$YETI Research Report (Part 2)
April 15, 2022
Not Financial Advice. Just the opinion of a couple Apes.
https://twitter.com/MBApesNFT
The article below is a continuation of the $YETI Research Report (Part 1). Please read the initial report for a detailed overview of the protocol including a high-level summary, its mechanics and potential investment strategies. This section will focus on the company’s tokenomics, revenue streams and an early (maybe too early) valuation.
Note: It is very difficult to value a protocol before launch. This article is intended to provide a framework for thinking about the valuation and offer a range of possible outcomes. All inputs are educated guesses based on the data available. We plan to update the article overtime.
Section 1: Tokenomics
Yeti Finance utilizes a two token system — $YUSD and $YETI.
$YETI allows you to participate in the protocol’s revenue generation and will have governance rights in the future.
$YUSD is an over-collateralized USD-pegged stable coin. This means that total collateral value will always be greater than total outstanding $YUSD; therefore, you can always redeem 1 $YUSD for $1 of collateral. No matter what happens — 1 $YUSD will always equal $1. A perfect peg! Learn more here.
Revenue Generation
The company earns protocol revenue through four separate revenue streams — 1. Deposit Fees — Ranges from 0.25%-1% based on collateral risk; 2. Loan Issuance — ~1.0% of each loan issued; 3. $YUSD Redemptions — Fees are variable ~1.0%; 4. Liquidation Fees — When a Trove falls under the minimum collateral ratio of 110%, the collateral is liquidated and is distributed to Stability Pool Providers. The Trove owner will keep the $YUSD from the loan, which will be less than the collateral they lost. Profits equal to the ~10% difference between 110% collateral ratio and 100% of loan.
Utility
$YUSD — decentralized stable coin worth $1 USD. You can trade it for other assets, contribute to a liquidity pool (i.e. YUSD — AVAX on Trader Joe), or farm in the $YUSD stability pool on Yeti Finance. The stability pool will provide rewards in $YETI and is incentivized by the protocol’s treasury. Furthermore, all liquidation fees are equally distributed to stability pool participants.
On the other hand, $YETI captures the rest of the protocol revenue including Deposit Fees, Loan Issuance Fees, and Redemption Fees. You can stake your $YETI to receive weekly rewards in $YETI and participate in the protocol’s growth. Additionally, Yeti Finance utilizes a veYETI model (similar to that of Trader Joe and Platypus — $YETI Wars looming?). $YETI can be staked to earn veYETI — veYETI is accrued over-time, is non-transferrable and is lost when the underlying $YETI is unstaked. veYETI provides three benefits — 1. Boost yields on stability pool deposits; 2. Boost yields on YUSD liquidity pool deposits; 3. Reduce user deposit fees; and eventually 4. Future governance rights.
Ultimately, Yeti Finance offers an exciting model that includes an innovative, decentralized stable coin native to Avalanche ($YUSD) and a powerful governance token that allows users to participate in the upside of the protocol ($YETI). $YETI utilizes a popular tokenomic design (following $PTP and $JOE) that will help it maximize long-term value and reward its loyal hodlers.
Token Distribution
Yeti Finance’s initial distribution heavily incentives its team with 25% of total tokens. At first glance, this allocation seems high; however, the figure includes early investors (or suggests that the protocol was financed internally). Furthermore, the team has a 3-month lock up period and a 3-year vest that incentivizes the team to continue to build and innovate long-term.
It’s more important to focus on the 50% allocated to community incentives and the 15% allocated to the foundation. The foundation / treasury will cover operational expenses, marketing and partnerships to help the platform grow. Therefore, combined 65% of the total distribution is going to support and develop the protocol. This figure is in line with other protocols, including Trader Joe, and ensures a fair and equal distribution for its users.
Furthermore, the company has allocated 9% of total equity for future investors. This will allow the company to bring in value-add partners later on, possibly to expand to other blockchains or add products / functionality to the protocol. If not used, this 9% will be divided amongst the foundation and community incentives pool.
Ultimately, I’m encouraged that the team is adequately incentivized long-term and that the company is committed to rewarding its community.
