Bybit Learn
Bybit Learn
21 Th12 2021

What Is Yearn Finance (YFI) in DeFi & How Does It Work?

This year, cryptocurrencies and blockchain-based projects reach new heights in growth and value. Yearn Finance, more commonly known as YFI or Yearn.Finance, is one of the ERC-20 tokens to show a massive price rally surpassing Bitcoin’s value (for a time) at over $25,000 per token. Still, it remains unheard of despite its phenomenal performance on their projects and vision.

So, if you’re searching for an answer to the question “What is Yearn Finance and how does it work?,” here’s precisely what you need to fully comprehend its concept and the processes it involves.

What Is Yearn.Finance?

Yearn.Finance is an open-source, decentralized finance (DeFi) lending protocol based on the Ethereum blockchain. It works as a yield aggregating platform to maximize the user’s investment by automatically moving the user funds between DeFi lending protocols, such as Compound, Dydx, Curve, or Aave

As of now, Yearn is one of the most popular and most decentralized DeFi projects in the crypto sector. While the YFI is the native cryptocurrency of Unlike Bitcoin, YFI is a governance token that boasts of the autonomous protocol.

That means users of the platform have the rights to cast a vote on the protocol’s direction that favor their intention the most. As of now, YFI is one of the largest Ethereum-based tokens prioritizing automated yield farming strategies.

Yearn Finance

How Does Yearn.Finance Work?

Yearn.Finance is designed to autonomously move users’ funds to more profit-giving providers by locating the protocol offering the best annual percentage return (APR). It is considered a revolutionary breakthrough in the DeFi sector due to the potential yields parallel with stablecoins. 

Think of Yearn.Finance as a decentralized lending platform that lets users deposit ERC-20 stablecoins such as DAI, USDC, USDT, TUSD, or SUSD into the protocol. As a return, stakers receive an equivalent amount of yTokens. So technically, a YFI coin is just like any other ERC-20 token. But instead of lending the deposited stablecoins into any particular protocol, the Yearn Finance platform automatically switches the tokens into a protocol with the highest yield to maximize the user’s profit.

When comparing YFI and other tokens, it possesses better automation and flexibility that has never been achieved before on the blockchain. The best part? The network only charges a small fee deposited into the platform’s pool and is then distributed among YFI token holders as dividends.

A Retrospective Look at Yearn.Finance

Andre Cronje is the founder of the popular DeFi protocol— Yearn. Although this protocol only launched in July 2020, it has already achieved significant adoption in the crypto sphere. In early September, the platform’s native token, the YFI coin, even reached a peak value of approximately $44,000.

Yearn Finance Price Chart

The original goal behind the platform stemmed from Cronje handling money for friends and family. He was looking for a way to put stablecoins to work for a profit. At the time, the most popular protocols were Aave, Fulcrum, Compound, and dYdX. As such, Cronje would manually check these protocols to see which was offering the best annual percentage return (APR). 

To avoid manually moving tokens around and paying gas fees all the time, he coded some smart contracts that would do the figuring for him. He then wrote the iterations for the yTokens. These yTokens could read the normalized APR output and move to the place, offering the best returns.

Subsequently, it became the basis for Yearn.Finance, which Andre first used himself before opening it up to others. The increase in the number of users had a positive effect on the protocol. That’s because each time a user interacted, the smart contracts checked to see if a rebalance was necessary. A higher frequency of interactions resulted in more shifts between protocols. And more shifts will produce a higher return. 

Currently, Yearn produces better returns in aggregate than any of its downstream sources on its own. The concept is relatively simple – the protocol sends more capital to the place with the highest returns. 

How Do YFI Tokens work?

YFI is the native token of the Yearn.Finance platform. It is purely and simply a governance token, allowing holders to vote on decisions that affect Yearn.

YFI Governance Token

YFI is an ERC20-token used for all governance activities on the platform, like voting on a protocol upgrade/change proposal. While there are only 30,000 YFI coins that have been minted and fully distributed to date.

To participate in the protocol, users need first to stake their YFI in a governance contract. They then receive voting rights and a percentage of protocol profits for each of Yearn’s products at regular intervals. To claim rewards, users need to vote, and once they have voted, their YFI tokens will be locked for three days, i.e., they won’t be able to un-stake the asset.

YFI Total Locked Value (TVL)

Firstly, TVL represents the dollar value of all the tokens locked up in a smart contract in a decentralized lending project. When analyzing the YFI’s TVL, most of the capped supply (29,968 coins) has entered circulation. Thus, the token’s success was marked by an all-time high price of $43,873 in mid-September 2020 when it’s TVL in the parent protocol surged to over $676 million. As the buying sentiment grew, the YFI/USD exchange rate soared YFI over 13,0000% growth in value. The upshot? YFI is now the first cryptocurrency to worth more than Bitcoin (BTC) per unit.

What Is The Yearn.Finance’s yEarn Product Used for?

Yearn.Finance has several features or services users can tap into now. The yEarn component of the protocol lets users deposit any of several stablecoins: DAI, USDC, USDT, TUSD, sUSD, and more. And as of now, Yearn looks for the DeFi platforms that produce the highest yield. 

In the early days of yield farming, this is what Cronje built yEarn to do: move stablecoins around to the best place for growing them as conditions changed.

Over time, the upgrades and improvements to secure the protocol make Earn more sophisticated. So, the size of the protocol’s user base means yEarn attempts to estimate the optimal allocation rather than simply dumping all of its holdings in one place. The allocation constantly changes because other users are going in and out of the liquidity pools directly.

