While scrolling through CT (Crypto Twitter) as I usually do when killing time, this tweet caught my eye:
My interest immediately peaked. I thought this was a genius idea with great tokenomics for $YFI if implemented.
But wait, hold on a second…
What this guy talks about is $FARM without actually mentioning $FARM. Harvest Finance has had these features since mid-2020. They literally pioneered the idea of profit sharing and have described the results of it many times over.
That said, seeing as $YFI is to $FARM in the same way as $UNI is to $SUSHI (they’re competing platforms), let’s explore the results of $FARM’s pioneering tokenomics and speculate on the impact $YFI can have on $FARM if it does in fact implement these tokenomics.
$FARM Tokenomics — Farming as a Collective
With Harvest Finance, all farmers (users) farm as a collective. You can think of it as “farming at scale” to reduce operational costs and improve efficiency.
For instance, when you farm with Harvest, your gas costs associated with executing farming strategies and compounding deposits are covered. All you need to do is pick one of Harvest’s latest and greatest high-yielding strategies, deposit funds, and the rest will be automatically executed at no cost.
Compare this to going at it alone, and yield farming can be a lot of hard work with gas costs adding up quickly. That’s why for many people, solo yield farming just isn’t worth the cost, time, and effort to make it profitable.
It’s simply better to use an automated yield farming protocol like Harvest and it’s all made possible with $FARM’s unique tokenomics.
$FARM is the native token of Harvest Finance and there are 3 facets to $FARM you should be aware of:
- It Incentivizes Participation
$FARM tokens are distributed to Harvest Finance liquidity providers until all $FARM has been minted and distributed (this will take until the year 2024 when the maximum supply is reached.)
- It Governs Harvest Finance
$FARM token holders have a voice and voting power for various higher-order strategic decisions. Harvest governance polls in which $FARM token holders can participate can be found here.
- It allows Users to Benefit from the Performance of the Platform
Harvest has what’s called a “Profit Sharing” pool where $FARM token holders can stake their tokens to receive a portion of 30% of all the profits generated by the farming collective.
That 3rd facet is what’s entirely unique to Harvest Finance’s $FARM tokenomics and it’s the same thing in which the guy in the tweet above has proposed that Yearn Finance do to make $YFI a million-dollar coin.
That said, let’s break this Profit Sharing down so we can fully understand its significance on token price.
As mentioned, all the users on Harvest Finance farm as a collective and benefit from improved efficiency and reduced operational costs.
Now, the reason it’s called a “collective” and why users benefit from reduced costs is because Harvest implemented a performance-based fee structure where 30% of all the profits generated from farming are sent to the Profit Sharing Pool to be distributed to the $FARM stakers in this pool.
Therefore, if you are a farmer on Harvest Finance, you probably want to get ahold of some $FARM and stake it in the Profit Sharing Pool to maximize rewards. As for the reward amount stakers receive, it’s proportional to their stake in the pool.
Now, here’s where things get really interesting:
30% of all profits generated by Harvest are converted to $USDC and used to buyback $FARM tokens off the market. These $FARM tokens are what’s distributed to those who stake $FARM in the Profit Sharing Pool.
Do you follow me?
Now get this:
The $FARM token buybacks create a natural demand for $FARM and it's fueled by Harvest profits generated by farmers. Therefore, everyone in the Harvest collective has aligned incentives to help Harvest succeed and generate more profits for its humble farmers because the more profits there are, the more that $FARM gets bought up, which effectively increases its price.
THIS ^ is the reason the guy in the tweet above wants $YFI to adopt $FARM’s tokenomics and is why he thinks it could make $YFI a million-dollar coin.
No Damage to other Vault Users
“Yearn could retain 1% of profit from every vault, convert it to yUSD and release it in the $YFI vault to the depositors.”
The guy who tweeted this highlighted that this would not cause damage to other vault users.
He is correct.
As mentioned, Harvest Finance retains 30% of all profits generated by farmers and distributes them to the Profit Sharing Pool. Therefore, farmers receive 70% of the profits generated from farming via Harvest as well as $FARM token rewards.
While a 30% fee seems like a lot, Harvest Finance farmers don’t even notice it.
That’s because the APYs for different strategies shown on the front page were already charged by the 30% Profit Share fee. They are the final APYs, what you see is what you get, and let me tell you, there are still lots of high APYs.
Also, the reason why APYs are barely affected is because Harvest features so many yield farming strategies on its platform that the profit share fee gets distributed across all the strategies, making each strategy’s APY negatively affected just a little.
That said, nobody’s going to really miss that 1% of profit on whichever vault they’re in. It’s a small price to pay for the betterment of the protocol and its native token.
Lower Supply on the Market
Another thing highlighted by the guy who tweeted is: these proposed tokenomics would lower the $YFI supply on the market.
Damn, right it would!
For instance, with Harvest Finance 64% of $FARM tokens are staked in the Profit Sharing Pool:
On top of that, another 10% of $FARM sits in Harvest’s operational treasury.
Therefore, there is really just a small % of $FARM tokens circulating on the market, making it a very scarce DeFi asset.
Now, you might ask if that’s the case why is the price of $FARM falling down? Shouldn’t it be rising if there are so few tokens available?
I’ll tell you why:
It’s because these days the price of smaller market cap projects are still largely driven by memes, with just a few valued by people who see their true underlying value.
Remember, Price =/= Value.
If these $ FARM-inspired mechanics get implemented into $YFI, not only will Yean’s users benefit immensely, but also $YFI will get more scarce on the market.
Also, this would actually put $FARM into the spotlight too because people are gonna talk about how $FARM had these tokenomics all along.
That said, even though Yearn is a competing platform to Harvest; if it betters itself by implementing $FARM’s tokenomics, it’s likely to have a positive impact on both projects.