Flow-performance relationship in DeFi yield aggregator

Abstract

Decentralized Finance (DeFi) is a new financial infrastructure with applications similar to traditional financial products, such as exchange, lending, derivatives, and asset management. This paper empirically investigates Yearn finance, one of the fastest-growing and largest in DeFi yield aggregator protocols for on-chain asset management, to demonstrate the flow-performance relationship and compare it with mutual funds in traditional finance. According to the findings, there is a positive non-linear relationship between fund flows and recent performance for using stablecoin deposited. In contrast, we cannot find this relationship for using cryptocurrency. Then, we look further into stablecoin holder behaviour and our findings show that, on average, they prefer the leverage strategy, which offers a chance of higher returns. Finally, we examine the event study of internal and external changes to see how investors respond. For the internal changes, the publication of deploying new strategies for both stablecoin and cryptocurrency vault does not affect investors' immediate reaction. However, only stablecoin holders have directly responded to protocol partners' announcement of the partnership with Yearn finance for external changes.