Yeti Finance: A Deep Dive into Deals and Mechanisms

Yeti Finance is a decentralized borrowing protocol operating primarily on Avalanche (AVAX). It allows users to deposit various yield-bearing tokens as collateral and borrow against them in YUSD, a stablecoin pegged to the US dollar. The platform attracted users through its innovative collateralization model and promised to unlock significant liquidity within the DeFi ecosystem.

Core Functionality and Token Collateral

The primary function of Yeti Finance is lending. Users deposit interest-bearing tokens like staked AVAX (sAVAX), LP tokens from Trader Joe (JLP), or tokens representing staked positions on other protocols (e.g., Benqi's QI) as collateral. This is the heart of how users interact with the platform. Unlike traditional lending platforms that often require a single asset as collateral, Yeti Finance aimed to accept a diverse range of yield-bearing tokens, effectively unlocking their value for borrowing. The platform allows users to unlock more capital from yield bearing assets.

The Role of YUSD and Stability Mechanisms

YUSD serves as the stablecoin that borrowers receive when taking out loans. Maintaining the $1 peg of YUSD is critical for the protocol's stability. Yeti Finance implemented several mechanisms to achieve this: liquidations when collateral falls below a certain threshold, and incentivized arbitrage opportunities for users to buy or sell YUSD to bring its price back in line with the peg. The goal was to keep it pegged to 1 dollar.

Liquidations and Risk Management

To manage risk, Yeti Finance employs a liquidation mechanism. When the value of a borrower's collateral falls below a predetermined Loan-to-Value (LTV) ratio, the collateral is auctioned off to repay the debt. This is critical for maintaining protocol solvency. Liquidations are crucial for maintaining the solvency of the protocol. The LTV ratio is a dynamic parameter that adjusts based on market conditions and the perceived risk of the underlying collateral. Early on the LTV was set fairly high. This was changed after the platform got hacked.

The Price Oracle and its Vulnerability

A crucial component of Yeti Finance is the price oracle, which provides real-time price feeds for the collateral assets. These price feeds are used to determine the value of collateral and trigger liquidations. Unfortunately, Yeti Finance suffered a major exploit due to a vulnerability in its price oracle in December 2022. An attacker was able to manipulate the price of a specific token, allowing them to borrow against inflated collateral and drain a significant amount of funds from the protocol. This was a major blow to the project.

The Aftermath of the Exploit

Following the exploit, Yeti Finance paused operations and initiated an investigation. The team worked to identify the vulnerability and implement fixes. They also explored options for compensating affected users, including a potential restructuring of the protocol or a token buyback program. The exploit significantly impacted user trust and the future viability of the project is uncertain. This led to significant drops in YUSD price.