FLOW-PERFORMANCE RELATIONSHIP IN DEFI YIELD AGGREGATOR

Abstract

Decentralized Finance (DeFi) is a new financial infrastructure with particular characteristics and application services similar to traditional financial products, such as exchange, lending, derivatives, and asset management. This paper empirically investigates Yearn finance protocol to demonstrate a flow and performance relationship and compare the results to mutual fund research in traditional finance. The selected protocol is one of the fastest-growing and largest in DeFi yield aggregator protocols for on-chain asset management, which launched in the Ethereum blockchain in 2020. Our main observations are retrieved from the Ethereum blockchain using Web3.py -one of the python libraries- from January to December 2021. We employ the fixed-effect model in our regression and analysis of the insight protocol by looking at a transaction level. According to the findings, there is a positive non-linear relationship between fund flows and recent performance for using stablecoin invested in the pooled fund, which the result is consistent with mutual fund research in traditional finance. On the other hand, we cannot find this relationship for using cryptocurrency. Then, we look further into stablecoin holder behaviors. Finally, our findings show that, on average, the stablecoin holders prefer the leverage strategy, which offers a chance of higher returns, including higher risks.