Listen to our latest episode featuring Yearn and learn why fully on-chain, automatic accounting is the foundation of trustworthy DeFi vaults.
In this episode, Nertila from Trading Strategy discusses with Corn from Yearn. Yearn is one of DeFi's earliest and most established yield protocols, built as a borderless, permissionless vault platform to give anyone access to yield. Its V3 vaults are built on the ERC-4626 tokenized vault standard, which Yearn co-authored, and power projects such as Cap, Curve's staked crvUSD, 3Jane, and Term Finance under the hood. Yearn also runs an open-source risk and curation platform at curation.yearn.fi, and has recently launched Flex, a redemption-based fixed-rate lending product.
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Transcript:
Welcome to TradingStrategy.ai, the podcast where you can learn more about the essentials of DeFi trading in the new world. This is your go-to show for automated trading strategies and market insights. Welcome to the conversation, and this is your host, Nertila.
Nertila: Hello, everybody. Welcome to today's podcast at TradingStrategy.ai. Today we have a very interesting guest. He's known as Corn, and he contributes to Yearn, which is one of the most successful stories in DeFi so far. Hello, Corn, and thank you for joining me today.
Corn: Hey, thank you for having me. It's good to be here. Thank you for the kind words about Yearn, too.
Nertila: Of course. I'm really curious how you got started working in the crypto industry, and specifically how you ended up working on, or contributing to, Yearn.
Corn: My journey into full-time crypto started in November 2021, right at the top of the top, when Yearn had over six billion dollars of TVL. I think we were the fourth-largest DeFi project ranked by TVL on DeFi Llama. That was almost five years ago. Before that, I was working for the largest Cisco Networks partner in the US, building networks and data centers for hospitals.
I took part in some of the largest healthcare IT transformations in the US, making electronic medical records a thing. That was a great career for me for ten years, and I was a technical seller there. Toward the end of that, during COVID, when things really started to blow up, we had a lot of supply chain issues, and I saw the writing on the wall: the electronic medical records companies that were previously hosted in my customers' on-prem data centers were changing. The largest of them, Epic, was becoming a web app, and it was time for me to find something else to do.
At the time, I was very crypto-curious and in a bunch of Telegram chats. A few people from Yearn in there knew I was a technical seller, and they were looking for someone to represent Yearn and keep talking to builders, institutions, DAOs, and literally everyone about Yearn and the permissionless, fully on-chain vault platform we had. So they hired me, and that was almost five years ago. It's definitely been a journey, with a lot of ups and downs and some dark days in there, but I'm pretty optimistic about the future, and I have absolutely zero regrets about getting into crypto and joining Yearn all that time ago.
Nertila: Let's focus a little on Yearn. What exactly is it? Give us a very short history. In my opinion, Yearn isn't successful just because at one point it had a huge TVL; it's mostly that it has maintained its status as a decentralized protocol. That's my first question. The second is how the project pivoted to vaults, which is a relatively new concept in DeFi.
Corn: Yes. The thing that caught my attention most about Yearn was its mission to be borderless and permissionless, and to give everyone in the entire world access to yield. For that we needed a platform, and we identified DeFi as the place: permissionless lending markets, supply-side yield, stablecoin yield from MakerDAO. Those were the strategies we originally honed in on, and that's what I found most interesting.
That was so long ago that we came up with the first vault concept. Even back then it was forked a million times. You may remember YFII, YFIII; there were tons of people bringing forked tokens to market. It was the YFI token. Still is today.
As for how the whole evolution of vaults happened: originally, in Yearn V1, we had just a single strategy. People would deposit into a vault and that vault would do one thing. It would supply to Compound, or supply to Aave, get yield, and return it to the user. Then in Yearn V2 we could have up to 20 strategies per vault. Say a vault was USDC: a user would deposit USDC into that vault, and that USDC would do up to 20 different things depending on which was most profitable at the time, or a blend of all of them.
