What is Yearn Finance?


7 mins read April 28, 2021

Decentralised finance (DeFi) is a relatively new area of finance involving numerous cryptocurrency projects and applications, one of which is Yearn Finance. Yearn Finance is built around the foundation of DeFi as it provides an automated model that facilitates yield farming. Andre Cronje created yearn in 2020 before it was handed over to the community for modifications and optimisations.

What is Yearn Finance?           

Do you think it is possible to earn more crypto with your crypto? Yes! This is very much possible through something known as yield farming. Yield farming involves complicated strategies that allow you to navigate different DeFi projects, like lending your crypto, to maximise profits. This enables yield farmers to earn the most profit through crypto farming. yearn.finance is built to maximise profit for yield farmers as it helps to reduce the inconsistencies in their yields. Think of Yearn as a portal that allows you to maximise the best profits from several DeFi projects and provides you access to its unique products.

Yearn Finance Vault

Yearn.finance, also known as yEarn, is built on the Ethereum blockchain. It is modelled to generate the highest profits for its users on deposits of stablecoins, ether, and several altcoins. Yearn operates through investment strategies referred to as Vault, also popularly considered the "Robo adviser for yield."

The vaults are designed to minimise the costs of transacting on Ethereum. A yield farmer has to pay specific fees to operate an account to participate in yield farming. However, pooled together yield farmers can share the cost of these transaction fees among themselves.

While Vault is a crucial part of how yearn.finance works, it isn't the only service it offers. Yearn also incorporates Zap, which allows users to exchange traditional stablecoins for liquidity provider tokens. Other projects still underway include yInsure and Stablecredit, which aim to eradicate the need for conventional banking systems in insurance and lending, respectively.

What is the YFI token?

YFI is the governance token of Yearn Finance that allows users to vote on the modifications to be made on the Yearn protocol. Since its introduction in July, YFI has risen to become one of the largest Ethereum-based tokens. According to Andre Cronje, the token is strictly for governance and has no intrinsic value to traders. At its launch, Cronje stated that he hadn't kept any for himself and expected everyone to source it on even grounds. This is why many consider the launch of YFI the fairest cryptocurrency launch after bitcoin, as it allows anyone to generate the coins at the same cost. There are only 30,000 YFI tokens in supply, which are used solely for making decisions that affect the protocol on which Yearn finance rests.

However, shortly after its launch, the YFI token was listed on several exchanges. Its value increased by a whopping 3583% from its initial trading price of $3 before the end of July, and its price as of April 2021 was about $48,304.

You can get YFI through farming: which involves providing liquidity to a decentralised exchange, balance, or investing in Yearn Finance products. Perhaps, the reason why YFI tokens increased so much in value is that investors perceived them as an essential asset in Yearn Finance. In order to reduce the inflation rate of the token, the community opted to reduce the limit of the supply to 30,000 tokens. However, this didn't sit well with some users who decided to instigate a fork and created the YFIL, better known as DFI.money.

The YFI token can also be purchased at a price. YFI holders can actively participate in governance and earn a dividend for voting. However, to cast a vote, they need to stake their YFI for about three days, making it difficult for them to withdraw. Yearn generates profits by charging 5% on withdrawals which are then distributed among YFI holders. The rewards to investors who use their tokens to participate in governance actively incentivise participation in its community. This is perhaps why Yearn has one of the most active communities in the crypto space.

What is YDAO?     

YDAO refers to people in the Yearn Finance ecosystem who voluntarily donate their YFI to fund developers working on modifications for Ethereum. Donating 0.1 YFI equates to one share in YDAO, which is used to fund projects on Yearn. Shareholders of YDAO are tasked with voting or approving project proposals that Yearn would benefit from.

How yEarn works

There is a lot of buzz about Yearn Finance as it creates an avenue for investors to generate high yields. Newcomers can deposit into the Vault and earn profits they may not have attained based on their skills alone. This has helped to minimise significant risks for yield farmers. All investors have to do is hold their asset in the Vault and let Yearn put it to use. While in the Vault, stablecoins are borrowed against the assets in the search for profit through yield farming.

