EXECUTIVE SUMMARY

Presently, most of the well-known DeFi protocols are floating-interest-rate. Although floating-interest-rate borrowing and lending is a powerful tool, there are significant drawbacks such as interest rate volatility, making it difficult to plan for the future, make investment decisions, and adequately hedge risk when lending and borrowing. Yield Protocol claims to solve these challenges by introducing fixed-rate, fixed-term lending and borrowing.

As an Ethereum-based project, Yield Protocol is on a mission to make fixed-rate lending and borrowing a cornerstone of DeFi, believing this will help attract a billion users to Decentralized Finance. Yield Protocol users can enjoy collateralized fixed-rate, fixed-term borrowing and lending. This outcome is achieved via Fixed Yield Tokens (fyTokens), which are set to be redeemable for an underlying token at a 1:1 ratio. Anyone can create fyTokens by depositing collateral. fyTokens behave like a zero-coupon bond rather than the common yield-bearing tokens that increase redemption value.

Interestingly, the team has not yet announced any native protocol token.

Yield Protocol is located in the United States, a country with the most significant number of crypto investors, trading platforms, exchanges, investment funds, and crypto mining firms.

The project’s team members have a solid technical background and experience working in the crypto space. Multiple investors also back the project.

Yield Protocol’s app is live, offering asset lending and borrowing at fixed terms. As of June 26th, there were ~5,202 users, and the Total Value Locked (TVL) on the protocol was ~$11.9 million. At the moment, no roadmap has been published.

Our researchers gave Yield Protocol a final rating of C. The breakdown of this rating is available at the end of this report.

 

PRODUCT & COMPANY DESCRIPTION

Introduction to Yield Protocol

Yield Protocol, an Ethereum-based project, has introduced the concept of fyTokens. They are fungible tokens behaving similarly to a zero-coupon bond that allows fixed-rate lending, borrowing, and interest rate discovery on the Ethereum blockchain (ref. 1).

The mission is to make fixed-rate borrowing and lending a fundamental part of Decentralized Finance (DeFi). The project team thinks that fixed-rate lending and borrowing will be essential to onboard DeFi’s first billion users (ref. 2).

Yield Protocol’s goal is to bring fixed-term, fixed-rate lending and interest rate markets to DeFi using fyTokens. This new class of tokens will offer fully collateralized fixed-rate lending and borrowing in DAI (ref. 3).

The protocol’s notable features include:

  • Integration with Arbitrum (ref. 4).
  • Protection against interest rate fluctuations.
  • Support for multiple types of collateral.

 

Features of Yield Protocol. Source: Yield Protocol

 

Yield Protocol consists of the following elements:

  • fyTokens

fyTokens (fixed yield tokens) are ERC-20 tokens that, after the maturity date, are redeemable for an underlying asset one-to-one. For example, a user could redeem one fyDAI for one DAI after the maturity date.

fyTokens do not continuously pay interest but instead, like a zero-coupon bond, trade at a discount to their redemption value, rendering a profit at maturity when redeemed for the total face value. The interest rate can be calculated from the difference between the underlying asset’s value at maturity and the discounted value (ref. 6).

Interested readers can learn more about fyTokens in the whitepaper.       

  • Yield App

Using the Yield App, users can lend or borrow assets for a fixed term at a fixed rate. Users may also provide liquidity to earn fees from different users wanting to lend and borrow.

The Yield App is available here; a guide is available here.

  • Vault

A vault is a collateralized debt position, and users might have many vaults. Every vault permits one type of collateral deposit and allows borrowing a single asset for a fixed term.

  • Series

A series represents a defined maturity date with a single borrowable asset. Every series relates to a single ERC-20 fyToken.

  • YieldSpace

YieldSpace is an automated liquidity provider designed to improve the liquidity of fyTokens by enabling efficient trading between fyTokens and the underlying assets. Interested readers can read this paper to understand better the overall mechanism and the calculations being used. An interesting Twitter thread here.

 

Yield Protocol architecture. Simplified Illustration by D-Core

 

The project has published a whitepaper outlining essential relevant topics. The document is quite technical and, besides the introduction, has sections detailing prior work influencing Yield Protocol, a high-level description of the fyToken mechanism, and various applications of fyTokens.