Yearn V3 came right after we co-authored the ERC-4626 vault standard, the tokenized vault standard. Basically, it turns each strategy into its own vault, which helps composability. Before we had 4626, each of our strategies had to be written in a customized way. It had to be checked for security, we had to pay for that security, and it took a long time for all of that to happen. So we were looking for a way to get to market safer, cheaper, and faster, and the 4626 vault standard was exactly what we needed.
Yearn V3 can have as many tokenized strategies inside one vault as the operator would like. Yearn V3 is also the first fully automatic on-chain accounting system, and it has been live in the market for almost three years with billions of dollars of TVL and over 45,000 harvests with zero issues.
The big differentiator for us is that Yearn vaults and Morpho V2 are the only two vaults that do on-chain automatic accounting. Everything else is basically a mix of what you'd see in the traditional world of finance. It's a more opaque model, one where you can set the vault share price to whatever the user is going to see. You do all those harvests manually, you adjust the price per share manually, and there's a lot of room for error and a lot of room for lack of trust. If you're operating one of those vaults that has the ability to change the share price and you're not being regulated, what is your set of values and guidelines for using those permissions in an ethical way? For those reasons, Yearn has always stuck to being fully on-chain and fully automatic, operating in the most open and permissionless way possible, and I don't think Yearn is ever going to change that.
Nertila: On a day-to-day basis, what are some of your responsibilities at Yearn?
Corn: I also started yAudit, which is a Solidity, Vyper, and ZK audit company. I started that four years ago, because five years ago yAcademy was the first smart contract security education program in the industry. We eventually turned it into yAudit because so many people were graduating from yAcademy and joining other audit firms and other projects, and I said, "Guys, we've got to capture some of this talent we're incubating. Let's start an audit company."
Basically, what I do every day is talk to builders, institutions, DAOs, literally everyone, about our permissionless, fully on-chain vault platform. I also lead all the operations for yAudit, so I do a lot of selling for yAudit too. The two are very closely aligned, because everyone who is building on Yearn will inevitably need to audit that code. For everyone coming to me wanting to build permissionless DeFi, it's good for me to have a reputation in the industry and an audit company behind me, because it forces us to be safe and gives us that image of safety and trust. It's been a great complementary business to what Yearn is.
So every day I talk to builders, tell them exactly what Yearn does, lay all the cards on the table, and educate them. Hopefully they want to be a consumer of our technology, and it has worked out really well so far. There are a lot of projects that have built on top of Yearn V3; it's not just us operating those strategies. If you've heard of the project Cap, Cap is a Yearn V3 vault underneath. They built all their own customized strategies and attached them to Yearn V3. If you know Curve, staked crvUSD is a Yearn V3 vault under the hood. The credit project 3Jane's staked USD3 is a Yearn V3 vault under the hood. Term Finance, a fixed-rate lending project, just came out with another version, and it's also built on top of Yearn V3.
So it's a very useful technology for those who find value in operating a permissionless product. If they don't, and they want full access to change the vault share price to whatever they want to meet the needs of whatever problem they're solving, they can use other vault platforms. But the one we represent is always going to be fully on-chain. It will always have automatic accounting, and that's what matters most to us.
Nertila: Great. As a DAO, I'm sure there must be some risk management system in place. Can you tell us a little about it?
Corn: Absolutely. We were definitely the first to come to market with a full risk platform: this is how we evaluate strategies, and this is how we evaluate their safety. It always comes down to longevity, time in the market. New products are generally the riskiest. The ones that have been in the market longer are more battle-tested, and those are the safer ones. We also evaluate liquidity, and we evaluate the audits they have.
If you go to curation.yearn.fi, that is our curation platform, and you can see all of the reports we do for every single asset that Yearn touches now or may touch in the future. You can see our entire risk framework there. You can even join a Telegram chat with all of our alerting systems going off 24/7, so you can see exactly what we're seeing. We made it all open source; you can use our alerting system in your own way, and all the code is there. You can also see, historically, all of the alerts that have fired in the past.
