The Complete Guide to Yearn Finance – What You Need to Know
The decentralized finance (DeFi) sector is expanding at lightning speed and becoming ever more relevant in the new digital economy. However, as it evolves, some of its initial purposes lose contour and relevancy. One of these now-fading goals is offering broad access to anyone who wants to trade, invest, or deposit assets outside the traditional financial system.
This evolution is not user-inflicted in any way. The mechanisms that power the DeFi ecosystem increase in complexity, thus making the market less approachable for beginner investors in cryptocurrency. Fortunately, here is where Yearn.Finance steps in to save the day.
Yearn.Finance aims to make investing in crypto assets easier for people who are new to the topic. It targets those who do not have the patience to research what cryptocurrencies are, how blockchain works, or to discover the meaning of stablecoins, DApps, smart contracts, and yield farming.
This protocol offers convenient access to the multi-billion dollar market of decentralized finance, and our complete guide to Yearn.Finance should help you understand how to use it.
What is Yearn.Finance (YFI)?
Yearn.Finance is an aggregator platform for decentralized finance (DeFi) that enables investors to maximize their annual profits through yield farming.
The service is ideal for entry-level crypto investors or traders who are not tech-savvy. Yearn.Finance reduces user interaction with DeFi applications. It allows them to increase the annual percentage yields (APY) on their cryptocurrency deposits with minimal involvement or financial know-how.
Yearn.Finance may be confusing to people who are new to DeFi. The platform hosts several decentralized protocols with very similar names.
One of them bears the same name as the platform, yearn.Finance. This one is a separate aggregator mechanism that automatically shifts the users’ deposits between DeFi lending protocols such as Compound and Aave to increase their APY’s as much as possible.
There are plenty of other protocols on the platform. Some of them are up-and-running, while others are still in the testing stage, and they include:
- finance – It is a leveraged stablecoin exchange that enables users to borrow stablecoins with up to 1000x leverage.
- finance – A protocol that enables users to liquidate funds in Aave through flash loans.
- exchange – An exchange that enables users to manually deposit funds and use them for Automated Market Maker (AMM) pools.
- finance – A protocol that allows the tokenization of debt in other DeFi protocols.
At the moment, yearn.Finance is the most popular protocol in the Yearn.Finance ecosystem. A large community of investors and crypto traders is steadily growing around this DeFi platform that has been launched less than a year ago. Its evolution along with the users’ participation is governed through the native YFI token.
A Brief History of Yearn.Finance
Yearn.Finance is one of the most successful performers in the cryptocurrency space in 2020. The protocol was released in February 2020, and by the end of summer, it had a total value of locked assets nearing $1 billion.
The main brain behind yearn.Finance is Andre Cronje, a brilliant and highly-experienced software developer that shouldered the rapid rise of the multi-billion dollar DeFi industry with his innovations.
Cronje is the man behind the iEarn project, which was one of the first decentralized finance aggregators on the market. His philosophy relies on wider and easier access to decentralized finance, which in his view has become almost inaccessible for regular people and beginner investors.
He briefly left the iEarn project at the beginning of 2020 only to return and transform it into the powerhouse of DeFi that Yearn.Finance is today.
On July 17, 2020, Andre Cronje announced the launch of a native token for the yearn.Finance protocol under the name Yearn Finance (YFI). Thanks to the $8 million in assets under management, the token provided an APY of about 10.58% since its launch.
Shortly after its release, YFI was listed on Uniswap and delivered returns upwards of 35,000% within its first week of “life.”
As of early October 2020, yearn.Finance is among the Top-10 protocols on the DeFi market with more than $600 million in locked value assets.
What is the YFI token?
YFI is an ERC-20 token that enables governance on the protocols that compose the yearn.Finance ecosystem. It was released on July 26th, 2020 without an ICO or pre-mining involved in the launch process.
Also, the developers did not take a share of the tokens upon its release as it happens with most cryptocurrency issuances.
