From going viral to near death to resurrection, why does renowned researcher Hasu believe "Yam" is a Ponzi scheme of some sort?

The rise, vulnerability, near-death experience, and push for version 2.0 of the DeFi project Yam Finance not only demonstrates the current frenzy in the DeFi space but also sparks curiosity about what makes Yam stand out. Renowned options exchange Deribit researcher Hasu shared his personal insights, suggesting that Yam resembles a decentralized Ponzi scheme.

Mechanism of Yam Finance

According to reports, Yam Finance aims to achieve a "low-volatility cryptocurrency" with a flexible supply adjustment mechanism known as reBase. When the price deviates from the target price, the protocol can inflate or contract the supply of the currency to all Yam holders based on market conditions to achieve a new price equilibrium.

Each time YAM implements an expansion (expanding the currency supply), a portion (approximately 10%) of the tokens is used to purchase yCRV (an interest-bearing stablecoin) and added to the Yam protocol's treasury for management by the Yam community.

The initial target price of YAM is $1, and a flexible supply adjustment is implemented every 12 hours.

The Risks of DeFi

Yam Finance's official statement at the beginning claimed it was an "experiment" in "fair mining, governance, and flexible supply." Despite the fact that the contract code had never undergone a formal audit, and the development process from scratch to launch took only 10 days, YAM locked $600 million on the first day (24 hours).

On the next day (8/13), a smart contract vulnerability unexpectedly permanently locked $750,000 of investor funds. Many believed Yam was on the brink of collapse, but the protocol's funds did not continue to decline, instead rising from $200 million back to $400 million.

Deribit researcher Hasu was very curious about this phenomenon and came up with two explanations.

Fair Distribution Mechanism

Hasu previously believed that this is similar to Bitcoin's proof-of-work mining issuance mechanism, with no presale or premine. The only way to obtain Yam is by staking assets on the platform for liquidity mining, giving everyone an equal chance to receive the tokens.

Flexible Supply Mechanism is just a Gimmick

As mentioned earlier, the core of YAM is a currency with a flexible supply, with an initial target price of $1 and a flexible supply adjustment every 12 hours. Hasu pointed out:

Although the founders did not explicitly state it, they hinted that YAM could be a stablecoin, which is far from the truth. Coins with adjustment mechanisms, like Ampleforth or YAM, are just as unstable as Bitcoin, replacing price fluctuations with fluctuations in token quantity.

When a YAM needs to be adjusted by a factor of 10, a YAM worth $10 will be split into 10 tokens, each worth $1. In a rational market, the purchasing power of each YAM holder remains the same, only the quantity of coins changes.

However, Hasu stated that compared to models with "fixed supply, price volatility" (like Bitcoin), YAM not only lacks any upward potential but, worse still, the public generally lacks understanding. So if this mechanism cannot make the token have a better economic model or become a better "currency," why use this mechanism? Hasu gave the reason:

I think it's because the public doesn't understand the adjustment mechanism, but this mechanism has become an incentive for retail investors to enter. Previously, Ampleforth had a market value of up to $700 million, then quickly collapsed because token growth requires the push of retail investors, and traders who understand the mechanism are happy to see this. After inflation reaches a certain level of growth, they exit the market, and the token collapses.

So, What Exactly is Yam?

Hasu believes that Yam is a more elaborate version of the "Nakamoto Scheme." The term Nakamoto Scheme was coined by law firm partner Preston Byrne in 2017 to describe situations where early investors achieve high returns through new investors, but the decentralized structure distinguishes it from traditional Ponzi schemes.

Bitcoin itself is a Nakamoto Scheme. The interesting question is: will this bubble eventually burst?

Hasu points out that YAM needs a reason for the public to hold it, and this reason must be based on utility, not just expectations of an increase. At present, YAM and many similar projects may find it difficult to become "money" due to design flaws. The remaining options are to change through community governance or to completely overhaul the protocol itself.

As of the time of submission, the protocol has successfully transitioned to YAMv2, and trading pairs are available on Uniswap v2, Mooniswap, Gate.io with a supply of approximately 3.72 million tokens and has initiated on-chain governance for voting on future YAMv3.