Having recently breached the $14B milestone, the defi ecosystem is booming and showing no signs of slowing down. People are earning interest, however little:
And everything seems right in the world. But is it? If you’ve been involved with any of these defi apps, chances are you’ve come across or even asked some variation of:
Why is the return for lending X so low?
That’s the problem of there being far more lenders than there are borrowers especially if you’re trying to lend a non-stable asset. Take Compound — arguably the premier “money market” protocol out there — in which there’s currently ~$87M worth of ETH deposited (“supply”). Only $633K of that amount has been borrowed. That peculiar situation remains largely unchanged on other platforms like Fulcrum and the more recent Aave.
A rather odd state of inefficiency
And why would it be any different? The current set of defi lending apps significantly favor lenders over borrowers, and lenders are already naturally incentivized by earned interest. Borrowers on the other hand are subject to (sometimes absurdly) high collateral ratios, liquidation risks, and in the event they manage their loans to term despite crypto volatility, receive no equivalent incentive like interest — often increasing after the fact nowadays, and the borrowers have to pay these — to compensate them for dealing with market inefficiencies and being good peers. Yield is an attempt to fix that.
Yield?
Yield is a P2P — no need to worry about yet another set of representation pseudo-tokens — lending dapp. What sets it apart from virtually every other defi lending app out there is that not only is lending incentivized as always, but so too is borrowing. No longer will you have to successfully manage your loan to term yet earn nothing for your trouble. This helps not only the lenders and borrowers of non-stable assets like ETH but also, and perhaps especially, the borrowers of stable assets like DAI and USDC.
Say SpongeBob puts up a borrow request for $1,000 worth of BAT, overcollateralized with $1,350 worth of ETH @ 2% interest for 45 days. Squidward quickly funds expecting interest when it’s due and as expected, a couple weeks later, SpongeBob repays Squidward $1,020 (principal + interest). Normally, that would be that — Squidward gets his principal back + interest and SpongeBob, well, all he’d get is his collateral back. With Yield, SpongeBob would be able to claim 10 YLD and, assuming he does the smart thing (as always) selling them for more than his total expenses, he could possibly end up as well, if not better, off as Squidward.
Increasing the YLD reward he can claim is simple:
- Borrowing $1,000 worth of BAT @ 5% interest would yield 40 YLD
- Borrowing $5,000 worth of BAT @ 2% interest would instead yield 50 YLD
Two levers any borrower is free to exercise — increase either the interest to be paid or the principal requested and you increase the reward you can claim. Before freaking out about the existence of a token…
Another Token? And Hyperinflation?!
Like many other defi apps, Yield has (for lack of a better term) fees that are levied on both borrowers and lenders. The fees in Yield would exist regardless of any token (although the project likely wouldn’t since the point is to balance the lender–borrower relationship by compensating borrowers for taking on market inefficiencies and using said compensation to eventually facilitate what some would say is the holy grail — undercollateralized loans). This is because, as the creators of the dead P2P Dharma lending protocol have learned, free is neither a business nor bootstrapping model especially in a competitive market and more so if you are beholden to some VCs who will eventually come knocking. Said fees also disincentivize certain malicious actions and freeloading. The question then becomes what to do with those fees when you:
- don’t actually want the fees and want to ensure that, unlike in other platforms, users get back all of the value they put in in some form
- understand the folly of “build it and they will come” and have to deal with the realities of bootstrapping a new project in a fairly competitive market, and one that involves a P2P market
With the entire point of the project revolving around the token and how it modulates the incentives of lenders and especially borrowers, and the existence of necessary platform “fees”, the answer to the above questions is obvious — 100% of said fees is used to burn YLD, and at a rate that is more aggressive than most, if not all, other implementations. As a quick comparison using the figures from Aavewatch, there is currently $12.9M sloshing around in the protocol but only $10.7K has been generated for burning. The same amount in Yield would result in no less than $128.7K for burning.
To deal with inflation, there is a limit of 350 YLD per loan so the Pearl Krabses of the world, despite being impressively large whales, cannot simply dump all their ETH into the system in one fell swoop and hyper-inflate it to death. This limit together with the burn explained above, as well as others that will be expanded upon in future articles keep the inflation rate relatively tame.
Starting out, YLD enables these utilities:
- cutting 25% off their user fees
- increasing the YLD per loan borrowers can claim
- reducing the collateral liquidation ratios (the difference between active and defaulted is often less than a percent)
Some may have noticed an unspoken utility of sorts in that it further incentivizes borrowers, separate from the fear of being liquidated, to manage their loans to term unlike every other platform that simply relies on hopefully swift liquidation if the collateralization ratio falls too low. It’s not too hard to see how this utility gets supercharged in the event undercollateralized loans become a reality.
- 100% of the fees on the platform are used to buyback and burn the token
