Another DeFi product is rocking the markets. YFI, a governance token that sits on top of a DeFi yield aggregator, is now priced above Bitcoin. Yes, a single token is worth more than a single BTC! This YFI flippening is spectacularly irrational, but it helps us debunk the myth of Bitcoin unit bias.
It also helps us illustrate how scarcity induced distortions work on the market. Most of you will still remember the toilet paper crisis we had early on during the pandemic. That is a scarcity induced distortion that can drive prices up without relying on any kind of fundamentals.
Here is what we think about the YFI craze, how it can all end in tears and why Bitcoin unit bias is not real.
What is YFI?
Let us start with the information we have gathered on YFI. Any similarity between YFI and traditional banking is not a bug; it is definitely a feature:
- YFI stands for Yearn.Finance
- It is an ERC20 on Ethereum
- Supply is capped at 30,000 tokens but members could vote to change this
- Andre Cronje created the token and the underlying protocol
- There was no private allocation. Cronje released the token as is to the market
- Cronje asserted that YFI is “a completely valueless 0 supply token”
- Holders profit from DeFi yield farming activity through fees and YFI staking interest – sounds like dividends for voting shareholders right?
- Profit comes from vault fees on withdrawals and interest from the assets held in them
- These vaults hold other DeFi assets and the protocol automates yield farming
YFI Scarcity Induced Prices
Yearn.Finance is just another DeFi product. Perhaps it is smarter than others. It yields dividends and pays interest based on DeFi farming, but it is scarce. In other words, if you want to have this protocol do your yield farming for you have to pay into it. Then whatever you earn from it, comes to you “indirectly” from yield farming.
Perhaps with the DeFi yield farming craze in full swing, it makes sense to limit the number of people who have access to this kind of wizardry. After all, scarcity is a huge driver of demand. If you want to give early buyers a brilliant exit strategy so they can dump on greater fools, all you need to do to maximize the money they make is create scarcity.
Nevertheless, just like toilet paper at the beginning of the pandemic, scarcity induced prices cannot last. You will also be able to find substitutes – no toilet paper, try wet wipes!
The YFI Flippening
At this point in time, that scarcity is working. That created the YFI flippening on August 19th, 2020. This is a day that will go down in history for all the wrong reasons.
Flippening refers to a market outcome in which Bitcoin would lose its dominance in terms of market cap to other cryptocurrencies. Yearn.Finance supporters are using the term to “show you” that they were right about the fact that the price of a single YFI unit would surpass that of a single unit of BTC.
YFI prices surpassed those of Bitcoin on this now historic day. Bitcoin’s total market cap, however, is still about 5 times greater than that of Ethereum. Yes, that is the blockchain on which YFI tokens reside! Flippening? Don’t fall for that!
YFI Flippening Shows that Bitcoin Unit Bias is a Myth
The faux flippening however, allows us to put the myth of Bitcoin unit bias behind us. It also shows us how we should be looking at scarcity. But before we get into that, it is important to define what Bitcoin unit bias is.
Bitcoin unit bias refers to a psychological phenomenon in which would be buyers, seeking to own a whole unit of a given cryptocurrency, would opt to buy into a cheaper “alternative” because they can own whole units of it. Bitcoin unit bias is a function of price:
- If BTC prices were significantly lower, people would be more willing to buy it because they can own whole units
- Therefore, as prices climb, Bitcoin adoption takes a hit
Why is There no YFI Unit Bias Then?
Well, then why would people keep on buying YFI after the faux flippening if unit bias is a factor? The answer is not straight forward:
- Unlike Bitcoin, YFI holders “earn money” from holding the token
- Yearn.Finance “does” something, unlike BTC which just “sits there” – flawed logic, yes!
- YFI is scarcer than BTC
Why would you hold a whole unit of BTC and enjoy nothing else besides the freedom and hedging value it confers, when you can own a token that “makes” you money and is scarcer than Bitcoin?
Well, because DeFi yield farming is a bubble that will inevitably burst. Do you care about how much Lehman Brothers stock was available for you to buy 15 years ago now, or how much money it used to “make” in dividends from investments in subprime mortgages? Certainly not!
Do you care about how your local currency is doing against the USD and how much more of it your government is printing arbitrarily? You should. That is why you should buy Bitcoin and not Yearn.Finance, no matter the price.
Markets Will Adjust, YFI Flippening Will Evaporate
Once markets adjust and the DeFi bubble bursts, Bitcoin prices might come down, but YFI prices will tumble. In fact, what is likely to happen here, is a combination of the Lehman Brothers effect and the pandemic toilet paper effect.
YFI’s scarcity will prove to be temporary because demand will collapse once a critical mass of investors understands that the underlying assets held in Yearn.Finance vaults are at least as toxic as the subprime mortgages were 13 years ago.
In the meantime, holders can keep on celebrating the YFI flippening. We are celebrating the fact that it proves Bitcoin unit bias is a myth. Once YFI falls as spectacularly as it rose, we will be re-posting this piece on social media to remind everyone that it is all about the fundamentals!