Yield farming operates similarly to staking crypto as it allows investors to earn rewards from adding funds to liquidity pools. The DeFi ecosystem is built on the money Lego model that enables the protocol to build on another protocol. Yearn Finance has been able to use this model to help investors put their idle assets to profitable use.

When a user makes a deposit, they are rewarded with a token that equates their share in the liquidity pool. Users can redeem their deposits along with the gains at any time of their choosing. The liquidity pool is run with the automated market maker (AMM), allowing users to switch between currencies. This means that a user who has initially deposited ETH can withdraw the equivalent value plus gains in DAI. The purpose of this initiative is to allow users to switch between stablecoins at no extra charge.

The purpose of this initiative is to allow users to switch between stablecoins at no extra charge.

Yield farming doesn't come without risks, as investors may lose their assets in the liquidity pool if their collateral falls below the limit set by the protocol. Investors should place higher collateral as shields to protect their stakes from being liquidated.

Yearn rewards its users with tokens for contributing to the liquidity pool. This act is known as liquidity mining, which differs from cryptographic mining, which cryptocurrencies like bitcoin adopt. Therefore, users can mine a new token every time they contribute to the project. However, as more deposits are made into this project, the depositor receives fewer incentives. This is because the tokens are distributed at a fixed rate per block, which is often proportional to the percentage of deposits provided in a block.

What do you need to know about Earn?

Earn is one of the financial derivatives of Yearn Finance. It facilitates the deposits of several stablecoins and wrapped BTC. Earn seeks to generate maximum profits for its users by sourcing for DeFi projects where they can earn the most yield. Cronje built the foundation of Yearn Finance on the purpose of Earn, which is to facilitate more profits by moving stablecoins around to the highest profit project.

However, because of the size of Earn, it has to be strategic in sourcing for the highest yield pool. This is because Earn cannot dump all its holding in one high-yielding pool at once without changing the course of the pool. In this regard, Earn is structured to source out the highest yield pools, and it is then rotated around these pools to generate the most profit. Earn is structured to rebalance itself as users make withdrawals and deposits in the liquidity pools.

The future for Yearn Finance

Andre Cronje may have handed over the running of the Yearn to the communities; however, some sceptics argue that it is still centred on the creator. Following Cronje's decision to leave the DeFi space, there was a fall in the price of YFI tokens as investors feared the project might crumble in his absence. However, as Yearn expands and inculcates new products and team members, the focus on him is beginning to wane, allowing Yearn Finance to take on its role as a DeFi project.

Yearn was created to enable more participation in DeFi protocols. These protocols may, however, be too complicated for the average individual to understand at one glance. However, modifications are being made to this protocol to make it more user-friendly.  With increased adoption, Yearn Finance would be able to attain these goals. This would allow users from across the globe to partake actively in its governance to ensure it meets the needs of the masses.

Yearn Finance remains one of the most successful DeFi projects because it stands not only to help generate higher yield profits but also focuses on the decentralisation of protocols. In this regard, users, irrespective of the price they stake, can earn rewards simultaneously and at the same cost. Following YFI's launch, users can take active roles in decision-making, even those that include hiring developers and marketers for Yearn Finance. The profits generated from Yearn are distributed among YFI holders and the team of developers and marketers. This is perhaps why Andre considers it a dividend-yielding asset.

Final thoughts

Yearn Finance is built around helping investors maximise profits by putting their idle crypto to work. As an incentive for its users, it launched the revolutionary YFI token, which has restructured the perception of governance in the crypto space. This is because it has led to increased participation of its members in the governance of Yearn. Yearn Finance still has several projects in the works driven towards the decentralisation of financial structures like yInsure. With these projects and many more, Yearn is on the pathway to make revolutionary changes in the DeFi ecosystem.

Disclaimer: This article is meant to provide general guidance and understanding of cryptocurrency and the Blockchain network. It’s not an exhaustive list and should not be taken as financial advice. Yellow Card Academy is not responsible for your investment decisions.

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