Inside Ethereums Testnet Headwinds & Growth in Tokenized Bitcoin: A Data Perspective by IntotheBlock
Every week, IntoTheBlock brings you an on-chain analysis of top news stories in the crypto space. Leveraging blockchain’s public nature, IntoTheBlock’s machine learning algorithms extract key data that provide a deeper dive into the major developments in the industry.
This week, we analyze yearn.finance and how YFI holders are positioning themselves following its outstanding price performance. As well, we cover the reduction in ‘crops’ received by Compound yield farmers, and its implications on the token that catalyzed the explosive growth in liquidity mining.
On-Chain Data Signals YFI Holders Looking to Take Profits
Yearn.finance’s native YFI token has been on a hot streak, increasing by over 10x in August alone. Having launched with a fair distribution and near-zero market cap, YFI is up a staggering 1,300x within two months of its inception reaching a market cap of over $1 billion. With such eye-popping returns, it is worth going over how yearn.finance works and analyzing some of its key on-chain metrics to gain an understanding of where YFI may be heading.
Previously known as iEarn.Finance, the protocol started out of a developer’s frustration of having to manually search and constantly reallocate capital in protocols providing returns on top of stablecoins. The developer and founder, Andre Cronje, realized this process could be automated such that the iEarn.Finance protocol would integrate into lending protocols, programmatically allocating stablecoins to the highest yield opportunity while also allowing other users to invest their capital in it. Andre Cronje later decided to rebrand the project to “y”Earn.Finance as in you earn to emphasize its collective, community-focused approach.
In its v2, yearn.finance introduced its most popular product, yVaults. Through yVaults, depositors’ capital is allocated in a more active, risky manner than with the original earn feature. It got started following the COMP yield farming release, with the vault simultaneously earning depositors yield in the form of interest rates plus the dollar equivalent in farmed tokens, while also lowering gas costs as these are split evenly between participants. Additionally, vaults generate revenues in the form of a 0.5% withdrawal fee and a 5% fee to subsidize gas. These are distributed to YFI token holders as staking rewards.
The recent price run in YFI is in part due to anticipation of the yETH vault, which allows anyone holding ETH to automatically earn the best yield, as reported by Decrypt. This has led to speculation that yETH will simultaneously drive demand in ETH, which would be stored to generate yield, and YFI, which would accrue revenues from locking this ETH. The recent price growth, along with its already remarkable appreciation, has had implications in on-chain activity. For one, we can verify that YFI holders are sitting on outsized profits.
The average balance of a YFI holder is currently of over $135,000, eclipsing that of other DeFi leaders. In comparison, LINK has an average balance of $73,000 and LEND of $6,000 despite their parabolic price action. The biggest factor driving this divergence is likely YFI’s fair launch, which allowed early adopters to profit significantly, to say the least.
Another interesting insight from this chart is that the average balance of YFI holders has not kept up with price action, indicating that large holders have been selling their positions or at least taking profits. We can corroborate this pattern by analyzing inflows into centralized exchanges.
As can be seen in the graph above, the dollar inflows of YFI into centralized exchanges recently hit an all-time high. This is a potential indication of large holders seeking to sell their positions following the parabolic run-up. That being said, the $30 million in inflow volume is still relatively small in proportion to YFI’s billion dollar market capitalization.
While yearn.finance’s yield optimization and fair launch has allowed it to become one of the most innovative and respected protocols in DeFi, its price action signals a high amount of risk for those speculating in YFI’s token price. As evidenced by on-chain data, holders are appearing to take profits as prices retrace from nearly $40,000 to $27,000 within a couple of days.
Compound Reduces COMP Distribution by 20%
Another DeFi protocol that has been on a tear recently is Compound and its COMP token. While Compound did not invent the concept of yield farming (also referred to as liquidity mining), its initial COMP token release is widely recognized as the catalyst igniting the current DeFi frenzy. Given the speculative activity taking place with COMP farming, its governance has recently approved a proposal reducing COMP emissions by 20%.
The vote was proposed by the blockchain simulation and testing platform Gauntlet, which stated that a high amount of COMP was being held by short-term holders and centralized exchanges. Compound governance, which uses COMP to stake votes, approved the proposal, with a low total of 63 addresses voting out of 1,070 voting addresses and over 30,000 total addresses holding COMP. With the backing of large organizations, Compound’s emission reduction proposal received backing from venture capital firms a16z and Polychain Capital, while ConsenSys and InstaDapp voted against it.
The proposal was executed on August 31, effectively reducing the amount of COMP rewarded from 0.44 to 0.352 per block. According to the proposal, this would be a short-term solution with the focus long-term shifting towards implementing something similar to Synthetix’s vesting period which locks users rewards for one year.
From the moment the proposal was created on August 26 all the way to its implementation, the COMP token managed to increase by nearly 50%, approaching its all-time highs. It is likely that some holders saw that this emission reduction would alleviate sell-side pressure as yield farmers would have smaller amounts to sell, similar to how miners are affected by block reward reductions. As a result, the number of addresses profiting from COMP increased substantially.
At the time of writing, 84% of COMP holders are profiting from their holdings as indicated by the In the Money clusters above. Additionally, this percentage is expected to be even larger, since IntoTheBlock’s In/Out of the Money indicator assigns a cost to an address’s holdings based on the price at the time they received their tokens. Since many addresses received COMP through yield farming, with the only cost being gas costs, the percentage of addresses profiting is expected to be even higher.
By tracking exchanges inflows and outflows, IntoTheBlock is able to determine the net amount entering centralized exchanges. This provides an idea of how exchanges’ token holdings change over time.
COMP tokens just had the highest net outflow since it began to be traded. This means that less COMP is now available to be sold in centralized exchanges. The decrease coincided with COMP’s price increase, pointing to the likelihood of holders buying and deciding to store their COMP elsewhere.
Whether this is because of the 20% COMP emission that just took place or not is hard to determine. Ultimately, the effects from this proposal and future actions taken towards reducing short-term yield farming will be monitored as Compound solidifies its position as one of DeFi’s leaders.
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