Yearn.finance is a Decentralized Finance (DeFi) protocol that uses lending projects like Aave and Compound to provide users with optimized token lending services. The protocol was developed by Andre Cronje in 2020, independently of any company or organization.
Powered by its native YFI token, the platform offers multiple features like aggregated liquidity, leveraged trading, and automated marketing making, as well as insurance on the Ethereum network.
YFI can be obtained by users who contribute liquidity to the protocol’s liquidity pools, as the token couldn’t be pre-mined, purchased in an Initial Coin Offering (ICO), and no part of the total supply was allocated to the team, a notable achievement for this type of projects.
As with other Decentralized Finance projects, Yearn.finance removes the need for an intermediary to access financial services, allowing users to optimize the earnings generated by their crypto assets by using lending and trading services.
Yearn.finance offers 4 core products:
- Vaults: Capital pools designed to generate the highest passive gains possible for its users by using different strategies and projects, all without the need for a deep understanding of DeFi.
- Earn: A lending aggregation tool that shifts funds between dYdX, AAVE, and Compound automatically, benefiting its users from changes in interest rates in the protocols.
- Zap: A tool that allows users to save fees and labor by bundling trades in liquidity pools using curve.Finance.
- Cover: An insurance service that covers users against losses in some protocols running on the Ethereum network.
These tools have allowed Yearn.finance to quickly become a popular choice by DeFi enthusiasts looking to maximize their gains by optimizing their investment strategies.
What is the Purpose of YFI?
The YFI token works as an incentive around which the totality of the platform is built, as users don’t only generate gains by using the platform but also the opportunity to participate in the governance by using the YFI they use a reward, which in turn provides the token with value.
Holders of the YFI token can submit proposals for changes in the platform, as well as vote, with the changes being implemented depending on the quorum and percentage of positive votes.
Yearn.finance capitalizes on a common investment strategy known as “yield farming,” which consists of locking crypto assets in a DeFi protocol with the objective of generating more cryptocurrency in the process, a process reminiscent of sowing seeds.
A total of 30.000 YFI tokens were originally minted, with all of them being distributed already. The only way for more of these tokens to be minted is if a proposal to do so is created and agreed on by its holders.
How Does YFI Work?
Yearn.finance works by deploying smart contracts on the Ethereum network and integrating them with decentralized exchanges like Balancer and Curve, automating the yield farming process by using the tools previously mentioned.
Most of Yearn.finance tools allow users to either trade or lend cryptocurrencies, which is the case of Earn and Zap, while vaults provide users with a way to follow investment strategies and run them using self-executed code, making it a tool similar to managed mutual funds.
Earn automates the search process in protocols like dYdX, AAVE, and Compound to search for the interest nearest rate, with users then being able to deposit their crypto assets into those liquidity pools to maximize their earnings in the form of passive interest rates.
Zap, on the other hand, facilitates the investment process by allowing users to execute multiple transactions with a simple click, saving time and maximizing profits by avoiding changes in value, as time is essential when trading.
However, using Yearn.finance’s suite of tools is not the only way for its users to improve their investments and generate more returns, as YFI holders can receive rewards in the form of revenue collected from the fees paid by other users.
The protocol charges a percentage between 0.5% and 5% to investors who use the tools, with a total of $500 thousand being kept by the protocol at any given time and the rest being proportionally distributed between YFI holders.