Corn: DeFi faces critical customer support challenges, Yearn’s foresight on UST highlights governance risks, and the market is set for recovery in late 2023

Key takeaways

• Customer support remains a significant challenge in DeFi due to the lack of traditional support structures.
• Yearn Finance conducts due diligence on new strategies to ensure safety before implementation.
• UST was identified as structurally unsound by Yearn, demonstrating foresight in risk management.
• Stablecoins backed by governance tokens are unlikely to succeed long-term due to inherent risks.
• Yearn’s strategy involves curating yield-generating opportunities across DeFi protocols with a focus on risk management.
• The DeFi market is expected to recover and grow in late 2023 and 2024.
• The recent mass liquidation event highlighted vulnerabilities in DeFi vault management.
• Turning vaults into multisig structures can lead to a lack of transparency and control over funds.
• The finite amount of tokens in projects like Yearn creates misaligned incentives for investors.
• Tokens pegged to the dollar can create a false sense of security regarding volatility and risk.
• There is a significant lack of verifiable proof in some DeFi projects, indicating potential fraud.
• Traditional finance companies are hesitant to enter DeFi due to safety concerns and a lack of understanding.

Guest intro

Corn is head of business development at Yearn Finance. Yearn Finance has maintained a long track record as a battle-tested DeFi protocol through multiple market cycles. Corn discusses the evolution of DeFi from 2020 to today, including the impact of the TerraLuna crash and changes in incentive mechanisms.

Customer support challenges in DeFi

• “Customer support is something of an unsolved problem within the crypto world” – Corn
• Understanding the complexities of DeFi highlights the lack of traditional support structures.
• This issue affects user experience and trust in DeFi protocols.
• The decentralized nature of DeFi complicates customer support solutions.
• Users often have no direct contact for resolving issues with decentralized protocols.
• The absence of centralized support can deter new users from engaging with DeFi.
• Developing effective support systems is crucial for DeFi’s mainstream adoption.
• “Who do you call when you’re dealing with a decentralized protocol?” – Corn

Yearn’s risk management and strategy implementation

• Yearn conducts due diligence on new strategies to ensure safety.
• “Someone from the Yearn security team is gonna have to do due diligence on it” – Corn
• This process involves a light audit on the code base.
• Ensuring safety before implementation enhances security in DeFi projects.
• Yearn’s approach reflects a commitment to risk management.
• The security team’s role is crucial in maintaining protocol integrity.
• “They’re gonna have to do at least something of like a light audit” – Corn
• Yearn’s strategy involves curating yield-generating opportunities across DeFi protocols.

The structural issues with UST and governance-backed stablecoins

• Yearn refused to make a strategy for UST due to structural concerns.
• “We knew something was going to happen” – Corn
• Stablecoins backed by governance tokens are unlikely to succeed long-term.
• “Anytime a stable is backed by a governance token, it’s not gonna end well” – Corn
• The governance token’s eventual devaluation poses a risk.
• Understanding the UST collapse provides insights into DeFi risk management.
• Yearn’s foresight showcases its expertise in evaluating project viability.
• The risks associated with governance-backed stablecoins are significant.

DeFi market trends and recovery forecasts

• The DeFi market is expected to recover in late 2023 and 2024.
• “We start to come out of that into late twenty twenty three 2024” – Corn
• Previous bear markets have impacted DeFi growth, but recovery is anticipated.
• Investors and stakeholders should prepare for potential growth opportunities.
• Understanding market trends is crucial for strategic planning in DeFi.
• The recovery forecast is valuable for assessing future investment prospects.
• “Into this year” indicates ongoing market developments.
• DeFi’s resilience is evident in its ability to rebound from downturns.

Vulnerabilities in DeFi vault management

• The mass liquidation event highlighted vulnerabilities in DeFi vaults.
• “On October 10 there was this mass liquidation event across crypto” – Corn
• High-risk vault management practices were exposed during the event.
• The event underscores the importance of robust risk management strategies.
• Understanding vault management vulnerabilities is crucial for DeFi stability.
• The liquidation event serves as a learning opportunity for DeFi protocols.
• “Some bodies have started to flow to shore within DeFi” – Corn
• Addressing these vulnerabilities is essential for future DeFi security.

The impact of multisig structures on transparency

• Multisig structures can lead to a lack of transparency and control.
• “This gives people the opportunity to still be anonymous” – Corn
• Users may have no visibility into fund management decisions.
• The anonymity provided by multisig structures poses governance challenges.
• Understanding the risks of multisig structures is crucial for DeFi users.
• The lack of transparency can undermine trust in DeFi protocols.
• “For you to have no visibility into the decisions” – Corn
• Balancing transparency with security is a key challenge in DeFi.

Tokenomics and investor incentives in DeFi

• Yearn’s finite token supply creates misaligned incentives for investors.
• “Yearn does not have a token print and we have a finite amount of tokens” – Corn
• Newer projects with flexible token incentives attract mercenary money.
• “Is this gonna be the cycle forever?” – Corn
• Understanding tokenomics is crucial for evaluating DeFi projects.
• The cycle of capital movement based on incentives may continue indefinitely.
• The sustainability of projects depends on effective incentive structures.
• “Those are the incentives that these new multisig projects started to bring” – Corn

Risks associated with dollar-pegged tokens

• Tokens pegged to the dollar can create a false sense of security.
• “It gives users probably a false sense of security” – Corn
• Users may underestimate the volatility and risk involved.
• Understanding the mechanics of these tokens is crucial for risk assessment.
• The perception of stability may not reflect the underlying risks.
• “Really under the hood there are risky things happening” – Corn
• Evaluating the risks of dollar-pegged tokens is essential for informed decision-making.
• The disconnect between perceived and actual risk poses challenges for users.

Transparency and verification in DeFi projects

• A lack of verifiable proof in some DeFi projects indicates potential fraud.
• “When we asked them about it there was no proof of anything” – Corn
• Transparency is crucial for building trust in DeFi protocols.
• Understanding the operations of DeFi projects is essential for risk assessment.
• The absence of verifiable proof is a significant red flag for investors.
• “Nothing that they were doing was verifiable” – Corn
• Ensuring transparency and accountability is vital for DeFi’s credibility.
• The need for verifiable proof highlights the importance of due diligence.

The role of reputation and long-term strategies in DeFi

• Reputation is paramount in the curation space.
• “Reputation is everything and we’re completely blind to accepting short term incentives” – Corn
• Short-term incentives should be avoided for sustainable business practices.
• Focusing on user adoption and long-term strategies is beneficial.
• “Profits that are generated from those events are not going to be as significant” – Corn
• Understanding the ethical considerations in DeFi is crucial for strategic planning.
• Long-term thinking can influence strategic decisions for projects.
• The importance of trust and integrity is emphasized in the DeFi ecosystem.

The future of DeFi and decentralization trends

• The trend in DeFi is moving towards reducing reliance on centralized entities.
• “Reducing counterparty risk and relying on maybe something that is just a smart contract” – Corn
• The use of smart contracts is expected to increase over time.
• Understanding the current landscape of DeFi is crucial for strategic planning.
• The shift towards decentralization highlights the evolution of DeFi.
• “Getting the human element out of decision making will become more popular” – Corn
• The future of DeFi involves balancing decentralization with security.
• Embracing decentralization can enhance the resilience of DeFi protocols.