Yam Finance, an experimental protocol of Decentralized Finance (DeFi), saw its market capitalization reduced to zero in a matter of minutes on August 13. With it, DeFi’s major tokens, including Compound, Yearn Finance and Balancer, also sank.
Compound, the second largest Bitcoin Rush protocol in the international market, saw its market capitalization fall by nearly $100 million. Yearn and Balancer, which had a strong momentum in recent weeks, fell by 7% to 13%.
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The Yam protocol gained strength in the DeFi space as the second purely decentralised project after Yearn Finance. It allowed Yam’s holders to govern the protocol, deploying a decentralized governance model.
But on August 13, Yam co-founder Brock Elmore announced that the protocol was in error. The bug within Yam’s override function crippled the protocol’s governance system.
In an official media release, Yam’s developers wrote:
„Shortly after 7am UTC on Thursday August 13th, we submitted a governance proposal and voted with what we originally thought were enough votes to enact it. Shortly thereafter, with the help of security experts, we concluded that the override bug would interact with the governance module and prevent this proposal from succeeding.
Elmore emphasized in a later tweet that he is grateful for the „crazy“ support from the community. He said:
„I’m sorry, everybody. I have failed you. Thank you for the crazy support today. I’m in a lot of pain.“
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Why did Yam fall, and why did DeFi’s main tokens fall at the same time?
Because of its decentralized structure, when Yam was first launched, it allowed users to stagger with several cryptom currencies to win Yam. The staking model allowed the protocol to distribute Yam’s tokens in a transparent way.
The distribution model was unique and popular, and attracted the attention of industry executives, such as BitMEX CEO Arthur Hayes. Within 24 hours, nearly half a billion dollars of capital was locked into the Yam protocol.
Initially, Yam opened investment funds for tokens from Compound, Aave’s Lend, Chainlink’s Link, Wrapped ETH (WETH), YFI, Synthetix (SNX), Maker (MKR) and Uniswap V2 LP. But most of the tokens that were used in Yam’s staking pools fell out after the bug.
Most of the DeFi tokens were corrected after Yam officially confirmed the bug in the override function in the protocol. This caused the DeFi index perpetual exchange contract on FTX to fall sharply, causing the DeFi market to collapse.
Although no assets were lost at Yam, the value of the token itself fell to zero. Kelvin Koh, co-founder of an Asian-based venture capital firm, Spartan Black, said that Yam’s large holders were most affected. He stated that:
„So much for YAM’s farming. YAM’s large holders were burned in the harshest way….. However, fortunately no assets were lost. I’m sure someone somewhere is already preparing the next iteration of the farming.
Most of the amount of Yam held by users was distributed through staking, but some users bought Yam on decentralized exchanges, like Uniswap.