In addition, a paper introduces a new formula for automated liquidity provision, the “constant power sum invariant,” incorporating time to maturity as input and ensuring that the liquidity provider offers a constant interest rate—instead of price—for a given ratio of its reserves. The paper is also introducing a generally helpful methodology that can be employed for deriving invariants for pools with desired properties.

Yield Protocol V2 was launched on Ethereum Mainnet in Beta on October 27th, 2021 (ref. 2). On March 2nd, 2022, Yield Protocol was launched on the Arbitrum One Mainnet (ref. 4). On Yield Protocol V2, it is possible to borrow and lend popular ERC-20 tokens based on protocol usage to pool tokens for variable returns.

Success Factors

Based on our understanding, the project has several success factors. These factors are listed below: 

  • The protocol has shown early traction with growing user counts.
  • The team’s product focus. 
  • Arbitrum integration (low gas fees and the biggest market share among Layer 2 projects).
  • Large potential market as evidenced by the number of existing lending protocols — 152 at the moment. 
  • A team with a strong technical background.
  • Financial backing by multiple investors.

 

MARKET CONDITIONS AND COMPETITION

Market Conditions

Overall, the cryptocurrency market is in bad shape currently. The week from June 13th to June 20th has been called “a historically bad week,” possibly even being “the darkest week in the history of digital assets.” The DeFi sector, as of June 19th, has witnessed a week-over-week price decrease of 11.0% and a Year-to-Date (YTD) decrease of 76.2% (ref. 7).

Lending deposits in the top two lending protocols, Aave and Compound, significantly dropped in June 2022. TVL across both protocols decreased in one month by 39.83% and 33.80%, respectively (ref. 8).

 

Lending Deposits by Lending Protocol. Source: Footprint Analytics

 

DeFi lost 45% of its value during the Terra collapse. DeFi has been affected the most of all the blockchain verticals during this market downtrend. Even so, the DeFi sector during the first four months of 2022 was able to stay afloat behind rising DeFi blockchains, including NEAR, Avalanche, Cronos, and Terra. The industry’s TVL decreased only by 15% during the first four months despite DeFi tokens losing 25% to 40% of their value in that timeframe (ref. 9).

 

TVL of DeFi. Source: DeFi Pulse

 

In the Layer 2 space, the TVL increased by 964% in one year, from $686.9 million in Q1 2021 to $7.3 billion in Q1 2022 (ref. 10). Arbitrum is the number one Layer 2 project, holding a TVL of $1.94  billion and a market share of 50.32% as of June 23rd (ref. 11).

 

TVL by Layer 2 Projects. Source: Footprint Analytics

Competition

The lending sector is the second-largest DeFi segment, according to data published by DefiLlama. The category comprises 152 protocols and a combined TVL of $16.49 billion (as of June 27th, 2022). It can be witnessed that the five most prominent protocols hold a vast majority of the TVL (ref. 8).

On-chain lending or margin trading systems, such as dYdX, Compound, and Fulcrum, allow users to deposit assets, lend out those assets for interest, and use them for their own borrowing as collateral. These protocols provide floating “overnight” interest rates controlled by a formula, and positions can be withdrawn anytime.

 

How is the project different from its competitors?

 

These features differentiate the Yield Protocol from the competition: 

  • Implicit interest rates set by market prices: The project primarily differs because its interest rates are set by market prices and are implicit rather than determined by a formula or governance.
  • Fixed interest rates: In contrast to most lending protocols using floating interest rates, Yield Protocol enables term loans featuring fixed interest rates while still having a degree of fungibility.

 

TECHNOLOGY REVIEW

Product

The open-source code is available on GitHub. Developers can clone repositories and run tests on them. This section explains where to get started regarding the fyDAI repository and the contracts making up the Yield Protocol. 

Yield Protocol consists of its core contracts and the periphery.

The core contracts, among other functions, manage collateral and debt, redeem and issue fyDAI, and interact with MakerDAO contracts. The core contracts are the following:

 

 

The periphery contracts are used to improve UX or provide other replaceable functionalities without affecting the core contracts (ref. 13). The periphery contracts are the following:

 

 

Below is an illustration of how the contracts interact:

 

The Yield Protocol architecture. Source: Yield Protocol

 

There is also the YieldProxy, serving as the main entry point for users. Future versions will make it possible to convert Yield vaults to Maker vaults (and vice versa) (ref. 13).

 

Illustration of the interactions taking place involving the YieldProxy. Source: Yield Protocol

Blockchain

Yield Protocol is deployed on Ethereum and Arbitrum.

