2020 and the first half of 2021 saw impressive growth of total value locked in decentralised finance protocols. One of the most promising and most exciting projects in this space is Yearn.Finance (YFI). Offering numerous different elements, it is also one of the more challenging ones for new investors to understand. That’s why it is worth looking into Yearn.Finance and why it could turn the decentralised finance space on its head.
How Yearn.Finance works
Yearn.Finance is a portal to various DeFi products but is mainly known for its automatic yield-maximiser function. Currently, Yearn boasts $4.5 billion in total value locked, making it the ninth-biggest DeFi protocol in that regard. Yearn was developed by Dutch developer and crypto expert Andre Cronje, a Head of Technology for different companies before developing Yearn in his free time.
Yearn.Finance provides several services, such as lending aggregation, yield generation, and insurance. Its products are:
- Yearn Vaults: a tool for passive investing that generates yields automatically through allocating capital to the most profitable pool.
- Yinsure: an insurance policy for smart contracts.
- Zap: a tool for swapping in and out of liquidity pools.
- Earn: a lending aggregator that searches for best interest rates.
What is YFI?
YFI is the protocol’s governance token. The founder Andre Cronje did not reserve any YFI for himself upon launching it but chose to distribute all tokens to liquidity providers contributing to Yearn. The total supply of YFI is only 36,000, and all tokens are already in circulation, which explains the hefty price tag for a single token.
YFI holders can participate in governance by staking their YFI. The protocol also maintains a $500,000 treasury by charging a 5% fee on certain withdrawals. Excess holdings in the treasury get redistributed to token holders, making YFI one of the few tokens earning a dividend. However, only token holders participating in governance receive this dividend.
How Yearn products work
Earn
Users can deposit a stablecoin, which Yearn then uses to find DeFi platforms with the highest yield. This was the protocol’s first raison d’être, moving stablecoins around to find the best place under changing conditions. Nowadays, the Earn program is too big to deposit funds in the highest yield pool on protocols, which is why the underlying algorithm rebalances deposit balances to optimise the yield for the entire pool.
Vaults
This is Yearn’s best-known product. It allows users to hold a native token and earn yield with that token as collateral. For instance, a user can hold ETH and earn yield in ETH by using a Yearn Vault. Roughly speaking, Yearn borrows stablecoins against the deposited asset and seeks yield-farming opportunities with the borrowed funds. Similar to Earn, the algorithm constantly rebalances to optimise its allocation.
Is Yearn.Finance suitable for the mass?
That depends on whether decentralised finance will become suitable for the mass. Yearn can undoubtedly earn better returns than regular bank deposits, but it is also a far cry from the convenience of regular online banking. Thus, the long-term success of Yearn will coincide with mainstream acceptance of DeFi and if DeFi can develop beyond the Ethereum ecosystem.