This post attempts to assess yearn.finance in terms of the Bankless Protocol Sink Thesis.
At it's core, yearn.finance is a automated money manager that automatically allocates tokens into the highest-yielding protocol(s).
In order, this post touches on
- Density
- Utility
- Surface Area of Attack
The Basics
Website: https://yearn.finance/
Token: YFI
What is yearn.finance?
- In the words of creator Andrej Cronje, yearn.finance is a 'one stop, deposit and forget, automated yield money manager' (Unchained Podcast 9/15/20)
YFI in terms of the Protocol Sink Thesis
Density Summary
- Utility: Very high
- Surface Area of Attack: Low
Those judgements should imply that centralized business and companies will build freely on yearn.finance, and yet, I don't believe that YFI is actually that deep in the protocol sink today.
Here is how I see it fitting in the stack:
Coinbase (or any fiat onramp)Yearn Finance (aggregator of protocols for automated actions)YFI (governance of yearn finance)Compound (or other protocols serving yearn.finance products)Ethereum (settlement layer)
That is, yearn.finance is built on top of Compound, Curve, Nexus Mutual, and every other protocol it chooses to serve one of its current or forthcoming products. yearn.finance is not a protocol that is built on by external parties today. Though it seems to be obvious that this should happen in the future.
Utility: Very High
What value does the protocol provide to the end-users?
- You can make money automatically; without yearn.finance, finding the highest-yield takes work.
- YFI is a "one stop, deposit and forget, automated yield money manager,” Andre via Unchained Podcast
What incentives encourage the adoption and leveraging of yearn.finance products?
- yearn products → in short, make money
- How strong is this incentive?
- Fairly strong; though people will chase yield wherever it exists. This forces YFI to continually improve/adapt, and not make poor governance decisions
- YFI token → govern the protocol
- How strong is this incentive?
- Very strong, buying token gives you a vote/power to influence how the protocol grows, changes, and allocates funds
Surface Area of Attack: Very Low
Trustlessness
- When using the protocol, how much trust are users placing in others to do the right thing? None, automated
- Will the selfish motives of others impact the outcomes upon other users? No
- Is anyone extracting anything from a user against their will or knowledge? No
Permissionlessness
- Can anyone use the protocol? Yes
- Is there someone that can restrict or censor usage of the protocol? No
- Are there any admin keys that give certain privileges to a special set of users? Yes, 9 multisig signers
Credible Neutrality
- Does the protocol benefit any particular user or entity above any other? No, other than benefiting particular protocols via product choices
- I don’t believe this is a detriment to credible neutrality
- Does one person or entity disproportionately benefit from the success of the protocol than what is fair? No, today it doesn’t appear so (Crypto Rank, Spencer Noon)
“The Protocol Sink Thesis” - Notes
Read in full: Bankless Protocol Sink Thesis
Thesis overview
- The core prediction of the Protocol Sink Thesis is that centralized businesses and companies will freely build on top of trustless, permissionless, and unbiased protocols, in order to offer superior services to their users.
- The thesis states that the more trustless, permissionless, and credibly neutral (unbiased) a protocol is, the further it can scale itself to a global platform, and as a consequence, absorb a larger amount of capital.
- The more people use an application, the further down in the Protocol Sink it falls from the collective weight of the people and companies building on them.
- Global Public Goods (GPGs) are the things that are found at the bottom of the Protocol Sink.
Utility, Attack Surface Area, and Density
Utility and Attack Surface Area are the two key features predict where a protocol finds its resting-place in the Protocol Sink.
Utility
Utility is simply the measure of value that a protocol provides to the world. The more useful a protocol is, the more people/companies/entities will build on top of it.
- The Utility of a protocol is the value that the protocol brings to its users, and generates the incentive for adopting and leveraging the protocol.
The utility of a protocol is the incentive it generates for depositing money or assets into its contracts.
- For protocols with a token, Utility can be measured by the tokens market cap or the total value deposited into its contracts.
Attack Surface Area
The Attack Surface Area of a protocol is the weakness or resistance a protocol has to capture, coercion, corruption, and exploit.
- Simplistically, having a low Attack Surface simply means that there is no central point of a protocol.
If a protocol has minimal attack surfaces, the protocol is trustless, permissionless, and credibly neutral. These qualities are what enable it to scale to the maximum number of people.
Trustlessness - If trust is not an issue, the protocol will fall down lower in the Protocol Sink.
- When using the protocol, how much trust are users placing in others to do the right thing?
- With the selfish motives of others impact the outcomes upon other users?
- Is anyone extracting anything from a user against their will or knowledge?
Permissionlessness - If everyone has equal access to use the protocol and no one can censor others, the protocol will fall down lower in the Protocol Sink
- Can anyone use the protocol?
- Is there someone that can restrict or censor usage of the protocol?
- Are there any admin keys that give certain privileges to a special set of users?
Credible Neutrality - If the protocol is sufficiently fair or equitable, then it will fall down lower in the Protocol Sink.
- Does the protocol benefit any particular user or entity above any other?
- Does one person or entity disproportionately benefit from the success of the protocol than what is fair?
Density
Density == Utility / Attack Surface Area
To discover the projected density of a protocol or application on Ethereum, you simply take the utility of a protocol (how useful it is) and divide it by its attack surface area (how easy it is to capture).
Things that are very useful and cannot be captured will find themselves at the bottom of the Protocol Sink.
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