$600M in 10 Days: How Crypto Project YAM Shows The Future of Finance

Within 36 hours of launch, over $600M had flooded in to an Ethereum protocol named after a vegetable, called Yam Finance. 12 hours later, a bug was detected that made the protocol “ungovernable”, most of the money fled, and around $750,000 was lost. The five people who created it had never formed a company. The “launch” was a Medium post and a tweet. And perhaps most astonishing of all, the idea itself — which was largely a mashup of existing open source projects — was only 10 days old.

It’s a strange new world in “Decentralized Finance” (DeFi) — Ethereum’s emerging financial ecosystem — where you don’t even need a company to hold onto millions of dollars. It’s seen 6x growth in the last 3 months, and with some people making eye-popping returns, it could break out over the next year. The story of YAM is particularly fascinating because they took advantage of the three key innovations that DeFi is enabling:

1. “Sovereign communities”, which are an entirely novel, and digital form of human collaboration. These could be as transformative as the introduction of limited liability corporations.
2. A long-tail of speculation. DeFi gives anyone the ability to create an investment opportunity for a global audience. This taps into a basic human emotion, and should not be underestimated, especially during times of low yield.
3. It is fully composable and interoperable. This allows for “cut and paste mashups” of existing products, and will make for a blistering pace of innovation.

Let’s discuss each one, which all build on the foundation of Ethereum, a global and permissionless way to send money and run code (see footnote [1] if you want a hyper brief overview of Ethereum). A note on the term “DeFi”. I personally prefer the alternative “Open Finance” (OpFi), which I feel better conveys the ethos of the movement. But so as not to be confusing, I use DeFi throughout this article which is currently the more popular term.

YAM’s logo, which is actually an emoji. They were going for the memes, and knew they knew would help with community building

Sovereign Communities

Perhaps the first question you might have is, “why on Earth would anyone send money to YAM? How could you trust the creators to not steal your money when you don’t even have a company to sue?”. The reason is the smart contracts that controlled the money weren’t actually owned or run by the creators of YAM. From the very start, they were instead controlled by the community that emerged around YAM, much like a democracy [2]. I call these “sovereign communities”, though the more typical “blockchain” term is Decentralized Autonomous Organizations (DAO’s). These communities can vote to change basically anything about the project. And all of the votes are binding and enforced by the blockchain (eg. Ethereum), with no government required (hence why I call them “sovereign”). This is critical because it means you don’t actually have to trust the creators. All you need to do is trust the code (or trust someone else who has looked at the code).[3]

This is a novel human collaboration mechanism with several key properties 1.) No borders, 2.) Completely digital and scaleable 3.) Guaranteed enforcement, with no need for legal recourse. If you pause to reflect on this, you’ll realize how special it is. It’s not often that humans devise a new way to collaborate. But historically when we do (eg. villages, city-states, limited liability corporations), the results have been transformative. And considering this is the first truly digital collaboration mechanism ever, it’s hard to imagine it won’t also be transformative.

But how did YAM use sovereign communities?

I think the first aspect of YAM’s success was how it did the fair launch that has been popularized by Bitcoin — Derebit Research

YAM combined the community control with a “fair launch”. The fair launch just means that the creators did not get any free tokens or special privileges at launch. It is common for crypto projects to slice off a “founder reward” (often 5–25%), and then sell the rest to everyone else. But YAM chose not to. This provides a huge signal to everyone else that the founders aren’t here to just make a quick buck. They’re on equal footing with the rest of the world. They’ve just created a game and invited you to play.

The synergy of community ownership plus the fair launch drastically reduced the trust required to put in money. Any normal new bank would probably take years or decades, plus several tough licenses to build up the trust required for people to store hundreds of millions with them. Yet with the sovereign communities and trustable code of crypto, it apparently only takes hours.

The Long-Tail of Speculation

So now you trust your money won’t be stolen, but still, why on Earth would anyone send money to YAM? The simple reason here is speculation. In case you haven’t been checking alt-coin prices on the regular, DeFi tokens have been on fire recently. Since June the first billion dollar company in DeFi — Compound — was minted, and token prices generally, along with value locked and number of user, has been soaring.

The exponential growth of DeFi, a.k.a. Open Finance: The value held in smart contracts has grown from $1B — over $6B just in the past 3 months.

But why YAM specifically? Well, they had an interesting idea for a new product, and it was from several “DeFi natives” who were known in the community. This gave them credibility. People trusted they were acting in good faith, which they were. They were releasing a new token, and that token could appreciate in value. With similar tokens appreciating at astronomical rates in the recent past, many DeFi traders had serious FOMO on what might be the “next big thing”.