Yield Farming

Yield farming became popular after the public realized the potential of staking crypto assets for a passive return. In the yEarn protocol, yield farming sees crypto assets moved parallel to the chase of a liquidity pool offering the best APY from week to week. That also means moving into riskier pools from time to time.

In June 2020, staking stablecoins (USDT, USDC, DAI, or TUSD) into the Y pool will yield approximately 896% Annual Percentage Yield (APY). As of now, there is more than $650 million worth of crypto assets staked in the Y pool. Thus, making it one of the best returns in the decentralized finance sector. 

What Are The Yearn.Finance’s Vaults Used For?

Vaults are one of the main components of Yearn.Finance. They are the mechanism that temporarily holds the profits of stakeholders. While these profits are then distributed to YFI holders once the treasury is at or above $500k. And the profits are distributed as yCRV tokens.

Vaults represent the pools of funds that follow specific strategies. The use of vaults helps the community members work together to build strategies that determine the best yield protocol. They allow YFI coin holders to use any asset as liquidity. Liquidity is used as collateral, and collateral is managed at a safe level to avoid a default. The protocol then borrows stablecoins and puts the stablecoins to work on some farming. It then reinvests the earned stablecoins.

Is Yearn.Finance Different from Other Crypto?

Yearn Finance works similarly to other lending platforms. It lets users deposit any ERC20 stablecoin such as DAI, USDC, USDT, TUSD, or SUSD into the protocol and receive an equivalent amount of yTokens (i.e., yDAI, yUSDC, yUSDT, yTUSD, and ysUSD). The yTokens are like any other ERC20 token. The underlying stablecoin is then made available to lend.

Rather than lending the stablecoins into any particular protocol, the Yearn Finance platform automatically switches the tokens into a protocol with the highest yield to maximize user profit.

The network charges a small fee deposited into the platform’s pool and can only be accessible to YFI token holders.

How Sustainable Is The Yearn.Finance Ecosystem?

The purpose of Yearn.Finance has always been long term sustainability and symbiosis. Its creator Andre Cronje originally designed the ecosystem to be conducive to participating and optimized mutual settings. When a proposal is made, the goal is not to benefit yearn but to tweak all the systems engaged to benefit all participants and YFI coin holders.

“Yearn itself is a profit-generating system. It’s been profitable since day one, and it’s been able to recoup any of the expense I’ve needed and that is why I didn’t feel any need to assign any token when I was happy to play by the same rules as everyone else.”

  • Andre Cronje

Currently, YFI has a market cap of over $700mil with a trading volume of $300mil per 24 hours. At the same time, there are over 29k of YFI trading actively in 151 active markets.

Most experts agree that Yearn.Finance is very sustainable because its profitability is very high. The yields are high mainly because YFI is supported by a speculative enthusiasm for protocols with liquidity mining programs. The reason why “farmers” can get “yields” in three-digit and higher percentages is because speculators continue to buy new tokens on exchanges. It means speculators pay for the “yields” that “farmers” get in a more straightforward concept.

What Are The Challenges and Risks of YFI?

Although YFI is currently a pioneer in DeFi yield farming, it is not the only lending platform. Several (often questionable) YFI forks have recently appeared on the market and new Yield Farming aggregators such as APY.Finance and asset management platforms such as Set V2. Which may pose new challenges for Yearn.Finance in terms of competition within the industry. 

Furthermore, the current returns from yield farming will fluctuate, and it won’t last forever. There are plenty of variables that can cause the public to stop buying new tokens and focus on those with stable value. Eventually, it’ll lead to a lower return. Experts and crypto enthusiasts express the hope that the launch of Yearn’s planned insurance, exchange, leverage, and liquidation products may diversify YFI revenue streams and provide option value for YFI holders.

For now, YFI remains one of the most exciting advances in decentralized management. The protocol created a large, diverse, and enthusiastic community of people who are very invested in the success of yEarn. Additionally, Cronje’s leadership and diversification of Yearn products are impressive. 

It’s important to remember that YFI is still a work in progress. That means there are no guarantees of a successful outcome or that the YFI token will remain valuable.

Yearn.Finance is a public, open-source project, and anyone can decide to imitate the protocol and concept. Over the year, Yearn has encountered many imitators. However, not many possess the proprietary technology which gives Yearn.Finance the edge over its competitors.

The YFI token value is mainly associated with the community around yEarn and reflects people’s confidence in the protocol and the people behind it. That makes it unpredictable and highly speculative.

What Is The Future of Yearn.Finance?

The Yearn Finance project has enjoyed vast interest since its launch. After the YFI token crossed the value of $40,000 within a few months of its inception, many labeled it ‘better than Bitcoin.’ 

The nature and efficient protocol are what drives the efficiency of Yearn. For this reason, the platform’s user base will likely continue to increase in the years to come. Especially given that Cronje has announced a new Deriswaps to be rolled out soon and the upcoming partnership of Yearn and Cream. Aiming to focus on core lending and leverage products that increase yields with leverage.

Cronje’s intention to ‘dumb down’ DeFi for the average person turned out to be a winning strategy that catapulted Yearn to crypto stardom. His efforts to simplify the process and provide a better user experience stimulated the mass adoption and growth of YFI. 

Even though Yearn’s yield farming strategy involves a high level of risk, the protocol has so far managed to balance it out and provided some excellent returns this year with relatively limited risk.