Security Audit

Yield Protocol has been audited by Trail of Bits and Code4rena (Source: Discord).

 

Yield Protocol: Security Assessment by Trail of Bits (August 21st, 2020, and updated September 14th, 2020)

 

The security assessment by Trail of Bits was done to review Yield Protocol’s security (available here). The assessment resulted in 11 findings ranging from high to informational severity. It also notes that the code adheres to a high-quality software development standard and best practices.

 

Yield V2: Security Assessment by Trail of Bits (October 19th, 2021)

 

A second audit was conducted by Trail of Bits to assess Yield V2. Link to the Audit Report here.

 

Code4rena Audits

 

Code4rena has conducted three security audits encompassing different scopes (available here, here, and here).

The latest one was conducted between January 28th and January 30th, 2022. The audit found 10 unique vulnerabilities and 37 total findings.

 

There is also a bug bounty available via Immunefi.

 

ROADMAP

At the moment, the project has not published a roadmap. 

 

TEAM

Yield Protocol lists eight core team members skilled in distinct fields such as product management, research, software development, sales & business development, and blockchain architecture.

The team members have acquired business experience working for firms like Google and bloXroute Labs, a blockchain distribution network. The CEO has co-authored the whitepaper and the paper introducing YieldSpace, Yield Protocol’s automated liquidity provider.

Allan Niemerg (ref. 14), CEO, has worked as a product manager at bloXroute Labs.

Alberto Cuesta Cañada (ref. 15), Lead Engineer, is a blockchain architect designing and building blockchain solutions.

Bruce Donovan (ref. 16), Lead Front-end Engineer, has an MSc from Rhodes University.

Andy Zhu (ref. 17), Growth Lead, co-founded ZK Consulting, a company that helped build and launch crypto projects.

Advisors

The project has not listed any advisors.

General Comments on the Team & Advisors

The project is built by a team with a strong technical background. Team members from the project’s investment partners have also contributed to its GitHub codebase.

Yield Protocol is currently hiring for these roles: Technical Product Manager, Front-End Engineer, and Head of Business Development/Partnerships. These ongoing hiring steps would assist the project in bridging gaps in required skills.

During our review period, we did not find evidence that the team members have taken part in any previous or current illegal projects or projects that were controversial.

 

LEGAL AND COMPLIANCE SPECIFICS

Jurisdiction

Yield Protocol is operating under the legal name ‘Yield Inc.’ The information indicates that ‘Yield Inc.’ is headquartered in the Greater Chicago Area (ref. 18).

In the United States, the regulatory framework for cryptocurrencies is evolving despite existing differences in viewpoints and any overlap between agencies. For example, the U.S. Securities and Exchange Commission (SEC) often views many cryptocurrencies as securities, while the Commodity Futures Trading Commission (CFTC) calls Bitcoin a commodity, and the Treasury views it as a currency.

On a positive note, the United States is home to the most significant number of crypto investors, trading platforms, exchanges, investment funds, and crypto mining firms. The President’s Working Group and the Financial Stability Oversight Council will have essential roles in developing a future regulatory framework to straighten out the regulatory differences and clarify confusion about definitions and jurisdiction (ref. 19).

 

Decentralized Protocol Governance

 

Extract from Trail of Bits Yield V2 Audit Report. Source: Trail of Bits

Partnerships

FIAT DAO has partnered with the Yield Protocol, which has been chosen as a launch partner. FIAT DAO aims to collaborate with Yield Protocol on future fixed income innovation (ref. 20).

Yield Protocol has also been backed by multiple investors, having closed a $10 million Series A funding round led by Paradigm (ref. 21).

 

Backers of Yield Protocol. Source: Yield Protocol

Legal Advisors

The project has not listed legal advisors or team members responsible for legal matters.

KYC & AML

Details concerning KYC & AML have not been released.

Token Classification

Yield Protocol has issued no tokens at the moment. There are no plans to issue governance tokens (Source: Discord).

 

SOCIAL MEDIA AND VIRALITY

Yield Protocol currently has 20.3k Twitter followers.

Discord is the most accessible and popular channel to communicate with the team. Some team members on Discord are participating in discussions on varying topics about the project. Yield Protocol Discord channel at the moment has 6.7k followers. There is no Telegram channel.  

Yield Protocol has 169 followers on LinkedIn. No updates have been posted (ref. 22). The project has no presence on Facebook.