There is a maximum supply of 30.000 YFI that users can earn when using the yearn.Finance protocol by providing liquidity. Besides the coins, they also gain governance privileges.
A part of the community has decided to use these rights and vote for a fork in the Yearn protocol. At the moment, there is an initiative for the second issuance of 60 000 tokens that would take the YFII denomination once the fork would complete.
Since its release, almost the entire amount of YFI has entered circulation. The token is freely-tradable and it can pair up with fiat currencies and cryptocurrencies, including stablecoins.
YFI enjoyed a popularity peak in late August-early September 2020 when it reached an all-time high (ATH) value of $43,873.82.
At the time of this writing, YFI has a market capitalization of $392,441,411. One token is trading for $13,095.49, which is more than the current value of Bitcoin (BTC). The native token of the yearn.Finance protocol has a 24h-trading volume of over $720 million.
Some of the main crypto exchanges where you can trade YFI include:
How does Yearn.Finance work?
Yearn.Finance works by attracting liquidity from a niche of investors that the cryptocurrency industry has neglected so far. This niche is composed of those who do not want or do not have the time to actively research a crypto asset before putting their money on it.
Yearn.Finance reduces the risk of losing capital while maximizing the returns. It manages to do so by locking the investors’ funds into DeFi protocols like Curve, Compound, and Aave.
Nevertheless, the risk of losing money on Yearn.Finance remains. Like any financial venture out there, this DeFi aggregator is not 100% safe, and nor does it pretend to be. Even its creator, Andre Cronje, has admitted that the recent code audits do not necessarily make the platform safer than other top DeFi protocols, and urged investors to do their due diligence before opening their digital wallets.
The Yearn.Finance website does not have a whole lot of documentation explaining how the protocol works, but the mechanism behind it is relatively easy to understand. Here’s a simple interpretation of it:
- Finance supports stablecoins like DAI, USDC, USDT, TUSD, and sUSD
- A user deposits any of the supported stablecoins into the yearn.Finance protocol
- The stablecoins are converted into an equivalent amount of ytokens, also known as yield optimized tokens. For example, a deposit of DAI tokens becomes yDAI, USDC becomes yUSDC, and so on. Users can later employ the ytokens to earn YFI tokens.
- The yearn.Finance protocol shuffles the deposit between other DeFi protocols like Curve, Compound, DyDx, and Aave. The movement depends on which stablecoin asset pool is generating the highest APY.
- The protocol charges a 0.5% withdrawal fee and a 5% subsidization fee.
Yearn.Finance is a fully decentralized protocol governed by community votes. It means that every aspect of its functioning may change in time depending on the community’s intentions.
In terms of governance, token holders can express their opinion on community proposals in a democratic fashion. One YFI token is equal to one vote.
Users can make proposals about platform changes, which can only be tabled if 33% of YFI token holders agree to do so. On the other hand, a proposal can be vetoed if more than 25% of YFI token holders oppose it. For a proposal to reach the implementation stage, it requires the votes of more than 50% of YFI holders.
The Bottom Line – The Complete Guide to Yearn.Finance
Yearn.Finance has emerged in the cryptocurrency market at the right time. It powered the DeFi revolution and attracted outside investors who, for various reasons, were not keen to put their money in digital assets.
Both the crypto market and the DeFi sector can grow further if they lure in more liquidity, and Yearn.Finance is already an expert in it.
The protocol’s surge from $8 million to almost $1 billion in locked value assets in less than eight months is nothing short of spectacular. It also shows that there is a huge demand from less tech-savvy investors to access cryptocurrency ventures through simple and intuitive user experience.
While the Yearn.Finance protocol is yet to celebrate its first anniversary, it is safe to say that it has a bright future as long as decentralized finance remains a glowing attraction. With new features waiting to roll out and a fork on the way, the platform should cement its long-term value and build on its popularity even more.