Yearn.finance, a popular decentralized finance (DeFi) project, automates yield earning strategies, eliminating the need for manual farming strategies. It does this with help from its functional currency, YFI. This guide covers everything you need to know about Yearn.finance in 2024.
KEY TAKEAWAYS
► Yearn.finance automates the process of yield farming, making it easier for users to maximize their returns and limit gas fees.
► Yearn Vaults are a core product that allow users to earn yield by automatically reallocating their crypto assets to the most profitable strategies.
► The YFI token governs the Yearn ecosystem, giving holders the ability to vote on protocol upgrades and decisions.
► Yearn.finance comes with inherent risks, including smart contract vulnerabilities, market fluctuations, and liquidation risks.
What is Yearn.finance?
Yearn.finance is a collection of decentralized finance (DeFi) products that streamline yield farming strategies, such as lending, liquidity providing, and yield generation.
In other words, it is a DeFi product that serves as a doorway to several protocols, allowing users to take advantage of the best yields for earning crypto assets via lending and other trading methods. This decentralized application (DApp) launched on Ethereum, but has since launched on Optimism, Fantom, Base, and Arbitrum.
To understand what this truly means, you must understand the environment before Yearn. In 2020, yield farming was an extremely popular strategy for earning passive income. The downside was that all the traders moving assets across various protocols caused a spike in gas fees.
Yearn automated this process of manually moving crypto to the best-performing liquidity pools on exchanges, borrowing and lending protocols, and other DeFi applications, abstracting a lot of the complexity away from the average user.
Overall, Yearn.finance aims to bring the booming DeFi space to the average user. The platform is monitored and controlled by YFI holders and several independent developers.
What’s the story behind Yearn.Finance?
Yearn.finance was created in Feb. 2020 by a developer named Andre Cronje. He is a South African businessman and software developer. The concept was born when Cronje examined and compared DeFi protocols that could offer the best APY to maximize his crypto earnings. Compound, Aave, Fulcrum, and dYdX were the most popular.
However, Cronje reportedly found the whole process monotonous, so he decided to create the first version of the Yearn protocol. The idea behind the project was to automate the process of exercising the optimal performing strategies to maximize annual percentage yields (APYs).
In an interview, Cronje stated that the project didn’t receive any funding, and he didn’t reserve any YFI tokens for himself before the launch. Subsequently, Cronje decided to build a team to develop the protocol and raise funds from venture capital investments.
In Feb. 2020, the protocol released the Earn feature. A few months later, Yearn.finance launched its cryptocurrency, the YFI token.
How does Yearn.finance work?
Yearn.finance works by moving crypto assets from one DeFi protocol to another, allowing users to maximize their returns. The platform transfers users’ assets between DeFi applications such as Aave, Dydx, and Compound to increase your APY.
It works by deploying Yearn’s contracts on the blockchain to provide optimum services for users. This way, Yearn monitors the funds on the connected applications to ensure that they remain in the liquidity pools that offer the most profitable yield.
Earn
Yearn’s Earn feature uses the best-performing strategies for users to maximize their yield by searching for the platform with the best interest rate. These platforms are usually Aave, Compound, Dydx, etc.
Yearn supports many tokens and stablecoins. Once you deposit any of these coins into the protocol, the platform automatically converts your assets into “ytokens,” such as yUSD, yDai, etc. It keeps track of the value of your deposit.
After these assets have been converted, they are moved to any of those yield platforms to ensure a higher interest rate. Notably, these ytokens are known as ‘Yield optimized tokens’ on Yearn.finance.
Annual Percentage Yield (APY)
As explained above, this explores all the available lending protocols to Earn users, calculates them, and then analyzes the expected interest rate. It does this for a certain amount of crypto they invest and provides the potential annual interest rate.
The platform uses zapper.fi, which allows users to exchange funds in and out of liquidity pools. In addition, zapper.fi enables users to make several deposits with just a single action rather than toggling across multiple platforms, like Balance and Curve.
For example, you can trade USDT for different DeFi assets, such as yCRV. These steps are additional blockchain transactions that cost gas fees and time. However, zapper.fi makes the whole investment process swift and reduces transaction fees.
What are Yearn Vaults?
One major distinct product of Yearn.finance is Yearn Vaults. Basically, Vaults allows users to earn on their crypto investments.
Yearn Vault – yVault is something like a savings account for your crypto investments. It receives your capital, processes it through different strategies, and then utilizes the best yield available.
Yearn Vaults offer more functionalities than lending, borrowing, and other basic functions the standard DeFi protocol offers. It offers users multiple strategies to maximize user returns.
These strategies often include providing collateral and liquidity, borrowing multiple assets, including stablecoins, receiving trading fees, and farming different tokens while selling them for profit. Notably, each of these Vaults follows an authorized strategy approved by the Yearn ecosystem.
The concept of the Vault was introduced in Aug. 2020. Similar to the standard Yearn protocol, when you invest money into a Vault, you get the equivalent of your investment in ytokens.
Once you have made the deposit, the Vault divides the investment into Vault holdings and strategy holdings. Vault holdings store inactive funds not used by any strategy, while the strategy holdings store the active funds.
How do you use Yearn Vaults?
You’ll see a list of Vaults with a proven history of the ROIs, then you can select your preferred Vault strategy and deposit USDT or any other token into it. The profits are used to invest in the same asset of each Vault, creating a reliable strategy.
However, for those that want to unlock their funds from the pool, they release their funds based on each of the investor’s stakes in the pool. The funds initially go down to the Vault holdings before the complete withdrawal.
Yearn vaults have no deposit or withdrawal fees, and the majority have no management fees and only a 10% performance fee.
Who are strategists?