Emissions Schedule
Yeti Finance will utilize a front loaded distribution to incentivize early participants and bootstrap liquidity. The protocol will distribute 3% of total tokens (6% of total rewards) in the first month and slowly decline over-time with emissions stabilizing at 1% of total tokens per month after five months. See the expected emissions schedule below.
Note: 70% of initial Yeti emissions will be allocated to the Curve liquidity pool. This will be a great opportunity for early users to earn high yield on stable coins!
Takeaways: Yeti heavily incentivizes early participation so if you believe in the long-term viability of the project, it will pay to be early. The initial liquidity pool on Trader Joe (AVAX-YETI) will include 1.4 million $YETI; therefore, early liquidity providers may experience high volatility (given 15M Yeti tokens will be distributed in the first month). I am bullish on $YETI’s potential and will look to earn $YETI rewards through stable coin farming (specifically through the Curve LP). How? Deposit Assets on Yeti -> Borrow $YUSD -> Deposit $YUSD in Curve pool -> Earn $YETI! -> Stake $YETI -> Earn even more $YETI!!
Section 2: Preliminary Valuation
Yeti Finance is truly a revolutionary protocol, with no direct competitors. Aave, Benqi and Banker Joe all offer borrowing services on Avalanche; however, there are key differences.
- Yeti allows customers to utilize serious leverage (up to 21x on stable coins). For comparison, Benqi and Banker Joe cap leverage at 5x (Aave at 4x). That’s 16x more leverage on stable coins! If you earn only 5% on your loan, that’s the difference between a return of 25% and 105% per year… before compounding! Stable coin yield farming will never be the same!
How does this work? Yeti can offer higher collateral value for deposits by allowing users to borrow against an assorted basket of assets (more diverse portfolio = less risk). Maximum leverage equals (1 / (1 — Collateral Factor of Assets)). Benqi and Banker Joe allow users to borrow up to 80% of the total collateral value on stable coin deposits (Aave offers 75%), while Yeti offers a collateral factor of 95.24%! Additionally, Yeti incentivizes users to stake $YUSD in a stability pool that provides further protection for the stable coin. - Yeti simplifies the process. On traditional borrowing platforms users must manually compound their loans to create leverage. Let’s walk through an example. MBApe Tyger uses Benqi - To lever his investment, he must deposit on the platform, borrow 80%, redeposit, borrow 80%, redeposit and so on. He’ll have to repeat this process 7 times to get to 4x leverage (27 times to get to 4.9x). On the other hand, MBApe Johnny uses Yeti - He deposits his assets on the platform, chooses his optimal leverage and clicks “Confirm.” It’s as simple as that! Leverage one click away!
- Yeti offers 0% interest. Yeti doesn’t earn revenue based on outstanding loans but rather on one-time fees; this incentivizes long-term holders that are committed to the ecosystem. Why pay 8% interest every year, when you can pay a one-time 1% fee and hold the loan forever?
- Yeti works seamlessly with other protocols and allows users to leverage their existing investments as collateral. You can now borrow against your LPs and staked assets! Think about the potential — you are already invested in a liquidity pool on TJ or have staked AVAX on Benqi. Now without changing your portfolio, you can borrow $YUSD against your current investments and earn additional rewards! There is currently $800+ million contributed to LPs on TJ and over $2 billion deposited on Benqi. Assuming a collateral factor of 80%, Yeti has the potential to add $2.2 billion of liquidity on Avalanche overnight! And that doesn’t include leverage!
Ultimately, these four reasons will allow Yeti to scale efficiently and become the largest lender on Avalanche but will make it very difficult to value.
Market Research
Given there are no direct competitors, I utilized the three aforementioned protocols to understand the size of the industry on Avalanche. Please note that given Yeti is unique across any blockchain, it may drive further capital to Avalanche from competitors (especially Ethereum).
Now what does this all mean? Since Yeti utilizes a different business model than the comparable company set, we cannot simply use a similar Price to Earnings multiple to value the business.