The project does not have a significant presence on YouTube. The project’s YouTube channel has 10 subscribers and three uploaded videos. There are not many reviews in English, and the existing ones don’t have many views, e.g.:

 

RISKS TO THE PROJECT

The following list of risks is not an exhaustive one. Some of these risks are internal, and others are external to the organization. Some risks may be minor/not materialize.

  • Hacks/exploits: Hacks and exploits are prevalent in the DeFi space. The total funds lost from 2,825 DeFi projects amount to $5.1 billion, with Ethereum-based projects constituting 29.9% of lost funds (ref. 23).
  • Security risks/ technological challenges: There are some risks associated with using Layer 2 projects, including Arbitrum. For example, if there is a validator failure, any activity can not happen. This includes withdrawals, and funds will be frozen. Also, the code securing the system can be changed without notice and arbitrarily. In the past, Arbitrum has experienced a brief outage due to a bug affecting the Sequencer, a special kind of full node (ref. 24). 
  • The volatility of digital assets: In general, volatility in the values of digital assets can be significant, and indirectly, a decrease in the value of digital assets could have a material and adverse effect on Yield Protocol.
  • Regulatory/Legal Risks: The occurrence of regulatory inquiries or regulatory actions could restrict or limit the project’s progress. Moreover, evolving or new laws and regulations in the United States or elsewhere may negatively affect the project. The project’s ability to comply or not comply with these new laws or regulations could have financial or reputational risks involved. 
  • Third-party risks: Yield Protocol is built on Ethereum, and any issues or bottlenecks on Ethereum can cause problems to Yield Protocol users. Similarly, reliance on MakerDAO and other DeFi solutions (for liquidations) pose uncontrollable risks. Another source could be Oracle risks. Therefore, the risk profile of Yield is dependent to a certain extent on third parties.
  • Lack of fyToken liquidity: It is essential to develop an efficient and deep secondary market for fyTokens for the protocol to gain significant market acceptance. Either on its AMM or third-party AMMs, fyTokens trading can encourage the development of a yield curve and an opportunity for users to trade the tokens based on market movements in rates.
  • Other operational risks: Yield Protocol is faced with several other risk factors (traditional risks). These risks are common to most lending/borrowing platforms, e.g., issues around collateral quality, market risks, and liquidity risks.

It is noted that two emergency types are implemented to mitigate protocol risks on Yield V2.

 

RATINGS

Everything you see in this report is the aggregate result of an extensive research process carried out by a distributed team of researchers and crypto enthusiasts around the world. The process consists of 60 questions divided into three phases. Researchers are called to answer these questions about a project, while providing links or screenshots as evidence to support their answers. For every answer, they also provide a rating from zero to ten. The average of their ratings is detailed below. 

 

Our researchers gave Yield Protocol a final rating of C.

 

 

DISCLAIMER

This Report is for informational purposes only and/or all or any of its content thereof, should not, may not and will not be taken to constitute, either as a whole or in part, any investment advice or recommendation or similar, regulated, or authorized advice, and D-Core by producing, disseminating, giving away, or making available this Report does not, should not, may not and will not be taken to advise on investments, or carry out any similar activity, or any regulated activity or any other authorized activity. D-Core is not authorized by the Financial Conduct Authority or by any other competent EU or elsewhere or otherwise competent authority to carry out any regulated activities and/or any activities within the scope of these authorities’ competence. 

D-Core excludes and disclaims all liability and/or responsibility whatsoever and/or howsoever caused, arising out of any actions, or omissions taken, or made by any authorized and/or other recipient of this Report in reliance on, or arising out of, or in connection with any or all content of this Report. Any authorized and/or other recipient of this Report acknowledges, accepts and agrees that they carry out their own independent research and act in their own sole risk in reading or using any or all information contained in this Report. In any event, recipients of this Report are urged to seek professional advice before making any potential investment decision in relation to the project described herein. Any authorized and/or other recipient of this Report accepts this Disclaimer in full. For the avoidance of doubt, this Disclaimer is binding against any recipient of this Report whatsoever.

