Yearn vaults are like saving accounts for crypto assets, so they are supposed to grow. But there are vaults with negative APY, most recently the crvSETH vault. This has resulted in a large exodus of funds from this vault. The vault now contains less than 1/3 of TVL compared to one month ago. It is also not the first time that a vault has advertised negative APY.
So are people losing money in these vaults?
Before we answer the questions, let us briefly look at how a Yearn vault works. The following does not apply to yveCRV and yvBOOST as they are special vaults and work differently.
Each vault has an input token and an output token. Input token is the token that is deposited into a vault, and output token (also called yVault token) is what is received back as a deposit receipt. You can find the list of all Input and Output tokens here.
The amount of yVault tokens received back is calculated based on the share price of the yVault tokens.
If you deposit 100 eCRV into crvSETH at share price = 1.1
For crvSETH, input token = eCRV and output token = yvCurve-sETH
After one year, the share price goes to 1.2 and we withdraw.
Each vault has strategies that are responsible for earnings on the deposited tokens.
The crvSETH vault has two strategies: StrategyConvexsETH and CurveeCRVVoterProxy. You can find how much is deposited into each strategy here. It shows that 100% of the funds are deployed to the StrategyConvexsETH strategy.
The StrategyConvexsETH strategy lends eCRV (your input token) to Convex.Finance and earns CRV and CVX rewards which are sold for more eCRV and are deposited back into the strategy. This increases the number of eCRV in the strategy. The vault harvests eCRV from the strategies increasing the supply in the vault, which in turn causes the share price to go up.
Image 4 below shows harvests in the crvSETH vault. Harvests are always positive so the share price can only go up.
So how come the APY is negative when the share price can only go up?
Yearn v2 vaults charge fees on the deposits to the vault.
The performance and management fees are both deducted from the vault during each harvest.
Yearn documentation also mentions:
Vaults will only harvest if it is profitable after fees so that users won't withdraw less than their deposit
Meaning the harvests only happen when they are profitable. So why is the APY negative?
The answer is in how the APY is calculated. The APY advertised is the net APY which includes fees. APY are estimates based on the current yield. Usually last 7 day returns are taken and annualised for the year.
Suppose last 7 day yield is 0.03%
Since the harvests don't occur on a set basis, annualising the current rate does not show the true picture and it may not equal the actual yield on the vault over that period. The actual earnings will be known once the earnings have been harvested.
If you are interested in more details about APY and ROI calculation, you can read about it here.
For actual yields on your deposits, check out the Vault Tracker in Wido which shows a graph of the actual yield over time, based on the change in share price.
Yearn tries its best to only harvest when it is profitable for the user after fees. So unless there is a bug, users should not lose money inside yearn vaults.
The crvSETH vault did start showing positive APY starting Sept 4th and it was due to a change in the management fees. It was lowered to 1.5% from 2% which gave the net APY a little bump to make it just above 0%.
Curious to know if there are vaults with better performance? Head over to https://app.joinwido.com