Only a few years after the arrival of Bitcoin, which marked the first popular use case for blockchain technology, decentralised finance (DeFi) appears to have piqued the interest of both developers and investors alike.
According to defiprime.com, there have been steady increases in the number of DeFi protocols, with no fewer than 240 projects listed. While the bulk of these projects offer similar products ranging from lending aggregation, to yield creation, insurance etc, only a few are as impressive as Yearn Finance.
Notably, Yearn Finance aims to become a gateway for other DeFi solutions powered by the Ethereum blockchain. Yearn Finance, as a gateway project, is driven by a decentralised community that is jointly building and reaping the benefits of a constantly growing variety of financial solutions. Just before we deep dive into what Yearn Finance is all about, let’s quickly take a look at what led to the birth of the DeFi protocol.
Brief history of Yearn Finance
Yearn Finance was launched by Andre Cronje, an independent developer, in 2020. He is a prominent figure in the crypto space and boasts a veteran-level experience as he has become synonymous with DeFi.
Unlike the typical decentralised projects, Cronje did not raise any private or public funding for the Yearn Finance project until it went live. Even so, Cronje did not reserve any token for himself, as is the case of most decentralised protocols that reserve tokens for founders and developers.
Since going live in July 2020, Yearn Finance has slightly more than $4.47 billion in native crypto-assets staked on the platform. In comparison, Yearn holds a significant share of the total $195.8 billion worth of value locked in the DeFi space.
What is Yearn Finance?
Specifically, the platform allows user to maximise their earnings on crypto-assets through four major products including Vaults, Earn, Cover, and Zap – all of which are jointly responsible for the network’s yield production, lending aggregation, insurance, and trading services.
Notably, Vault, which is the network’s main feature, allows users to stake crypto assets into a liquidity pool where they can subsequently generate returns based on opportunities present in the market. However, to achieve the highest possible return on investment, Vault aggregate crowdsources gas costs, automates the yield generation and rebalancing algorithm, while automatically shifting capital when the need arises.
On the other hand, Earn is a lending aggregator where funds are shifted between other DeFi Protocols that offer support for interoperability. For instance, Yearn Finance Protocol can automatically aggregate funds from AAVE, and Compound Protocols as interest rates changes amongst them, ensuring that end-users take advantage of the best rates at any point in time.
Also, on Earn, customers can deposit DAI, USDC, USDT, TUSD, sUSD, and wBTC, among other stablecoins, while the Yearn protocol will then look for DeFi platforms where they can earn the most yield to help them stake.
By using Zap, users can trade from one cryptocurrency to another in and out of the network’s liquidity pool using a decentralised exchange like Curve Finance, while the final product – Cover – functions as a risk shield, ensuring that end-users take coverage in the event of financial losses for various smart contracts and protocols on the Ethereum network.
In addition, there is another feature known as APY (which stands for Annual Percentage Yield) that searches across the lending protocols, while giving users estimates of how much profit to expect over a given period.
In terms of wealth generation on the network, users earn YFI, the network’s native token, by staking cryptocurrency in the Yearn Finance contract running on either Balancer or Curve exchange. More so, the amount of YFI earned by a user is determined by the amount of cryptocurrency locked in the smart contracts.
Yearn Finance, just like other decentralised protocols, leverages yield farming as its major source of capitalisation. However, the unifying goal of all Yearn products, according to industry experts, is to create a simple intuitive interface for other DeFi protocols.
In other words, each of the products is a gateway to other DeFi applications offering similar services, for instance, Zap is an access point to Zapper.fi, as Cover is to Nexus Mutual, and so on.
How does Yearn Finance work?
Being a decentralised protocol, Yearn Finance acts as an ‘intuitive interface’ that relays smart contracts to the Ethereum blockchain alongside other decentralised exchanges (DEX) such as Balancer and Curve, running on the same blockchain.
By carrying out an activity on Yearn Finance, it’s as good as doing so on the associated decentralised protocols connected to the decentralised protocol, hence the reason it is regarded as an ‘intuitive interface’ between Ethereum and DeFi applications.
Yearn Finance also features automated DeFi strategies, which are designed to assist users to maximise their benefits while minimising underlying risk. These strategies, on the other hand, comprise both complex and dynamic variables, all of which may be accessed by putting cryptocurrency into the protocol of user’s choice (Vault, Earn, Zap, and Cover, for example).
As discussed earlier, the strategies deployed on the Yearn Protocol include the provision of assets for lending, earning YFI tokens through yield farming, provision of liquidity, or in an extreme situation, a combination of all across a wide range of DeFi protocols.
Yearn Finance token -YFI
Yearn Finance’s native governance token, YFI, is also used as the network’s default utility token. The ERC-20 currency, like any other decentralized protocol, is very instrumental to the network’s reward and voting systems.
Notably, community members who contribute to the network’s growth are rewarded with the token, whilst YFI token holders who stake their token gains eligibility to participate in the network’s governance.
Currently, there are just 30,000 YFI tokens in circulation, with each representing a controlling stake in Yearn’s smart contract protocol development.
Yearn Finance governance
The Yearn protocol is run by a group of YFI token holders known as ‘collective of contributors’ who are in charge of discussing investment strategies, developing community resources, and implementing software upgrades to promote the network’s overall growth.
In this case, the YFI token acts as the coordination mechanism for the decentralised network as it is used to incentivise the community of developers who makes it their responsibility to manage the protocol with little or no supervision. In other words, YFI token holders do all that is within their capacity to improve the network.
However, Yearn Finance make use of a process it calls Yearn Improvement Proposal (YIP), which is also similar to other DeFi protocol governing system. The YIP process also requires that YFI tokens must be staked for members to participate in the voting system or contribute to governance decision making processes.
As typical of most DeFi protocols, one YFI token is equivalent to one vote; hence, the more tokens staked, the more power a voter has in the network’s governance. Although anyone can participate; make suggestions, and discuss pending proposals, only YFI token holders can vote on implementable changes.
Ultimately, Yearn governance is distinguished not by precise rules or processes, but by the platform’s organic and enthusiastic community, which, according to Yearn’s whitepaper, prioritizes building, equal access, and merit.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.