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What is Behind yEarn, the New DeFi Token worth $35k

It is hard not to notice yEarn, the $35,000 cryptocurrency that just exploded in value. What exactly is behind the monolithic explosion in value for this DeFi token? It is not easy to interpret the reason behind this explosion, but in my estimation, much of it is FOMO. The fear of missing out is an all too common driver of dramatic price increases. Many novice traders do not know how to properly conceptualize an asset worth $35,000. It is difficult to tell whether or not this is a good price, or a bad price for a couple of reasons. The asset is very new, and there is no precedent set for a token with such a low circulating supply. Properly interpreting the price is an important step to take before deciding to invest in anything.

two bubbles floating in a void with Ethereum and yEarn Logos

Scarcity Does not Automatically Mean Value

The max supply of yEarn is 30,000 tokens. This is a very low number in terms of absolute quantity of tokens that exist. However, each token may be divided into many millions of pieces. Nonetheless, the token is still scarce, but does that make it valuable? Not necessarily. Just because something is rare, doesn’t mean it has value. Scarcity alone is not what makes something valuable, there also must be utility. In the case of Bitcoin, scarcity is simply just one factor that contributes to its value proposition. There is also tremendous momentum, backing, security, and utility behind Bitcoin. I am afraid that the same cannot be said for yEarn.

The Utility of yEarn

Top say that yEarn has no utility would be disingenuous to the project. A handful of Ethereum DeFi projects work more or less the same, and are capitalizing on DeFi hype to raise their value. From my point of view, it all started with the Maker DAO. Maker is responsible for producing the DAI stablecoin by locking up assets to collateralize a loan denominated in DAI. Other DeFi projects such as yEarn have borrowed concepts from the Maker DAO such as token governance. Strictly speaking, yEarn is a governance token.

By holding and staking yEarn, you may influence the direction of the token itself. For example, one of the earlier proposals on yEarn was to decide whether or not any more yEarn would ever be minted. The conclusion of this proposal was that no more yEarn will ever be minted and brought into circulation. That means that there are, and will only ever be 30,000 yEarn. For the average investor, participating in the governance of yEarn is simply not relevant to their day to day lives. The more interesting part for most people, is whether or not it is a good investment.

The Market Capitalization

I like to think of Bitcoin as the benchmark for measuring the price of an asset. Most people just look at the absolute value of the asset, in the case of yEarn, about $35k. This is simply just one factor, and doesn’t mean much if it is not properly contextualized. The other factors are the circulating supply, and the max supply. We need to multiply the current value of the asset $35k by the max supply in order to know the market cap of the coin. Therefore the market cap for yEarn is just over a billion dollars (30k * $35k). The more interesting point of analysis is when we compare the market cap of yEarn to something like Bitcoin.

What would yEarn be worth if it was worth as much as Bitcoin in terms of market cap? In order to do this, we need to pretend the max supply of yEarn is 21 million. If there were 21 million yEarn instead of 30k, then each yEarn would be worth $50. Do you still think it’s the most valuable cryptocurrency? Each unit is still the most expensive, but it looks a lot different when you consider that a lot of the value is being derived from the limited supply.

The other calculator that we can make is determining what the value of each yEarn might be if it grows to a particular size. Lets just say that yEarn grows to the size of Chainlink, which is currently the most valuable DeFi token on Ethereum. The market cap of Chainlink is $5 billion. It is not unreasonable to suggest that yEarn could approach, or even meet this market capitalization. Therefore, each yEarn may become worth 5 times its current value. That would put each yEarn at a value of $175,000 dollars. 

Putting it All Together

Novice investors should proceed with caution, and examine the reasons why they are thinking of investing in new tokens. It is important not to be deceived by the high price of tokens such as yEarn. This explosion in price reminds many of us in the cryptocurrency space of the ICO bubble of 2017. During this time, many projects were launched, a staggering majority of which were outright scams. While I am not saying that yEarn is a scam, I am saying that caution is warranted when evaluating it is as an investment. People were quick to jump on new tokens to ride upward trends driven by hype. The price rise of yEarn appears to me to be at least partially driven by hype.

Waiting for a Track Record

One of the reasons why I prefer Bitcoin over all other cryptocurrencies is that it has a proven track record. The yEarn token is just 3 months old and the DeFi ecosystem has yet to reach maturity. For example, transactions on the Ethereum network are currently inaccessible to the average individual, costing as much as $50 for a single transaction. If DeFi actually wants to live up to its name, then the entire ecosystem needs to help Ethereum fix its scaling problem. If this doesn’t happen, then it threatens the viability of every platform existing on Ethereum. Not everything in the cryptocurrency world is about the price of assets. From my point of view, projects that truly have value will inhabit qualities of accessibility and useability. The price of yEarn does not account for its shortcomings.