Understanding Yearn Finance: TVL Sources and Recent Performance

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Yearn.Finance stands as a pioneering force within the decentralized finance (DeFi) ecosystem. Founded by Andre Cronje, it introduced a novel model that did not rely on traditional venture funding and instead distributed its YFI tokens through a fair launch. The project's strong profitability enabled it to distribute all tokens to the community rapidly. For many, Yearn.Finance was their gateway into the DeFi space. While recent announcements from Andre Cronje about stepping back from crypto caused brief market concern, it is important to note that he had already transitioned governance of the Yearn protocol to the community much earlier.

This analysis delves into the current state of Yearn.Finance, examining its key metrics, treasury composition, and financial performance since becoming a community-led project.

A Look at Yearn's Multi-Chain Total Value Locked (TVL)

Yearn's revenue is generated by taking a percentage of the yields earned on user deposits within its vault strategies. Consequently, the amount of capital deposited—known as Total Value Locked (TVL)—is a primary driver of its profitability and sustainability.

As of March 2022, the Yearn ecosystem has expanded across three blockchain networks: Ethereum, Fantom, and Arbitrum. Data from DefiLlama shows the TVL distribution as follows:

Over the past year, the combined TVL across all chains grew significantly, from $1.16 billion to $2.97 billion—a 156% increase. However, this growth trajectory appears to have stalled. Despite expansion to new chains, Yearn's TVL peaked in early December 2021 and has since declined. From that peak, the protocol's TVL has fallen by approximately 62.9%.

Following Andre Cronje's official departure announcement, the combined TVL across all chains saw a decrease of only about 6.1% over the subsequent two days. This suggests his exit did not trigger a major immediate loss of user confidence. As core developer banteg noted, Andre had not been actively working on Yearn for over a year, and the project is now maintained by a dedicated group of 50 full-time employees and 140 part-time contributors.

Heavy Reliance on Partnership-Driven Deposits

On the Ethereum network, Yearn's primary product is its Vaults V2. Older products like Vaults V1 and Earn have been largely deprecated, holding only $14.7 million and $46.1 million in TVL, respectively.

The Ethereum Vaults V2 hold a total of $2.49 billion in deposits. Six individual yVaults hold over $100 million each. An analysis of Etherscan data reveals that the majority of deposits in these largest vaults originate not from individual users, but from other major DeFi protocols:

This data indicates that Yearn's deposit base is highly concentrated among a few key partners like SushiSwap BentoBox, Alchemix Finance, Opyn, and Element. Offering fee-sharing arrangements or other incentives to these partners is likely a major factor in securing these large capital inflows.

A known issue within the protocol is the double-counting of TVL. For example, a user's DAI deposit might be deployed by a strategy into a Curve pool (e.g., Iron Bank or Frax). The LP tokens received are then staked back into another yVault, causing the same underlying capital to be counted in both the original DAI vault and the new Curve LP vault. This inflates the reported TVL figure, though a fix for this accounting method is expected in the future.

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Analyzing Yearn's Revenue and Profitability Trends

Yearn generates revenue through a 2% annual management fee and a 20% performance fee on yields generated within its yVaults. After accounting for expenses like strategy provider payouts and operational costs, net profits are used to buy back YFI tokens from the open market.

Since September 2021, Yearn's revenue has been solely dependent on its Vaults V2 product. At its peak profitability in May 2021, the protocol generated over $10 million in a single month—a figure comparable to many traditional finance companies.

However, revenue has faced a significant downturn, mirroring the decline in TVL. Since November 2021, income has trended downward. February 2022 revenue was $3.42 million, representing a 58.6% drop from the previous November. More critically, the protocol reported net losses of $243,000 in January and $1.027 million in February.

This decline in revenue has also reduced the funds available for strategic initiatives like yvBOOST. In February, only $480,000 was allocated to yvBOOST. A reduced financial commitment here could potentially weaken Yearn's competitive positioning against rivals like Convex within the Curve ecosystem.

Since November 2020, Yearn has spent $13.596 million on YFI buybacks, with the tokens held in its treasury. The most recent buyback occurred on January 22, 2022. Notably, from November 2021 onwards, the amount spent on buybacks as a percentage of revenue increased significantly.

A major factor contributing to the recent losses is high operational expenditure. Aside from variable costs like strategy and partner fees, Yearn's other operational expenses remained high. In January and February, these "other" costs were $2.30 million and $2.26 million, respectively. Additionally, the protocol distributed approximately $1.8 million in Grants during this period. These substantial fixed costs, amid falling revenue, directly led to the quarterly losses.

Frequently Asked Questions

Q1: Did Andre Cronje's departure significantly impact Yearn's TVL?
In the short term, the impact was minimal. TVL across all chains decreased by only about 6.1% in the two days following his announcement. The project had already been under community management for over a year, suggesting a smooth transition of governance.

Q2: Where do most of Yearn's deposits come from?
The vast majority of deposits in Yearn's largest vaults come from other DeFi protocols acting as partners, not from individual users. Key partners include Alchemix Finance, SushiSwap BentoBox, Opyn, and Element, likely attracted by fee-sharing arrangements.

Q3: What are the main reasons for Yearn's recent financial losses?
The losses are primarily due to a combination of declining revenue (linked to lower TVL) and consistently high operational expenditures. Significant spending on Grants and other fixed costs during a period of reduced income resulted in a net loss for two consecutive months.

Q4: What is TVL double-counting in Yearn?
Double-counting occurs when the same underlying capital is counted in multiple vaults. For instance, a deposit is used by a strategy to provide liquidity on Curve, and the resulting LP tokens are deposited into another Yearn vault. This accounting issue inflates the reported TVL figure.

Q5: How does Yearn use its profits?
Yearn's protocol profits are used to buy back YFI tokens from the open market. These repurchased tokens are then held in the project's treasury, effectively returning value to the token holders.

Q6: Has Yearn stopped its YFI buyback program?
The last recorded buyback was on January 22, 2022. The program's activity is directly tied to protocol profitability. The recent consecutive monthly losses have naturally paused the buyback initiative until the protocol returns to profitability.

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Conclusion

Yearn.Finance has demonstrated resilience in its transition to community governance, with Andre Cronje's departure not triggering a mass exodus of capital. Its strategy of forging deep partnerships with other major DeFi protocols has been successful in securing a large portion of its deposits.

However, the protocol faces significant headwinds. Its TVL is down substantially from its all-time high, and it has reported operational losses for two consecutive months due to high fixed costs and declining revenue. The future success of Yearn will depend on its ability to adapt its strategy, manage costs effectively, and potentially diversify its deposit base beyond its core partnerships.