 

REFERENCES

  1. “YieldSpace: An Automated Liquidity Provider for Fixed Yield Tokens.” https://yield.is/YieldSpace.pdf. Accessed 22 Jun. 2022.
  2. “Yield Protocol V2 is Live in Beta! | by Andy Zhu – Medium.” 27 Oct. 2021, https://medium.com/yield-protocol/yield-protocol-v2-is-live-in-beta-cf547f18cb5f. Accessed 22 Jun. 2022.
  3. “Introducing fyDai – Yield Protocol – Medium.” 6 Aug. 2020, https://medium.com/yield-protocol/introducing-ydai-43a727b96fc7. Accessed 22 Jun. 2022.
  4. “Yield Protocol launches on Arbitrum | by Andy Zhu – Medium.” https://medium.com/yield-protocol/yield-protocol-launches-on-arbitrum-31b6d8dd564. Accessed 22 Jun. 2022.
  5. “Yield Protocol.” https://yieldprotocol.com/. Accessed 22 Jun. 2022.
  6. “Yield Protocol Documentation.” https://docs.yieldprotocol.com/. Accessed 22 Jun. 2022.
  7. “11 Random Thoughts During a Digital Assets Bear Market.” 21 Jun. 2022, https://www.ar.ca/blog/11-random-thoughts-during-a-digital-assets-bear-market. Accessed 23 Jun. 2022.
  8. “Lending TVL Rankings – DefiLlama.” https://defillama.com/protocols/lending. Accessed 27 Jun. 2022.
  9. “DappRadar Blockchain Industry Report – May 2022.” 9 May. 2022, https://dappradar.com/blog/dappradar-industry-report-may-2022. Accessed 23 Jun. 2022.
  10. “State of Ethereum | Q1 2022 – by Ben Giove – Bankless.” 28 Apr. 2022, https://newsletter.banklesshq.com/p/state-of-ethereum-q1-2022. Accessed 23 Jun. 2022.
  11. “L2BEAT – The state of the layer two ecosystem.” https://l2beat.com/. Accessed 23 Jun. 2022.
  12. “Developer Documentation – Architecture · GitBook – Yield Protocol.” https://docs.yield.is/developers/. Accessed 23 Jun. 2022.
  13. “Periphery Contracts · GitBook.” https://docs.yield.is/developers/contracts/periphery.html. Accessed 23 Jun. 2022.
  14. “Allan Niemerg – Founder – Yield Protocol | LinkedIn.” https://www.linkedin.com/in/allan-niemerg-8392bb11. Accessed 24 Jun. 2022.
  15. “Alberto Cuesta Cañada – Lead Engineer – Yield Protocol – LinkedIn.” https://linkedin.com/in/albertocuesta. Accessed 24 Jun. 2022.
  16. “Bruce Donovan – Lead Front-End Engineer – Yield Protocol | LinkedIn.” https://linkedin.com/in/bruce-donovan-1435059. Accessed 24 Jun. 2022.
  17. “Andy Zhu – Growth Lead – Yield Protocol | LinkedIn.” https://www.linkedin.com/in/andyzhu87. Accessed 24 Jun. 2022.
  18. “Yield Protocol – Crunchbase Company Profile & Funding.” https://www.crunchbase.com/organization/yield-protocol. Accessed 24 Jun. 2022.
  19. “Cryptocurrency regulations by country – Thomson Reuters.” 1 Apr. 2022, https://www.thomsonreuters.com/en-us/posts/wp-content/uploads/sites/20/2022/04/Cryptos-Report-Compendium-2022.pdf. Accessed 24 Jun. 2022.
  20. “Collateral Partner Spotlight: Yield Protocol – FIAT DAO – Medium.” 13 Jun. 2022, https://medium.com/fiat-dao/collateral-partner-spotlight-yield-protocol-4ac3e7534e85?source=rss——blockchain-5. Accessed 24 Jun. 2022.
  21. “Yield closes $10mm funding round led by Paradigm | Yield Protocol.” 23 Jun. 2021, https://medium.com/yield-protocol/yield-closes-10mm-funding-round-led-by-paradigm-7e456e72b5e3. Accessed 24 Jun. 2022.
  22. “Yield Protocol – LinkedIn.” https://www.linkedin.com/company/yield-protocol. Accessed 24 Jun. 2022.
  23. “REKT Database – DEFIYIELD.” https://defiyield.app/rekt-database. Accessed 24 Jun. 2022.
  24. “Arbitrum One Outage Report – Medium.” 14 Sep. 2021, https://medium.com/offchainlabs/arbitrum-one-outage-report-d365b24d49c. Accessed 24 Jun. 2022.