DeFi yields crumble as Curve, Sushi, and other Ethereum coins crater

In August and September, the decentralized finance (DeFi) space was in a state of frenzy: random food farming strategies were yielding tens of thousands of percent APY while more reputable pools, paying out coins to thousands of users, was generating yields on orders of magnitude higher than bank accounts.

Yields have crumbled over recent weeks, though, at a rapid pace. A benchmark of yields, Yearn.finance’s yUSD Vault, which allows Ethereum-based stablecoin holders to earn steady returns on their capital, has dropped from around 150 percent to 12 percent now.

The cause: coins that are minted to generate yields, like Curve’s DAO Token and SushiSwap’s SUSHI, have plunged in value.

DeFi yields crater amid steep Ethereum coin correction

Over the past few days, leading Ethereum DeFi coins continued their rapid descent to the downside.

On Wednesday alone, top coins in the DeFi space slipped by another 5-20 percent as the market entered a state of capitulation: users on Twitter noted that there was an influx of on-chain shorting enabled by Aave borrowing, along with an increase in spot market selling as evidenced by exchange volumes.

At the lows of yesterday, the average DeFi coin was down approximately 70 percent from its all-time high price set in either late August or early September. Some names such as Mstable’s META, Bancor’s BNT, Band Protocol’s BAND, and Yearn.finance’s YFI were among those worst hit by this capitulation.

The collapse in yields has resulted in some fears that the allure of DeFi is gone. Many Bitcoin maximalists, especially, have likened the collapse of DeFi to altcoins and “scams” from 2013 and 2014.

Far from the end

Yet Ethereum analysts say that the steep decline in returns is far from the end of yield farming-focused projects, and more broadly, DeFi as a whole.

Spencer Noon, head of DTC Capital, wrote just the other day that he’s optimistic that the low yields in the space are not a concern for him:

“Just b/c yields are “dead” for now doesn’t mean #DeFi is. In fact, this is a massive opportunity to show that DeFi yields will be higher than CeFi in equilibrium long-term. Protocols have a lower cost of capital and are less rent-seeking. I’m highly optimistic this will play out.”

Commenting on Yearn.finance more specifically, as the project is focused on generating yields for clients, Mechanism Capital’s Andrew Kang said that the protocol’s developers are working on new strategies that should allow for the creation of higher yields:

“The argument that YFI / Yearn value is dependant on crazy yields is missing the forest for the trees. Yield opportunities continue to grow Future strategies: – 10x-100x leveraged short DAI – Basis/Funding trades – UNI Farming – BAL Farming – L1/L2 Liquidity Bridging – etc.”

The argument that YFI / Yearn value is dependant on crazy yields is missing the forest for the trees.
Yield opportunities continue to grow
Future strategies:
– 10x-100x leveraged short DAI
– Basis/Funding trades
– UNI Farming
– BAL Farming
– L1/L2 Liquidity Bridging
– etc
— Andrew Kang (@Rewkang) October 4, 2020