There are many crypto projects that came into the limelight in recent months that claim to provide better and safer ways for investors to profit. Yam Protocol is one of those projects that experimented in making programmable money. However, it suffered a tragic turn instead.
The problem that plagued the DeFi protocol has negatively affected the crypto space as well. It came at a time when ETH gas fees were soaring, and many liquidity pools were suffering from lower volumes. But where exactly did Yam go wrong?
Table of Contents
Background
The Yam Protocol was a project by Brock and Trent Elmore, Clinton Dembry, Dan Elitzer, and Will Price. The founders designed the protocol to be entirely community-owned and controlled.
It was planned to be a monetary experiment that will feature fair farming, governance, and elasticity by combining different decentralized finance (DeFi) innovations. The team had thought it was a worthwhile endeavor to pursue since yield farming had been the latest craze of the space.
What is Yam Protocol?
Yam is a newly-launched, experimental DeFi protocol. It has been one of the many yield farming projects in the DeFi space, combining other projects to feature:
- Price stability by creating an elastic supply of its tokens
- System stability by establishing a community-governed treasury
- Decentralization by fully on-chain governance,
- Equitable token distribution mechanism.
YAM, its native coin, is designed to achieve elasticity in its supply. This means that the supply of the coin is influenced by market conditions (i.e. supply and demand). Furthermore, its objective is to maintain a value of 1 USD per YAM.
Yam’s elasticity function is patterned from the principle behind Ampleforth’s model, fair token distribution from yEarn Finance, and on-chain governance from Compound Finance.
The token was launched starting at zero value, and its community members were the ones to determine how it will be priced and developed in the days ahead.
Through its use of the governance module from Compound, Yam’s community members can vote on-chain regarding how the amendments, implementations, and development of the protocol.
YAM’s First Launch and Token Distribution
The founding team only took 10 days to launch the protocol. It did not go through any formal audit yet, and Yam’s team just dwelled on just issuing warnings to potential investors about it.
The tokens were distributed following the YFI method. There wasn’t any pre-mining process and the founders were not given any share. Even venture capitalist (VC) interests were not opened.
Initially, YAM was distributed across different liquidity pools, namely: COMP, LEND, LINK, MKR, SNX, WTH, YFI, and ETH/AMPL. These pools were chosen because of their volume and the credibility they had established from their effective and active governance systems.
The Yam team stated that after the initial launch in these pools, another distribution will be made through the YAM/yCRV pool. This opened the platform for the deployment of Uniswap’s price oracle to support Yam’s rebasing mechanism. It also meant that yCRV can contribute to the system’s liquidity needed in its rebase.
YAM Tokenomics
The initial supply of YAM token was capped at 5,000,000 YAM, but will be rebased every 12 hours. 10% of the rebased assets will be kept for reserve and will use the yCRV tokens.
At least 1% of the total supply of YAM is required before a governance proposal can be submitted, and 4% of its total supply to achieve quorum.
YAM Implosion – A Single Code to a Loss of Hundred Millions of Dollars
As soon as the team launched the Yam Finance system, it has seen massive demand, with tons of investors putting their resources into the YAM token. Six hours after the launch, the token already held more or less $170 million in total value locked (TVL).
Yam Finance saw more growth the next day, with a TVL of a whopping $500 million just last Wednesday. Yield farmers were swooping in to ride the YAM hype. It happened despite the warnings that anyone could lose a lot of money from the platform.
Despite the transparent disclosure that the protocol was unaudited, people couldn’t help pouring their assets in. While there were prominent crypto personalities showing their support for the project, many skeptics also voiced their opinion.
Arthur Hayes, founder of Bitmex, tweeted “I’m a farmer now. Long live the #Defi bull market.”
On the other hand, Erik Voorhees, founder of Shapeshift, had an opposing stance. He said that Yam looks like a “scam” and will not do anything “good for DeFi.”
By August 12, the value of the YAM token went up to its all-time high of $167.72. Unfortunately, an hour after they found a bug in the protocol.
The bug will mint an excessive amount of YAM tokens despite the elasticity model designed to keep its parity with $1. Because of this, on-chain governance turned out to be impossible considering that any proposal forwarded to the protocol will not be able to reach the 4% quorum required to pass it.
The Community’s Attempt to Rescue YAM
The community had only seven hours to do what had to be done to make sure they didn’t permanently lose the funds locked up in the YAM treasury.
After the voting period, the community raised a total of 160,000 YAM and locked it in a governance proposal smart contract that will fix the bug. However, the problem was that they later found out that the smart contract supposed to fix the over-mint problem was also faulty.
This left the YAM token in the rubble, with its value dropping from a record $167.72 to measly $0.81 within a few hours. Brock Elmore admitted in a tweet that he had failed, but thanked everyone for their support anyway.
The bug resulted in a total loss of $750,000 in its treasury, on top of the other $500 million tokens that got permanently locked in the protocol 48 hours following its launch.
YAM V3 and the Migration Plan
While the first iteration of the project was a failure, the team decided to develop a migration plan to transfer all existing tokens in the protocol to a new, functioning smart contract.
For this plan, users will be asked to burn their tokens from the V1 of the protocol, and mint another set of tokens on the new smart contract. The difference in this contract is that it will not consider rebasing to determine the total amount of YAM tokens to mint.
It will also use off-chain signature-based voting instead of the on-chain governance plan from the first iteration of the protocol. Then, Yam will be officially relaunched following the deployment of an audited V3 contract.
Conclusion
In light of all recent events, one important lesson we can learn is that third-party audits are extremely important for every project, especially in the DeFi space. And while transparency and disclosures are important, they should never be an excuse for not taking responsibility.
Yam was just a new experiment in the block, but the enormity of its failure has exhibited a lasting impact on the crypto industry. However, we still have yet to assess how it could have possibly damaged the community’s trust towards the other DeFi projects.