These are people who create essential strategies for yVaults. Anybody can become a strategist. However, to be a validated strategist on Vault, you need to pass through some process that often revolves around mainnet testing, code review, and security review.
For creating a validated strategy, these strategists are incentivized with a fraction of the performance fee. They often get about 10% of the yields from the specific strategy.
Presently, there are more than 20 strategies per Vault, and each aims to improve diversification to manage investment efficiently during different market scenarios. Furthermore, each strategy has a capital cap, which is useful to avoid over-distributing funds to a dead strategy
Labs
Labs was a high-risk yield farming product that was a part of Yearn V1. Described as a multifaceted DeFi Bank, Labs allowed users to earn and carry out essential DeFi functions like borrowing and lending.
Furthermore, Yearn Labs enabled users to swap their crypto assets with various other diversified assets. Labs have since been phased out of Yearn’s primary products.
Iron Bank
Iron Bank is a decentralized protocol to many lending platforms. It enables authorized outlets to borrow funds with little or no collateral. Yearn.finance integrates the use of iron bank, allowing yVaults to come up with the most profitable yield farming strategies and cross-asset strategies.
Yearn aims to boost every Yearn strategy via the Iron Bank. Users will be able to invest their stablecoin assets and borrow an equal amount of ETH. Then enter liquidity pools while utilizing leveraged yield farming products.
What is the YFI token?
YFI token is the innate currency of the Yearn ecosystem, and it bootstraps the whole system’s operations. YFI holders can vote on several proposals and submit rules that govern the ecosystem.
To implement a change, the proposal must acquire over 50% of the total vote. It is important to know that while anyone can make a proposal, only YFI holders have the right to vote.
YFI holders benefit from a number of incentives that the ecosystem automatically allocates. These incentives make the YFI token different from other tokens.
History of YFI token
Cronje launched the YFI token in June 2020, just a few months after its main ecosystem launched. The token allocation was based on fairness and incentivizing Yearn users. Simply put, users who lock their assets in Yearn.finance and its contracts get YFI tokens as rewards.
To ensure a fair system, the YFI token had no pre-mine, no team reward, and no VC distribution. All the tokens were given to the users of the ecosystem.
Tokenomics
The token distribution started with allocating 10,000 YFI tokens to the liquidity providers of the yCRV pool. The liquidity providers had to lock up their yCRV LP tokens for YFI tokens reward. Subsequently, the protocol added two more Balancer pools, each containing about 10,000 tokens, making a total of 36,999 YFI tokens.
These tokens were staked through a Yearn interface that has been discontinued. Afterward, stakers were rewarded in YFI for seven days until the supply maxed out.
Token model
YFI token comes with an in-built minting function. This function was initially supervised by Andre Cronje, but was later handed to a multisig wallet. This happened briefly after the start of token emissions.
Because the intention behind YFI was to decentralize control completely, there were no concrete plans for emissions after the initial 30,000 YFI distribution. YIP-1 approved a weekly distribution of YFI, but the execution of that proposal required a second decision about how to distribute, which did not come to fruition.
YFI token has become quite popular for temporarily exceeding the value of Bitcoin — the largest crypto asset. In May 2021, the YFI token reached an all time high of $93,000, significantly exceeding the price of BTC, thereby drawing the attention of many investors.
Notably, the price of YFI is so high because there are only 36,666 YFI in supply, but there is a high demand. Making it one of the assets with the lowest circulating supply. Particularly lower than the supply of 21 million BTC.
Token as governance
YFI token employs a system of governance called “constrained delegation.” This involves a system whereby YFI holders delegate their governance powers to self-governing groups like the Multisig and yTeams, thus enabling them to be creative. This gives token holders control while making governance powers discrete.
How does governance work?
The Yearn ecosystem is controlled by YFI token holders. These token holders shape the future of the system. They influence decisions concerning the project, such as proposing and voting on new feature proposals. YFI governance works by submitting and approving the majority vote and then implementing the proposals.
Once the vote is more than 50%, they are utilized by a nine-member multi-signature wallet. Once six out of the nine wallet signers sign these changes, they implement them. YFI holders vote for the members of the multi-signature wallet and are liable to change from the prospective governance votes.
What are the risks of using Yearn Finance?
As flawless as the whole mode of operation might seem, Yearn isn’t without risk. The more new strategies are being added to the protocol, the increase in the possibility that a strategy could lead to investment losses. There are a few risks attached to Yearn.finance, including:
- Smart contract risks
- Market risks
Smart contract risk: In a bid to completely evacuate intermediaries and financial middlemen, Yearn.finance uses smart contracts built on the Ethereum network. Unfortunately, a smart contract bug or hack can disrupt the code and completely collapse the DeFi protocol or certain vaults and strategies.
In May 2021, Yearn.finance suffered an attack that resulted in over $10 million loss. An attacker hacked the Vault and carted away more than $2million.
However, YFI has so far ensured the security and safety of users’ funds. The protocol has built a wide range of products to offer users the best DeFi services.
Liquidation risk: Like regular finance, depositing funds in Vaults requires collateral. This makes it vulnerable to liquidation if you don’t meet some certain standards. For example, MakerDAO requires a 150% collateral of the deposited funds and once the ratio drops below that, the user faces the threat of complete liquidation.
Is Yearn.finance worth it?
Yearn.finance is a big whale in the DeFi space and has proven sustainability since its launch in 2020. It looks to be a project that deserves recognition, considering the protocol’s token distribution and various products.
It is worth doing more research on the investment options and automated yield farming, should this be of interest. However, remember to interacting with any DeFi protocol carries risk. Crypto is a volatile market and you can easily lose money.
Disclaimer: This article is for informational purposes only and should not be considered investment advice.
Frequently asked questions
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