What is Yearn.finance (YFI) and how does it work?

CoinTelegraph

One of the fastest growing DeFi projects, Yearn.finance has spawned a range of core products that provide passive earnings on crypto assets.

Launched in July 2020, Yearn.finance has emerged as one of the major players in the emerging decentralized finance (DeFi) space that provides services such as staking, lending aggregation and yield generation on the Ethereum blockchain. Boasting the most user-friendly crypto trading services that are being meted out autonomously, the project uses its native ERC-20 Yearn Finance (YFI) cryptocurrency to incentivize those who lock their crypto tokens in Yearn.finance contracts through any of the supported platforms such as Balancer and Curve DeFi.

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With all of its protocols operating on the Ethereum blockchain, Yearn.finance is managed through developers that act in accordance with governance proposals voted for by YFI holders. Crafted with the vision of simplifying the process of investing in DeFi products, the Yearn.finance platform also offers its users the ability to invest in other DeFi protocols in addition to earning a percentage of the platform’s fees in proportion to their YFI holdings. 

Who is behind Yearn.finance?

A veteran of the cryptocurrency and DeFi space, Andre Cronje launched the Yearn.finance protocol without raising any funding either through public or private means. Instead, the software architect relied on his over two decades worth of software development experience to launch the protocol first and then issued YFI tokens to retail investors, which are currently limited to a maximum supply of 36,666 tokens. 

Apart from the extremely rare approach adopted by Cronje, the Yearn.finance platform has benefitted from his previous experience as the founder of the Keep3r Network and his association with notable DeFi projects that include the likes of PowerPool, Hegic, Cover, Pickle, Cream V2, SushiSwap and Akropolish, among others. Unlike other founders, Cronje didn’t reserve any YFI tokens for himself prior to the Yearn.finance protocol’s launch, believing that a truly decentralized blockchain technology-based platform should not have the founder hanging on and dictating its future course. 

In fact, the history of Yearn.finance can be traced back to his efforts over the past five years to launch cost-effective financial products for the unbanked segment of the world’s population and has been heavily influenced by his efforts in Africa toward achieving the same. By choosing to focus on creating value for the entire DeFi ecosystem of developers, partners and investors on the Yearn.finance platform, Cronje has provided scores of crypto entrepreneurs with a new perspective on how to build DeFi products for the masses. 

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 What is Yearn.finance (YFI) and how does it work? 

Built on the Ethereum blockchain, the Yearn.finance protocol eliminates the need for a financial intermediary like a bank and offers crypto investors and tokenholders access to its range of lending and trading services that include Vaults, Zap, Earn and APY. The Yearn.finance protocol can deploy its smart contracts on the Ethereum blockchain as well as other decentralized exchanges that operate on it. Offered through a simplified web interface, Yearn.finance is a radical experiment in the DeFi world and has one sole aim- to maximize returns on crypto assets for its users. 

The most complex among its products is the Vaults product, which acts as a mutual fund of sorts and has 50+ different vaults or staking pools for Yearn.finance’s users to deposit their tokens in. These Yearn.finance vaults are basically investment strategies in other DeFi projects like Convex Finance and Compound Finance, with pre-programmed logic deciding when to shift capital and code automation deciding the yield generation and rebalancing process. Users additionally benefit from the lower gas costs and low transaction fees levied by Yearn.finance on each vault-related transaction.

The Earn product, Yearn.finance’s first product, relies on the interest rate changes on the Aave, dYdX and Compound protocols to let its users benefit from the best interest rates at all times. A lending aggregator, in principle, Earn allows Yearn.finance’s users to allocate their crypto tokens to either or all of these liquidity protocols and earn higher interest rates than that provided by traditional finance instruments. For those invested in stablecoins such as Binance USD (BUSD), USD Coin (USDC), Tether (USDT), TrueUSD (TUSD) or Dai (DAI), the Zap product enables them to swap between liquidity pools on the Curve Finance platform and deposit into any of Yearn.finance’s vaults using almost any token on a single click. 

This results in not only cost and time savings but also simplifies the entire task as many individual trades are coupled with Yearn.finance’s coding. The platform also provides its annual percentage yield, or APY, tool that compiles the interest rates offered by the various DeFi lending protocols at a glance, thereby helping crypto investors in narrowing down on the right platform for further investing. 

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What can you do with Yearn.finance?

The Yearn platform has something for everyone-investors, developers and even other DeFi projects that are interested in partnering with Yearn.finance. For crypto investors, the Earn, Zap and APY products help them to lend their crypto holdings or trade them for short-term yields, all in an effort to bolster their chances of earning a passive income. Zap and APY effectively improves the user experience when they use the Earn product, essentially a yield farming tool, to earn the highest interest rates across the Aave, dYdX or Compound lending protocols. 

Vaults, on the other hand, introduces users to a revolutionary way of actively investing using Yearn platform’s self-executing code, mimicking how traditional mutual funds operate to extract the best return for their investors. By using the Yearn.finance platform to run its smart contracts on the Balancer and Curve DeFi trading platforms, users can enjoy all aspects of a yield optimizer without having to worry about the internal workings. In this way, Yearn.finance is also a DeFi yield aggregator, but with a design that is simple, intended to maximize investor returns and works for the benefit of all YFI tokenholders.

Written in the Solidity programming language, users with a fair knowledge of this language can even transparently see how the code for each vault invests the lent tokens further into different DeFi protocols. For developers, Yearn.finance offers the functionality of creating custom vault strategies that then undergo a peer review, testing in a production environment and going live once the Safe Farming Committee provides its approval. The Yearn platform details the various procedures that are needed to be followed by developers, including naming conventions and operating procedures for these smart contracts. 

For other DeFi projects, Yearn.finance has displayed a rabid enthusiasm for collaboration as the platform strives to build a DeFi future where everyone can access any service or protocol from anywhere. Furthermore, Yearn.finance joined forces with the layer-2 Optimism protocol in August 2022 and is an example of its inclination toward building cross-chain interoperability and working toward improving capital efficiency for its users.

Is Yearn.finance secure and is YFI a good investment?

By virtue of providing YFI tokenholders the right to vote on community-submitted proposals, Yearn.finance has all the trappings of a truly decentralized DeFi project that prioritizes the tokenholders’ interest above all else. Known as Yearn Improvement Proposals (YIPs), any member can start a YIP on Yearn.finance’s governance forum and if a majority number of the members support it, the YIP will be put ahead for official voting through the YFI governance staking model. 

All YFI holders are eligible to vote on these YIPs, whether it be about a new vault, changes to the governance mechanism or even suggesting changes to the current fee structure. However, as admitted by founder Andre Cronje, DeFi involves risk and had even quit the space briefly before getting back to launch the Yearn platform. That being said, despite all efforts to ensure that the Yearn platform functions transparently, users do face a moderate risk of facing losses caused by volatile market conditions. The YFI cryptocurrency too is subject to trading fluctuations, changing market sentiments and speculative activity by large institutional traders. 

That said, as has been seen with various blockchain projects that have been successful over a period of time, investors may choose to hold onto their YFI holdings to potentially benefit from long-term price appreciation. With the peak total value locked (TVL) in the Yearn.finance protocol reaching a high of $6.91 billion, the Yearn platform is counted among the fastest-growing DeFi protocols in existence. Considering the range of benefits it provides and the honest nature employed in its governance model, Yearn.finance can be counted among the most significant DeFi investment platforms to have emerged in the post-pandemic era.

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Author: Murtuza Merchant


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