum penalty is 75% of the locked amount and decreases over time according to the calculation: (remaining time/4 years) * 100%. Currently:

• If the lock-up period exceeds 3 years, the penalty for exiting will be 75%.
• If the lock-up period is 2 years, the penalty for exiting will be 50%.

New dYFI Token

dYFI is an ERC-20 token that holders can sell for ETH or use to buy YFI at a discounted price. The ETH used for the purchase is then used to support Yearn’s buyback program. dYFI tokens are burned upon redemption. The circulating supply of dYFI cannot exceed the redeemable YFI quantity.

If stakers lock their tokens for the shortest period, they will receive 10% of the dYFI tokens, while the remaining 90% will be distributed among other veYFI lockers. Users who lock their tokens for a minimum of four years will receive 100% of the dYFI tokens, and those who lock for two years will receive 50% of the dYFI tokens. Although the weight decreases as the remaining lock-up time decreases, the lock-up can always be extended to the maximum duration.

Every two months, veYFI holders vote to determine how protocol earnings (YFI buybacks) should be distributed among the gauges (each gauge is associated with a yVault). Then, Vault depositors can stake their yTokens in the corresponding gauges.

The rewards distributed through the voting lock mechanism will not cause an increase in YFI supply. Yearn provides funding for dYFI redemptions through its buyback program, which has accumulated approximately 1,300 YFI from the protocol’s past profits.

Risk

Of course, there is no perfect tokenomics, and YFI is no exception. Yearn points out that the voting lock mechanism may bring risks of governance attacks, where one or more participants accumulate a significant amount of YFI and can control the protocol’s rewards and decisions.

In addition, the high demand for veYFI may affect the liquidity of YFI on exchanges. Currently, YFI is traded on multiple CEX and DEX. With the growing demand for using YFI elsewhere, there may be a lack of YFI/ETH LP supply in the liquidity pool and a lack of interest in general YFI market-making, resulting in even less liquidity for YFI. In this case, additional incentive measures may be necessary to ensure the liquidity of YFI trading.

As Layer2 activity increases, Yearn has been striving to maintain its market share. During bull markets, the high gas fees on the Ethereum mainnet are a driving force behind the popularity of yield aggregators. The current trading price of YFI is around $5000, a 95% drop from its all-time high in May 2021. It remains to be seen whether Yearn can turn the tide through improvements in tokenomics.

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