Yeti earns fees on one-time deposits (outside of Liquidation and Redemption Fees), rather than consistent APRs from loans. Therefore, Yeti needs to continue to grow overtime to earn revenue each year. This will heavily depend on the growth of the underlying blockchain (you can read about the many tailwinds for Avalanche here) and the team’s ability to innovate overtime (so far looking pretty good).
Therefore, I utilized a DCF to determine a range of outcomes for the potential value of the business. Given the early-stage nature, it’s more valuable to look at the sensitivity analysis to assess the distribution of outcomes. Compare the protocol’s actual TVL overtime and adjust the inputs accordingly.
Discounted Cash Flow
I derived my base case valuation by forecasting the Total Value Locked (TVL) on the Avalanche blockchain for the next 7 years. I utilized a step down from 4.0% monthly growth for TVL on Avalanche in 2022 to 0.25% in 2027 (3.0% annual growth rate), which also served as the perpetual growth rate (same methodology as the Trader Joe analysis — inflation joke still relevant). Next, I calculated the current Total Borrowing % compared to TVL and maintained that figure throughout the forecast — $7219 total deposits / $10,360 TVL = 69.7% (rounded to nearest integer). Given Yeti’s unique advantages over existing protocols, I utilized a market share of 50.0% in 2022 and haircut the total % overtime to consider the potential of new competition. Yeti has the potential to increase the TVL of the space, so not all value will be taken directly from incumbents.
In terms of revenue drivers, I utilized an industry average Borrowing % and maintained it throughout the forecast due to the limited information available at this time. Given Yeti’s 0% interest model, I expect its borrowing rate to be significantly higher than Benqi or Banker Joe and more inline with Aave (or higher). However, for purposes of this forecast I maintained a conservative figure.
Finally, I considered Redeposit Fees, assuming that total deposits would experience 10% turnover each year. Redemption Fees assuming that 5% of outstanding loans would be redeemed per year at a 1% fee (probably on the low end). And Liquidation Fees, assuming 5% of outstanding loans would be liquidated at a 10% fee (giving a lot of credit to you Degens).
Discount Rate: The beta of 3.0x considers the inherent volatility in the cryptocurrency markets at this time. The Market Rate estimate for a small tech company considers that Yeti Finance will be cash flow positive from day one.
The concluded market cap of $128.2 million implies a Market Cap / Total Value Locked of 0.02x, which is comparable to Benqi’s MC / TVL of 0.07x but significantly lower than Aave’s MC / TVL of 0.84x. Given Yeti’s innovative business model, it should trade at a premium to its peers. Aave trades significantly higher than Benqi (and Yeti) given it’s a blue-chip DeFi protocol on Ethereum with interest from institutional investors. Additionally, Aave has expanded to other blockchains including Arbitrum, Avalanche, Fantom, Harmony, Optimism and Polygon and therefore has a more diversified revenue stream and less risk surrounding the failure of a specific blockchain. Benqi and Yeti only operate on Avalanche and have not received equal institutional interest as Aave (yet).
Long-term, Yeti will expand to other blockchains (looking at you ETH / FTM) to drive revenue and unlock additional liquidity. There is significantly more TVL on ETH and therefore, its a logical growth avenue moving forward. For reference, Aave is roughly 2–3x larger on Ethereum than on Avalanche. Expansion is not yet included in the analysis.
Section 3: Conclusion
Overall, Yeti Finance is an innovative protocol with the potential to reshape the DeFi landscape. Its unique design will unlock billions of liquidity on Avalanche and benefit the entire ecosystem with an influx of new capital. Furthermore, the project has even greater long-term ambitions. According to its website, Yeti seeks to become decentralized finance’s prime broker by utilizing its exclusive access to a user’s entire portfolio to offer the most optimal lending rate, netting services to minimize collateral requirements across financial instruments and other products including flash loans and options. Lofty goals! Ultimately, I am excited for Yeti’s launch and will keep a close eye on its performance, use case and future road map. What excites you most about $YETI? Will you be utilizing the platform? Are you going to buy and hold $YETI? Comment below!
Note: Every early-stage investment comes with risks and Yeti is no exception. Yeti Finance is not an established protocol. The team is building something completely unique, and its concept and business model are unproven. Always DYOR and never invest more than you can lose!
