#11 Food For Thought - Pickles
Today we talk about preserving cucumbers in vinegar
This series is intended as an introduction to the world of Decentralized Finance by exploring it’s young but rich history. Today we will describe events and protocols which first popularized the terms, “Farming”, “Staking”, and “Decentralized Finance”.
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Pickles - off peg bad, on peg good
Here’s an image of pickle.finance from September 11th 2020 - only 11 months ago.
Off peg bad, on peg good
You then see written in the first dark gray box :
This is an experiment in using farming to bring stablecoins closer to their peg.
What the hell is this? Is it a scam!? Are they farming cucumbers and then somehow the act of fermentation helps stablecoins? What is farming and what do pickles have to do with stablecoins?
Update (08/3/2021 6:19PM EST) -
Nothing really. Well they did for a minute, but Maker managed to fix the peg of DAI and pickle finance never actually launched the stablecoin strategy.
The focus on stablecoin peg lasted a matter of weeks and never actually launched because Maker managed to fix the peg of DAI. When Uniswap launched their liquidity mining in September, the focus switched to yield auto-compounding and has been there ever since.
Yams - Yield farming
The birth of the YAM cryptocurrency in August 2020 helped popularize the term Decentralized Finance (DeFi). From Kraken’s “What Is the Yam Protocol” :
This was one of the first projects to use other protocols as the building blocks for a new product. This made many realize an emerging space (DeFi) was growing with fundamental buildings blocks (base protocols) that could be put together to create something bigger than the sum of its parts. Similar to how the Web and Social Media are an amalgamation of protocols and programming languages.
By combining these existing protocols YAM was attempting to create a stablecoin. It used an algorithm that would automatically adjust the supply daily to keep YAM pegged to $1 USD. Users could provide liquidity in a pool that paired YAM and ETH on Uniswap. The pair allows users to perform trustless swaps of YAM and ETH with a small fee paid to the liquidity providers.
When you provide liquidity on Uniswap you receive pool tokens that you can return when you are ready to withdraw the liquidity from the pool. Similar to getting a chip at the casino or Dave & Busters. To incentivize users to deposit into this liquidity pool, yam.finance allows user to “stake” their pool tokens and receive YAM tokens in return. The term “yield farming” has become popularized in DeFi to describe the staking of collateral to earn yield. In this case the collateral is the liquidity pool tokens. There you have it. This is where all the food and farming analogies come from.
The YAM token has become one of the first cautionary tales in DeFi as it has been unable to hold its $1 peg. A second version of the YAM protocol has been released and a third is on the way. The current marketcap of YAM at the time of writing is around $7 million.
Broken Jar - The Hack
Okay - back to pickles.
Following the analogy of farming: allowing the produce you’ve farmed to ferment would be where pickle comes in. The team behind pickle created “Jars” that you deposit your liquidity tokens into and then the Pickle protocol will automatically harvest your yield and reinvest it creating a compounding effect.
Even better, the protocol allowed users to zap funds back and forth between Jars each containing various assets. The idea would be investor funds could more easily (with reduced fees) flow to the highest yielding asset and help them earn more.
With all new ventures comes risk!
On November 21, 2020 a hacker used an exploit to steal $19 million in DAI, a decentralized stablecoin, from one of the pickle jars. The remaining funds locked in the protocol were safe from the exploit but many began to rapidly withdraw their funds in fear of another hack.
The price of the pickle token fell 50% on the announcement.
Sounds bad right?
Yearn - The Buy Out
In the business world if a company suffers catastrophic losses due to unforeseen circumstances but many believe the underlying product is still useful. It can be common for another company to acquire them. The pickle hack created an opportunity for anyone willing to bet on the protocol being recoverable and still useful.
Enter Yearn. At the time of the hack yearn.finance had established itself as one of the blue chip DeFi yield providers. The protocol had passed many security audits and though it offered lower yields, the yields were sustaining overtime better than other protocols. Yearn saw the pickle.finance hack as an M&A opportunity.
It was announced that Yearn would merge with Pickle.
Yearn would lend it’s security and yield farming expertise to salvage the Pickle Jars and return faith to investors. Post merger the total value locked (TVL) in Pickle would merge with Yearn adding $31 million to its $433 million TVL at the time. On top of this a crypto token, CORNICHON, was distributed to all the users that lost funds in the hack. Over time those users can redeem the CORNICHON tokens to be repaid by the earnings of the pickle protocol.
The price of the pickle token rose 30% on the announcement.
Update (08/3/2021 6:19PM EST) -
Although several articles excitedly describe this potential merger and the price rallied. The merged never actually happened.
Yearn did not 'buy' Pickle nor did the TVL merge. We do now have some 'wrapped' Yearn vaults but the TVL sits with us not double counted.
What is true.
Last week $61,000 was paid back to CORNICHON holders.
Fermentation - Set It And Forget It
When you go to pickle.finance in the modern day (just 11 months after launch) you see a different story. First, you notice while still humorous, the site looks sleeker, more serious and professional. The catch phrase is no longer some cryptic crypto comment only the most in-tune DeFi’r could understand. It reads :
The set and forget yield maximizer
No more “Farming”, “Staking” or talk about bringing stablecoins to peg. Just maximizing yield.
Pickle Finance auto-compounds rewards to boost yields
Got it! Like a savings account but with high-yields. Now this is starting to sound like something a normal person could understand. You will have your existing rewards boosted to earn a higher yield through compounding interest. Sounds like a familiar story.
Where does this yield originate though? Easy, other DeFi protocols.
Here’s the list of some of the protocols Pickle Finance supports
Pickle Finance has recently launched on Polygon and now supports
You can see the full list of supported protocols at pickle.finance.
That’s it! The term Decentralized Finance was popularized by tokens named after foods that utilized the combination of various protocols to create new finance products. Farming and Staking are analogous to depositing funds into a saving account to earn interest. Only the rewards are bigger but so are the risks.
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