What is yearn.finance? (YFI)
The Beginner’s Guide
yearn.finance is a group of protocols running on the Ethereum blockchain that allow users to optimize their earnings on crypto assets through lending and trading services.
One of a number of emerging decentralized finance (DeFi) projects, yearn.finance provides its services using only code, removing the need for a financial intermediary like a bank or custodian. To do this, it has built a system of automated incentives around its YFI cryptocurrency.
The yearn.finance platform consists of several independent products, including:
- APY – A data table that shows interest rates across different lending protocols.
- Earn – Which identifies the highest interest rates users can earn lending an asset.
- Vaults – A collection of investment strategies designed to generate the highest returns from other DeFi projects.
- Zap – Which bundles several trades in one click, saving on costs and labor.
Users earn YFI tokens by locking cryptocurrencies in yearn.finance contracts running on the Balancer and Curve DeFi trading platforms, using the yearn.finance platform.
In this way, yearn.finance capitalizes on a practice commonly called “yield farming,” in which users lock up crypto assets in a DeFi protocol in order to earn more cryptocurrency. The more assets users lock in a platform, the more tokens they are awarded by the protocols.
In its first month of operation, the yearn.finance platform attracted nearly $800 million in assets, making it one of the fastest-growing DeFi projects to date.
Who created yearn.finance?
Yearn.finance was launched by independent developer Andre Cronje in 2020.
Notably, Cronje received no funding for the yearn.finance protocol and reserved no tokens for himself prior to yearn.finance’s launch. This makes yearn.finance different from most DeFi projects, which typically raise investment from venture funds then assemble a team to develop the protocol.
In July 2020, the yearn.finance platform launched its native cryptocurrency, YFI.
How does yearn.finance work?
yearn.finance is a protocol designed to deploy contracts to the Ethereum blockchain as well as other decentralized exchanges running on it, such as Balancer and Curve.
In this way, users are trusting that YFI’s contracts, as well as those in associated contracts on Balancer and Curve, will deploy on Ethereum in order to provide the advertised services.
Lending and Trading
The majority of yearn.finance’s services – Earn, Zap and APY – seek to enable users to lend or trade their cryptocurrency.
Users can then deposit their DAI, USDC, USDT, TUSD or sUSD on the yearn.finance platform to receive those interest rates.
Likewise, Zap allows users to complete several investments with one click. For instance, a user can trade DAI for yCRV (another DeFi cryptocurrency) in one action, compared to three actions across the yearn.finance and Curve platforms.
This saves the user time, opportunity cost and transaction fees.
APY (which stands for annual percentage yield) searches across the lending protocols that Earn uses, and gives the user an estimate for how much interest they can expect to earn, on an annualized basis, for a certain amount of capital.
Vaults, yearn.finance’s most complex service, allow users to follow active investment strategies using the platform’s self-executing code. In this way, Vault’s are like actively managed mutual funds.
As of Aug 30, 10 strategies are available on Vaults.
Still in its experimental stages, these strategies are expressed in Solidity, meaning a user will need some familiarity with code to understand how the Vaults operate.
However, investing in a Vault is straightforward. yearn.finance’s user interface allows a user to deposit popular coins such as DAI and USDC in each strategy, with each strategy displaying its historical return on investment.
Why does YFI have value?
YFI is the cryptocurrency that governs the yearn.finance platform.
This means anyone who owns YFI tokens can vote on the rules users must follow when using yearn.finance by voting on proposals. To be enacted in yearn.finance’s code, a proposal needs more than 50% of the votes. Anyone may make a proposal, but only YFI holders may vote on it.
Of note for investors is that YFI has an initial fixed supply of 30,000 tokens, but this supply could increase if YFI holders elect to do so.
Still, YFI has value as it is used to encourage users to lock cryptocurrencies in yearn.finance and its contracts running on Balancer and Curve.
For example, anyone who owns YFI is able to receive revenue collected by the protocol in the form of fees. yearn.finance charges a fee of 5% for its Vaults service and and 0.5% on Vaults and Earn. The yearn.finance system retains $500,000 of fees and distributes the rest to YFI holders.
According to research service Messari, over $460,000 in fees was accumulated within a week of the YFI token being launched. This means yearn.finance could be on pace to generate up to $21 million in annual fees.
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Why should I use YFI?
The yearn.finance protocol may be of interest if you wish to earn interest on your cryptocurrency without trusting those funds to a custodian or intermediary.
YFI tokens may also be an interesting investment if you believe that yearn.finance will continue to attract users seeking interest rates and yield from their holdings.
Note: yearn.finance and other DeFi cryptocurrencies remain highly experimental and may be subject to risks not yet foreseen by even the industry’s most seasoned experts.
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