We just added a new page there covering bridge risk. Yearn has started doing some cross-chain strategies using CCTP, moving USDC to different chains depending on where the yield is best. We also use the Polygon LxLy bridge, which is the only bridge that uses ZK technology for atomic settlement of assets moving across chains. Every place where we integrate or use that technology, and where you're going to face exposure, is documented at curation.yearn.fi. We are also doing curation on the Morpho platform. They have excellent distribution, we really wanted to be there, and we're happy that we did.
I want to come back to the other part of what you were describing, in addition to the risk evaluation we do. The way our DAO is set up these days is that we have a multisig called ychad. It's a six-of-nine multisig, and the signers are all people with reputation in the industry: 0xngmi from DeFi Llama, Mitch from Curve, people from MakerDAO. We also have a Cayman Foundation, and everyone on the multisig is obligated to execute the results of any vote by staked YFI holders. If you hold YFI and stake it, you have a say in the governance and decisions of Yearn. There are different thresholds for when those votes kick off, and anyone is able to post a proposal on the Yearn forum for us to vote on.
That system has remained unchanged for all five years I've been here. The Cayman Foundation was just another layer of credibility we wanted to add behind the multisig, because we never want to be in a position where Yearn can't do an integration for some reason. In the past three years, we've needed an actual entity to apply to participate in some programs. So it's been extremely useful to us, and it doesn't hold us back from doing anything or from staying true to the borderless, permissionless mission we originally started with.
Nertila: Where do you think profit and risk will accumulate in the future?
Corn: This is a good question, and we've thought about it a lot. Originally, we came to market thinking we would have tons and tons of builders on top of the Yearn V3 platform. The thing is, you have to be a pretty good engineer to build and maintain your own strategies. For that reason, I think the answer to where the most profit is going to accumulate is inside the projects that vertically integrate the best.
What I mean by that is that Yearn never had a lending platform. Yearn has never built other products that consume Yearn vaults. So we are doing that now, and I think it's a really good thing for us to engage in. It's no secret that when you vertically integrate, you have a better say in the outcomes you're trying to drive, and you're also going to be more profitable because you control the entire supply chain. It's been this way in business for hundreds of years, so it's very proven, and I think the ones who vertically integrate are definitely going to be the most profitable. It doesn't necessarily have anything to do with the most value accumulating at the application layer or something like that. It's all about vertical integration and having a real roadmap and vision for what you're building.
Nertila: What are some of the hard lessons you've learned so far?
Corn: I think the hardest lesson we learned is about incentives. Yearn doesn't have a token print. We never did points. At one time YFI was one of the most held tokens; tons of VCs held YFI, it was a huge thing, and that was driven by alignment. The YFI token went up to a $2.8 billion market cap at one point.
But when those incentives are gone and there are other competing incentives in the market, the capital flees. It goes to those other places pretty much immediately, and it doesn't come back. We definitely learned a hard lesson there by not participating in farming and points; we saw a lot of capital go to those sorts of yields. Once those incentives were gone, they jumped to other places. So you need an endless amount of incentives if you want to capture the maximum amount of attention; otherwise, you're stuck selling on fundamentals. We have a really safe platform, but there are other really safe platforms out there that also have incentives, and users are going there to farm. That was definitely one of the most important lessons for us, 100%. Incentives and alignment matter almost more than anything else.
Nertila: How can the digital asset management ecosystem be improved? Is there any suggestion you'd give to everybody involved in DeFi?
Corn: That's also a very good question. I think this ties into what you were saying before about where the most risk is. I do think the path Yearn is on today, and digital asset management in general, couldn't be better. Everyone is paying attention to vaults.
I am a bit nervous about the combination of more traditionally managed, opaque vaults mixed with the values of DeFi, which are permissionless, borderless, and not regulated. When you combine opaqueness and unregulated products, you get high risk, and you get something like Stream Finance, where the users have no idea what's going on and the operators are probably stealing their money. That is banking, but worse. That's what we want to avoid.