If your reaction is “Ha, I knew crypto was a joke. It’s just a big casino!”, that’s understandable. And I’m not saying you’re wrong, but I think what’s actually going on is this technology makes capital formation 100x easier, and speculation is the first killer app. Anyone in the world can create a token for themselves, their future income, or maybe they make one for their village, or their company. Maybe you want to “speculate” on a promising young student in India, or take donations from around the world to pay for your daughter’s surgery. Or maybe you want to gamble on the Patriots. It’s all just capital formation.

Composable and Interoperable

This part is so cool. YAM was a “mashup” project of other existing projects. While open source code is nothing new, the possibilities are taken to a new level in DeFi, because all of the code is open source, even the commercial projects. Yes, even the most successful companies in DeFi, some worth hundreds of millions of dollars, share everything. Not because they are nice, but because they couldn’t hide it if they wanted to. It’s all viewable on the blockchain anyway. Thus the code and hard work of even the most successful companies is out there for anyone to view, change, or re-use as they see fit. YAM did just that. They forked code from 4 separate existing projects, and brought together different aspects to create their own thing. This was the main reason they were able to put it all together in only 10 days. That’s the power of composability.

Interoperability means that, in conjunction with open standards, new crypto products can be immediately supported across the wallets and tools of the ecosystem. For example, as soon as YAM launched, it was able to create trading pools on a popular decentralized exchange (Uniswap) because it used a standard interface for its token. Similarly, that interface allowed everyone’s crypto wallets to also immediately support it in their UIs with no coordination required.

Taking these together, the comparison would be something like, “I think it would be cool to have a bike delivery service for my local area. I know, I’ll take Uber’s driver-allocation and messaging system, and mix it with Google’s bike-route planning system. Also, I think other people will be into this idea too, so I’ll just list my new company on the NYSE, and I’d like all Robinhood users to be able to trade it as well. Boom. That was easy.”

I’m being a little glib there, but that’s pretty much what happened with YAM. They condensed a process that typically takes many years into days. This is the power of composability and interoperability, and means DeFi will have a blistering pace of innovation.

Conclusion

YAM is the insane story of 5 guys who, over the course of 10 days, built something that received $600M within 36 hours. So insane that it almost seems like a toy, or like just some bizarre occurrence from that weird crypto world. But writing off YAM and DeFi as jokes is a bit like writing off the microcomputer as a toy. Sure, it’s not yet where “real” finance happens yet, but that might change a lot sooner than you think.

YAM highlights unique advantages of crypto that traditional finance will never have. DeFi is composable and interoperable, meaning new products can be spun up in days, not months, and with open standards, those products can be immediately supported by tooling and wallets across the ecosystem. It’s run by sovereign communities, not companies. This means the trust necessary for a new product is greatly reduced, and that those products literally can’t make changes without their users consent. Lastly it enables a long tail of speculation, which means it’s got the best hook of all — making money — for bringing on the next wave of users.

Add to all that the baseline improvements of the blockchain — a global and permissionless way to send money to anyone — and DeFi starts looking less like a toy, and more like the future.

About the author: I’m Blake West. I’m the co-founder and CTO of an upcoming crypto lending protocol goldfinch.finance. Formerly, I was a senior engineer at Coinbase. I also personally know one of the members of the YAM team.

Thanks to Dan Elitz for reading a draft of this story.

[1] — Ethereum is a blockchain, like Bitcoin, but with a very important extra ability: it allows developers to write entire applications on top of it (through “smart contracts”), rather than only send money back and forth. This makes it possible to write code that can be used by anyone, while being controlled by no one. The fact that the code can’t be controlled by anyone is why some people have also called Decentralized Finance “unstoppable finance”.

[2] — Technically there are two kinds of funds at work here. The “treasury” funds were controlled by governance. The “staked” funds, however, weren’t controlled by YAM or subject to governance. The only way for that money to be lost was if it there was a bug in the Synthetix Mintr contract (which they had forked to use), or if they messed up their fork. But the key point remains that the YAM team did not have control over any of the funds directly.

[3] — It’s worth noting that “trusting the code” is not a trivial exercise, even for the developers who wrote it! It is notoriously difficult (impossible?) to understand the full implications of any code, but especially in a fast moving, bleeding edge environment like DeFi. YAM itself was written by excellent, experienced engineers with only the best intentions at heart, and the code had largely been taken from highly vetted existing projects, and YAM had been tested to a reasonable degree, but still a serious flaw arose. So while people were confident that the creators didn’t have control over the contracts, that doesn’t mean there was no risk.