Yield Basis: Disrupting Defi & Bitcoin Yield

Michael Agorov, co-founder and CEO of Curve Finance, discusses a new voting power model based on locked tokens, where maximum voting power is achieved by locking tokens for four years. This model promotes long-term commitment among token holders by proportionally reducing voting power for shorter lock periods. He speculates that potential yields could reach around 20%, although this may decrease if liquidity in Yield Basis suppresses Bitcoin volatility, estimating a limit of around $50 billion in Total Value Locked (TVL).

Yield Basis addresses challenges faced by automated market makers (AMMs) and impermanent loss. Unlike traditional AMMs like Uniswap, Curve employs concentrated liquidity around a price of 1.0, enhancing efficiency for stablecoins. The VTokenomics model aligns governance with the protocol's long-term success, encouraging token holders to act in the best interest of the protocol by adjusting voting power based on the duration tokens are locked.

Michael highlights that locking tokens removes them from circulation more efficiently than buyback and burn methods, which has significant economic implications. He also notes the need to address potential monopolies created by VE tokens boosting emissions, opting to remove this function in the new protocol, VEYB. In Yield Basis, liquidity providers are categorized into those seeking natural yield and those wanting stable value while earning protocol tokens, simplifying integrations and catering to diverse user preferences.

The conversation emphasizes the dynamics of governance tokens and real yield, noting that demand for governance tokens can lead to inflation and high admin fees, while a preference for Bitcoin can stabilize inflation if users seek real yield. The inflation of the YB token is directly tied to staking activity; if no one stakes, inflation drops to zero. YB is introduced as a vault system built on Curve AMMs designed to eliminate impermanent loss, allowing users to provide liquidity that mimics yield-bearing Bitcoin.

Challenges with staking Bitcoin in AMMs stem from concerns about impermanent loss. Yield Basis aims to create positions that counteract the square root function affecting liquidity value. The concept of compounding leverage is introduced, maintaining a constant loan-to-value ratio, allowing for a simplified relationship between collateral and Bitcoin price. An example illustrates how users can deposit Bitcoin into Yield Basis, borrowing stablecoins to create a collateralized position that mitigates impermanent loss.

The discussion also touches on the performance of yield bases during market volatility, particularly on October 10, when negative spreads raised concerns. However, it was found that the system did not incur fundamental losses during the crash, and increased Bitcoin volatility afterward was beneficial for yield generation. The system is acknowledged to be in an early phase with a current cap of $150 million, which is considered healthy for performance.

The speaker emphasizes the importance of understanding the split between staked and unstaked tokens, noting that profit measurement is volatile. A method to reduce this volatility by a factor of 10 is planned for implementation. While growth is measurable, daily fluctuations are often noise rather than true value changes, highlighting the need to manage volatility before scaling the system.

The focus remains on providing liquidity for Bitcoin users on Curve, with skepticism about liquidity provisioning on other platforms like Uniswap. The goal is to transition Bitcoin liquidity from centralized exchanges to on-chain, mirroring trends seen with stablecoins. Approximately 80% of trades are driven by arbitrage, and when simulating, a reliance on 100% arbitrage was noted. Speaker 1 believes that Yield Basis can handle substantial amounts, potentially billions, with an estimated $50 billion in TVL capable of influencing Bitcoin's price and stabilizing liquidity.

To prevent unauthorized copying of the Yield Basis model, a licensing requirement is mentioned that necessitates specific knowledge to determine the right parameters. Yield Basis serves as a major liquidity provider for Curve, enhancing liquidity and fees, although challenges exist in communicating the potential returns to the public. Upcoming milestones for Yield Basis include a protocol upgrade to implement feedback and UI changes, a vote on Curve for YB token allocation, and increased incentives for CurveUSD pools. These developments could lead to a significant increase in TVL for Yield Basis, with future caps potentially reaching one to two billion, contingent on the stability of CurveUSD.