If you are going to operate a vault structure where you can change things, especially the vault share price, you should probably have some sort of legal backing behind you that builds trust. That's the trust you need: you need to be held accountable for your actions at some point. For that reason, I think those structures have a lot of merit. But if you're operating something permissionless, completely automatic and transparent, I don't think you need to be held to those same standards, because you already are. The code is the standard. The code is the counterparty. So the path we're on today, with people talking about vaults, is really good.
There are definitely other paths I see in digital asset management right now that make me a little nervous. One of them is on-chain securities, tokenized securities mixing in with permissionless DeFi platforms. There are chains right now mixing wrapped securities into pools with meme tokens. That is not just banking but worse; it's not even banking. It's meme coins and securities. That is an absolutely crazy combination that is not going to end well.
Anyone who studies for regulatory finance exams learns about the risk of security wrappers like ADRs, American depositary receipts. Those are wrappers on foreign stocks, for example, and they teach you about all the risks: the buyer needs to know about political risk, currency risk, and taxes. And truth be told, the bank owns that product. You don't own that product; it's a wrapper. For the same reasons, if these platforms are moving tokenized securities around between users and they don't know which users actually own them, it means the platform owns them to some extent. That combination of the wrapper, the user thinking they own it, and the user interacting with those alongside providing liquidity in meme token pools is just not going to end well for the majority of users. It definitely makes me pretty nervous.
Nertila: Corn, what is next for you and for Yearn?
Corn: The next step for Yearn, as I was getting at before, is vertically integrating. We need to start building structured products that consume our own vaults. For that reason, we finally decided to come out with a lending product, but it's a special one, one we've never seen before. It's a fixed-rate platform. There are a lot of fixed-rate platforms out there today, but this one is a little different.
We had an engineer who was working on turning BOLD, the Liquity V2 stablecoin, into vaults. Basically, you take BOLD and turn it into a vault by getting yield from depositing into the stability pools and getting fees from liquidations as well. When he was looking at the Liquity model, he realized that the model works on redemptions. It doesn't have an interest rate curve, and it doesn't need exit liquidity to be reserved. If you're lending into Aave, you lend at 2% and the borrower pays 2.5%, and that spread is the exit liquidity. Whenever the exit liquidity dries up and the market is operating at 100% utilization, rates spike, and that's when you get negative carry.
A long time ago, I think over 60% of Aave deposits were people looping. Not only is that the market this product goes after, but it does it better than any other variable-rate or fixed-rate platform in the market, because the positions are always liquid, all the time. The lender can always exit the market, or the loop, by redeeming the borrower's collateral. This is not a product that's going to change the game for looping USDC and ETH or other uncorrelated assets. But when you're looping a yield-bearing stable, or a derivative of that yield-bearing stable, and you're long one of them and then get redeemed and are long the other, the risk isn't that bad, and you're not going to get caught with negative carry, because you can always exit the market.
You could even loop illiquid assets, or assets that have duration, because the lender is just redeeming the borrower's collateral. If the redemption period is three days or two weeks, as long as the lender is okay sitting for those three days or two weeks until that asset is liquid again, they can take the borrower's collateral and exit the loop anytime they want.
The platform is called Flex. It has been live for about two months now and has a lot of users. We're launching a V2 today; it has been launched. We're going to be adding a lot of pools. We've been talking to Inverse, Infinifi, Ethena, Lido, everyone you can imagine who is executing these loops. I want them to know about this product, because it's going to change the game. Never have negative carry again. There were huge risks of negative carry when the Kelp DAO hack happened; we saw that. Hopefully the industry learns from it and pays close attention to the Flex model in the future. We're really excited about this. I personally think it's the most exciting product we've come out with since vaults.
Nertila: Very interesting. Thank you so much for joining me today. I hope to have you on the podcast again.
Corn: Yeah, I'll come back anytime. There's going to be tons of stuff Yearn is coming out with in the future. We've really been trying our best to be innovative and bring new primitives out there. We know those are the most appealing products, not just in DeFi for safety and transparency, but to institutions too. They love primitives. We're going to keep building them.