Yam Finance, an experimental DeFi protocol, crashed to zero after the discovery of a rebase bug. Compound, Yearn Finance, and Balancer plunged shortly thereafter.
Yam Finance, an experiential Decentralized Finance (DeFi) protocol, saw its market cap crash down to zero within minutes on Aug. 13. With it, major DeFi tokens, including Compound, Yearn Finance and Balancer, plunged as well.
YAM/USD price performance. Source: Coinmarketcap
Compound, the second-biggest DeFi protocol in the global market, saw its market cap drop by nearly $100 million. Yearn and Balancer, which saw strong momentum in recent weeks, dropped by 7% to 13%.
Price chart of Compound. Source: TradingView.com
The Yam protocol gained steam in the DeFi space as the second purely decentralized DeFi project after Yearn Finance. It allowed Yam holders to govern the protocol, deploying a decentralized governance model.
But on Aug. 13, Yam co-founder Brock Elmore announced the protocol had a bug. The bug within the rebase supply feature of Yam crippled the governance system of the protocol.
In an official medium post, Yam developers wrote:
“Shortly after 7am UTC on Thurs August 13th, we submitted a governance proposal and cast a vote with what we originally believed were sufficient votes to be able to enact it. Shortly thereafter, with help from security experts, we concluded that the rebaser bug would interact with the governance module and prevent this proposal from succeeding.”
Elmore emphasized in a later tweet that he is thankful for the “insane” support from the community. He said:
“i’m sorry everyone. i’ve failed. thank you for the insane support today. i’m sick with grief”
Why did Yam fall, and why did major DeFi tokens drop in tandem?
Due to its decentralized structure, when Yam first launched, it allowed users to stake various cryptocurrencies to earn Yam. The staking model enabled the Yam protocol to distribute Yam tokens in a transparent way.
The distribution model was unique and popular, garnering attention from industry executives, such as BitMEX CEO Arthur Hayes. Within 24 hours, nearly $500 million worth of capital was locked in the Yam protocol.
Initially, Yam opened staking pools for Compound, Aave’s Lend, Chainlink’s Link, Wrapped ETH (WETH), YFI, Synthetix (SNX), Maker (MKR), and Uniswap V2 LP tokens. But most of the tokens that were used in Yam staking pools crashed after the bug.
The majority of DeFi tokens corrected after Yam officially confirmed the rebase bug in the protocol. It caused the DeFi index perpetual swap contract on FTX to sharply drop, causing the DeFi market to slump.
While no assets staked in Yam were lost, the value of Yam itself dropped to zero. Kelvin Koh, the co-founder of an Asia-based venture capital firm Spartan Black, said big Yam holders were hit the hardest. He said:
“So much for YAM farming. The big YAM hodlers got burnt the hardest……Anyway, thankfully no assets were lost. I am sure someone somewhere is already preparing the next iteration of crop farming.”
Most of the Yam held by users were distributed through staking, but some users bought Yam on decentralized exchanges, like Uniswap.
Yam 2.0 being built
Within hours after the crash of Yam, its developers said in a follow-up medium post that Yam 2.0 is underway. Elmore said he would only be involved in a Yam fork if “it has a professional four-week audit.”
