Harvest Finance
What: A yield farming aggregator that automatically selects the best yield pools to farm. Similar to a quant hedge fund.
Why: Absolute valuation @ P / CF ~3.3x (at price = $215) is cheap. Also good relative valuation vs. Yearn Finance which has similar economics but is at 7-8x FARM's MCap.
Things to look out for
Business model: FARM acts like a quant fixed income fund that reinvest all proceeds from crypto yield farming automatically. Harvest then collects a 30% fee on profits. Why this is useful is users 1) don’t have to go through the trouble of finding best yields and reinvesting, 2) suffer high gas fees – FARM aggregates investments into the best yield strategies so gas fees are spread across a large capital base.
Tokenomics: Every week, FARM issues more tokens, 70% goes to users of the platform (liquidity providers) while the remaining 30% goes to operations and developers. Current token supply at 545k, this tops off at 690k in 3.5 yrs. Token issuance per week is decreased 4.44% WoW, meaning very high token issuance at the start, which tapers off at the end.
Cash flow: Of all the profits made, 70% (not to be confused by the same figure for token supply) is distributed to users of the platform. 30% is kept is performance fees. This 30% is then used to repurchase FARM on the open market, creating upward pressure on prices, thereby acting as a mechanism to directly return FARM owners capital. Bear in mind that once repurchased, these same shares are distributed amongst stakers of FARM, meaning this does not have any impact on the token supply.
Valuation: Cash flow is therefore = (TVL / Total Value Locked) * (returns on the platform) * (profit share %). As it stands, we are at $600m TVL, ~25% returns which implies ~$45m of cash flow p.a. At the current market cap of $140m, this is roughly 3.3x P / CF.
The artwork is amazing too.
Comparison with Yearn
Yearn Finance pretty much does the same thing, with some important differences.
1. Yearn is listed, Harvest is not. YFI is listed on major exchanges, FARM is not (the only way to get access to FARM right now is through UniSwap which incurs high gas fees). This means listing in major exchanges could be potential catalyst
2. Yearn is higher profile relative to Harvest. Yearn has a “face to the company”, FARM is a lot more low profile (anonymous developers). Having an outspoken leader is somewhat important in crypto, but having a well-functioning protocol is probably more important
3. Yearn 2/20 base/performance fees, Harvest 0/30. The YFI token is purely for governance and does not yet have a mechanism to redistribute earnings back to token holders; current fee structure is 2/20, similar to hedge funds (this means for CF for Yearn to be > Harvest, return needs to be less than 20%). Bear in mind Yearn Finance has the exact same amount of TVL ($600m).
4. Harvest: More strategies churned out than Yearn. Harvest is releasing strategies at a much faster clip than Yearn, which could also mean more potential for higher yield strategies, which could result in higher AUM.
5. Yearn probably more secure than Harvest. Yearn has fees that go into a treasury fund, while Harvest buys back everything. There was an exploit at Harvest in Oct’20, causing a loss of $24m, 10% was recovered. This is now being rectified with a 0.5% weekly issuance being channeled to buyback the IOU token GRAIN, which have been distributed to affected users. Yearn Finance was also subject to a hack in Feb’21, which resulted in a $11m loss. However, they covered this with treasury funds, arguably making Yearn more secure than Harvest.
