Thread by @kaiynne

I appreciate the shout out ❤️. The story behind yield farming is a long and complicated one imo and a LOT of people contributed to it.

https://twitter.com/andrecronjetech/status/1462437912549769220

To understand why yield farming to get ownership of a protocol in the form of tokens didn’t happen until 2018 you have to go back to the market structure of ICO’s. For most of this era the expectation was that all the tokens would be distributed in a single event.

For example in March 2018 Havven distributed 85% of the HAV token supply, some were locked in vesting, but the protocol treasury only retained about 15% of the tokens.

This was the status quo and barring a few exceptions of extremely convoluted 🤪 token sales that left 80%+ of the tokens in the project treasury there were typically just not many tokens left to distribute for incentives.

My first encounter with the project that decided to experiment with distribution was a conversation with @jbrukh about @LivepeerOrg at web3 summit in 2018. Unlike most novel crypto schemes somehow I immediately saw the implications 🤷‍♂️ maybe Jake is just good at explaining things.

The MerkleMining system that Livepeer pioneered was brilliant but unfortunately it was a little too early and the demand side never really materialised.

The other project that contributed to the early designs of yield farming was @FCoinOfficial with their trans-fee mining. Which demonstrated how incredibly powerful token incentives could be.

The thing that I never really understood about the FCoin incentives was why it didn’t lead to a feedback loop of increased organic activity. My working theory is that the incentives were simply too powerful and only farmers were participating.

This theory only emerged later when I saw the same dynamic play out in other yield farming Ponzi style games during Defi summer. Basically you need a critical mass ratio of organic to incentivised behaviour, if this ratio is too low the feedback loop never kicks in.

Cut to late 2018, Havven was struggling, the launch of USDC and tUSD ate into the value prop of an alternative to USDT that was more transparent and open. Plus DAI was an older, safer and more stable product with much better support from the community and better liquidity.

What Havven did have was a great community, we had fostered a very open and uncensored place to discuss not just Havven but the nascent DeFi movement and crypto generally. We even let people talk about token prices 🤯.

Out of this community an idea started to form. What if we changed the token supply? The recovering BTC maxi in me recoiled at the thought of monetary policy change, but the more people I discussed it with the better it sounded.

But we didn’t have enough tokens to launch a sustainable incentive scheme. This is how inflationary rewards were born. I decided to pitch it to the community after DevconIV where @worthalter intro’d me to Manu @bootnodedev who got it instantly and enthusiastically encouraged me.

I started writing up a proposal to the community to change the token supply and stream this inflation to stakers when we launched @synthetix_io. This is one facet of what would become yield farming. Where you paid users in native tokens for doing the action the protocol required.

Inflationary rewards launched in March of 2019 and finally created a feedback loop that allowed Synth creation to become viable and worthwhile for stakers.

BUT there was a problem, we now had Synth supply but not much actual liquidity. Thankfully a scrappy new protocol called @Uniswap had launched a few months earlier in late 2018.

Paying people SNX to stake in Synthetix was working so well some smart people in the community asked, why not use SNX to incentivise people to add liquidity to Uniswap? This is the second facet of yield farming.

And like the first it worked incredibly well, sETH:ETH became the largest pool in UniV1 and suddenly there was tens of millions of dollars in entry and exit liquidity. Which was what precipitated the emergence of frontrunning (but that is another story).

A few projects experimented with yield farming through the rest of 2019 and there was a bit of a uniV1 arms race for liquidity. But none of the existing token projects were crazy or desperate enough to yolo change their monetary policies.

And launching a token was still considered a black mark against your reputation and character 🤦. So it wasn’t until almost year later when a young man named @rleshner and his team at @compoundfinance decided the time had come to hand governance to the community.

Finally we had a high profile project with good product market fit with no token that was in a position to take everything we had learned about yield farming and turn it up to 11.

When Compound launched their yield farming of the COMP token with approximately 100 trillion dollars worth of daily incentives 😜 the rest of crypto suddenly took notice. And thus was DeFi Summer 2020 started.

There is an addendum to this, which was the launch of @CurveFinance. Suddenly the Synthetix community realised we could incentivise our stablecoin in a pool of other stablecoins. Increasing the risk adjusted yield by removing ETH price volatility in the sETH:ETH uni pool.

Unfortunately in a presage of later days myself and @newmichwill didn’t agree on how this new pool would be created. Back then a stablecoin being added to the pool was not permissionless. Thankfully a dashing young gentleman by the name of @AndreCronjeTech mediated the dispute.

The SNX Curve incentives arguably led their community to realise the power of stable yield farming so when launching a token they built an ingenious system to distribute the native CRV rewards. An area of yield farming experimentation that is at the cutting edge even today.

A second addendum to this is the launch of YFI by @AndreCronjeTech . To this day probably still the greatest application of yield farming the world has ever seen. The key insight here was that you could start a new protocol purely from incentives alone.

With the right structure and incentive design it would emerge fully formed into the world, you didn’t need to toil for years building product market fit. You could also sidestep so many of the token based criticisms by releasing ALL of the tokens via yield farming.

No seed round, no pre-mine. And while I am not sure anyone else is clever enough to pull this off today, I still think it stands as one of the greatest and most successful yolo experiments in crypto history.

The final benefit is that it is also one oft he most decentralised protocols in crypto, something which imo the market doesn’t quite realise yet. But they will.

Final addendum, the contract that everyone used for yield farming, stakingrewards.sol was actually written by @k06a from a 10k SNX bounty I posted on twitter. Some of the most valuable lines of code in crypto given to the community open source to use and modify 🥰