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[Company Watch] Harvest Finance, the Passive Defi Fund Earning the Risk-Takers’ Money

The Serenity Research
Coinmonks

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Disclaimer: The Serenity Fund does not have a position in FARM but uses Harvest as a supplement to its asset management strategies.

Harvest Finance is a new DeFi project, and in essence, a passive fund. Created in August 2020 by an anonymous team, Harvest is not a fork of any big platform. It’s a yield aggregator like Yearn, except that it does not have a star founder. As of today, it’s AUM is larger than Yearn. It used to have 1 billion AUM and a market cap over US$100m, but it was hacked away US$24m in Oct. This gave the market, as well as its AUＭ and FARM, its native token, a big shock. Since then, Harvest staggered along, and still remained an attractive service and at the same time an interesting investment target.

Harvest’s Business

As a yield aggregator, Harvest’s service is straitforward. Taking stablecoins and LP tokens from investors, put into leading DeFi platforms’ smart contracts, take a cut of the yield but compensate investors with its FARM tokens.

Currently, investors can deposit and stake stablecoins, synthetic version of BTC, and LP tokens of Sushiswap.

Harvest’s yield for stablecoins is somewhere around 30% to 40%. The yield comes from taking a bit more risk, e.g. new stablecoins on Curve that have a higher CRV rewards, like BUSD or USDN; or farm other platforms like Idle. And lastly, incentive investors with a touch of its own platform token FARM. For instance, if you take the risks of Compound, and Idle, and Harvest, then your USDC yield today is 34.92% (after 30% cut), based on today’s FARM price.

​Harvest take a 30% on the yield and instead, it compensates investors its FARM tokens. The amount of FARM tokens for each pool is pre-determined, so the reward APR varies inversely with the size of the pool. The maths for a simple investor is simple: if you have a coin, say crvUSDN, and you are ok with the risks of Compound and Curve, then your calculation will be whether 70% of CRV + FARM offered by Harvest is greater than 100% of CRV offered by Curve. (You need some CRV staking to achieve this yield in this case.) If it’s greater, you will also need to consider if the extra yield is justifiable for taking the platform risk of Harvest.

FARM Token and its Value

Just like Yearn’s YFI token, FARM is cashflow-backed. 80% of FARM tokens in circulation are staked with the platform, and they are entitled to weekly distribution of the 30% income. The 30% income to FARM stakers are executed by market buy-back and distribution in pro rata to their staked FARM tokens. The chart below shows the entire Harvest/FARM value logic:

​It might look complex but in one line: Harvest takes away 30% of yield from investors, and give back FARM in return; then the 30% is used to buy back FARM in the market to distribute to FARM stakers. From here we can work out a theoretical minimum price of FARM for investors to accept this 30% exchange: FARM price > (AUM x expected yield x 30%) / Weekly emission to Harvest liquidity providers. Currently it’s US$51. We call this Expected Price risk, below this point its tokenomics do not stand on a macro level.

On the FARM holders side, currently the APY for staking FARM is over 220% (with a week’s profit sharing included), as stated on the front page of the website.

If we calculate the weekly earnings of Harvest, using data on its stats page, we will get an annualised entitlement of US$24.9m (weekly profits of US$1.2039m x 52 weeks /130% x 30%, adding the FARM staking award of 1561.71 FARM). The total staked FARM is US$29.2m (US$50.8m x 57.4%). This translates into an APR of 85.2% (or roughly 232% APY, if compounded weekly) for FARM stakers.

​Further, the FARM price is supported by pool 2 scheme. You can deposit FARM into pools or just staking to earn more FARM, at about 100% APY. (There’s a high variation of the APY here and we are not sure yet why.) Generally, we would recommend staking FARM rather than providing liquidity for FARM, for better yield with similar risk exposure.

​FARM Token’s Long-term Value

Let’s recap on the above analysis:

  • Total AUM is US$613m. Excluding FARM staking and liquidity pools, its vault AUM is US$562m;
  • Profit (before 30% cut) is US$0.93m per week, annualised to be US$48.1m. This means the APR on vault AUM is 8.6%;
  • FARM stakers get 30%, or US$14.4m. This means a PE ratio of 3.5x, given FARM’s market cap of US$50.8m;

This is not bad as-is. In our analysis of Curve, Curve’s PE is 7.9x, if you lock CRV for 4 years and 30.3x if you do not lock. In the case of Yearn, if we look at the YFI’s earning rate of 0.87%, we can estimate a PE of 114.9x. In other words, if we are just looking at earning power, FARM is a good buy.

In the long-run, well, we look at one-year-from-now which is a long-run for the cryptocurrency industry, the total FARM in circulation will be 663,826, about 1.73x of the circulation 384,042 now. In order for FARM to maintain it’s current market value or price, its AUM in a year’s time will have to increase 73% to about slightly over US$1 billion, or earnings to increase to 15% on AUM, or a combination of both. In the event that Harvest exceeds this expectations, which is very likely that its AUM goes up to US$1 billion, or its PE ratio goes up from 3.5x, which is also very likely due to market sentiment for Defi in general, then FARM price will go up. However, the increase in AUM does have a negative bearing on FARM, as FARM’s price has to be high enough to appeal investors to trade their 30% earnings. So this is the tokenomic model risk (Expected Price risk) that holders of FARM should watch out.

What kind of money is Harvest making for its FARM holders?

As explained above, Harvest seeks slightly risky projects, like new stablecoins in Curve, or Idle and Keep, for better yield. But FARM does not take those risks, the risks are born by investors of those pools. This is why the title of this article, FARM is yielding from risk-takers of the crypto industry; and given the animal spirit of this industry, Harvest is doing it right. Another part is arbitraging, for some pools, Harvest is taking away 30% of somewhat 40% yield and only gives back a few percent of FARM yield in return. This is probably a case of information asymmetry, and again Harvest is doing it right.

Harvest’s risks will be conventional security risks, third-party smart contract integration risks, and in Havest’s case, its Expected Price risk (price should drop below a certain point for the tokenomics to stand.) No pain, no gain. So, doHardwork().

(Serenity Team, 16 Dec 2020)

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The Serenity Research
Coinmonks

Written by The Serenity Research

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