What is Yearn Finance?
in Yearn Finance (YFI)
Yearn is a one-stop platform for a wide array of different financial services.
- Automatic yield aggregator for cryptocurrency deposits
- Sophisticated yield maximization strategies
In this article we’ll look at how Yearn works, what the YFI token can be used for, and how the platform can continue to expand in the coming years.
The Yearn Project
Yearn is one of the fastest growing DeFi platforms of all time. MakerDAO launched at the end of 2017 but didn’t reach $1 billion value locked until July of 2020. That’s two and a half years to reach $1 billion. Yearn did it in two months.
The platform started with a relatively simple offering: yield aggregation. Users could deposit their cryptocurrency with Yearn, typically DAI, USDC or WBTC, and Yearn would allocate the coins to the platform offering the highest yield.
For example, if the interest rate for DAI on Compound was 6% but 8% on Aave, Yearn would allocate DAI to Aave. If the interest rates switched and Compound began offering a better ROI, Yearn would move all of their users’ funds to Compound.
That’s how Yearn got started, however, the platform quickly began to expand its offerings.
Yearn Vaults, for instance, use sophisticated yield farming strategies to try and capture value. Some of the active strategies include depositing coins as collateral in order to create stablecoins to lend out, providing liquidity to decentralized exchanges, allocating coins to a specific platform with the expectation of earning a token reward, etc.
The Yearn Vault approach is higher risk, higher reward. If you’re willing to take that risk there’s the potential to earn a lot of money. However, the downside is that you could lose everything. The Yearn Vault strategy puts money to work on untested platforms, and from time to time, these platforms can have a critical vulnerability that leads to a loss of funds. More information about Vaults is available here.
As if these products aren’t enough, Yearn has also gotten into the insurance game. Investors can pay a premium to insure the coins that they’ve deposited with Yearn. In the event of a loss, Yearn will reimburse the investor.
Inversely, if an investor is confident in Yearn they can sell insurance. An insurance seller can deposit coins as collateral and then receive a regular payment from the insurance purchaser.
If Yearn loses money to a hack, then the insurance seller may have to reimburse the insurance buyer. However, as long as there is no loss, the investor can earn a premium for selling insurance.
More information about the Yearn insurance program is available here.
The most important thing to know about the YFI token is that according to Andre Cronje, the creator of Yearn finance, the YFI token is, “a completely valueless 0 supply token. We reiterate, it has 0 financial value.”
Of course, a creator claiming that their token has no value does not impede high valuations. YFI trades in the thousands per token. The reason for this huge price is YFI’s limited supply of 30,000 tokens. Although YFI’s price is closer to Bitcoin’s, it’s market cap, which is in the millions, is much lower compared to Bitcoin’s which is nearing half a trillion.
As crazy as DeFi is, there must be some reason for YFI to have such a high valuation. For one thing, Yearn collects 5% of all earnings. So if an investor earns $100 by depositing their crypto with Yearn, the investor will receive $95 and Yearn will keep $5.
This money ends up in the Yearn treasury. The treasury is designed to hold $500,000 at any given time. If the treasury balance exceeds $500,000 the excess money is distributed to YFI token holders.
The other major benefit of the YFI token is that it lets users vote on changes to the Yearn protocol. For instance, there was a vote to restrict the supply of YFI to a maximum of 30,000. A majority of current YFI holders were in support of this proposition and so the vote passed.
In addition to the number of circulating coins, YFI holders can also vote on fee allocations, protocol economics, token incentives, user fees as well as just about anything else related to the management of Yearn.
Yearn on the Rise
Yearn is just one part, admittedly a very popular part, of the rapidly expanding DeFi ecosystem. Although the YFI token is arguably overvalued, the Yearn platform itself actually offers a great service.
Yearn offers investors a way to earn the best possible return without having to manually move their assets from platform to platform. The 5% fee that Yearn charges is fairly steep, however, if Yearn investors earn 20 or 30% more than they would otherwise, the price is fully justified.
Although the project has never said as much, it appears like Yearn is trying to become the DeFi equivalent of Fidelity. That’s a big goal but if there is any project which can pull it off it’s Yearn.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.