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Yearn.finance and the YFI Cryptocurrency Token Explained

I have been fascinated by crypto for a long time now, and I enjoy sharing what I have learned about it on ToughNickel.

The Yearn.finance logo

The Yearn.finance logo

What Is Yearn.finance?

There are many different ways to earn interest on Ethereum. Aave and Compound are essentially crypto banks where users can lend coins to earn interest, and Uniswapallows users to earn interest by providing the necessary liquidity and earn rewards for it. Chasing the highest yield even has a term; it is called "yield farming." Yearn.finance is a DeFi protocol that automatizes the yield-farming process and moves users' cryptocurrencies to whichever platform is the most profitable at a given time.

With Yearn, it is possible for the average person that has little knowledge about the technological side of crypto to participate in the decentralized finance sector and earn high interest on their holdings. The two main features of Yearn are Earn and Vault, both of which offer a way to earn with high interest rates in an effortless way.

Interestingly, Yearn wasn't built by some large organisation with millions of dollars. It was built by a self-taught programmer from South Africa called Andre Cronje. He created a yield-farming bot for himself that drew the attention of other big projects in the crypto world like Aave and Curve and eventually grew into a very popular DeFi project.

The supported assets of the Earn feature

The supported assets of the Earn feature

What Is Earn?

Earn is a yield-farming tool that automatically moves provided crypto to the most profitable place. If the interest rates for USDC are the highest on Aave, Earn will move your funds there. If the interest rate becomes higher on Compound, Earn will then move your funds from Aave to Compound. Of course, you could just move your cryptocurrencies directly to these DeFi protocols, but you would have to monitor them constantly to make sure you're still getting the highest rate.

The Earn feature currently only supports stablecoins and wrapped Bitcoin.

Once you move your funds to the Yearn.finance smart contract, you receive the same amount in y-tokens, and the interest you gain is also paid in y-tokens. If you send 100 USDC to Yearn, you get 100 yUSDC and wkeep gaining yUSDC. These y-tokens serve as placeholders in your wallet and can be redeemed at any time at an exchange rate of 1-1.

Some of the assets supported by the Vaults feature

Some of the assets supported by the Vaults feature

What Are Vaults?

The Vault feature is a little bit more complex. It not only moves funds to the most profitable lending protocol, but it also handles entire yield farming strategies. Like the Earn feature, the Vault feature uses lending protocols, but it also uses your crypto to provide liquidity to decentralized exchanges like Uniswap to earn trading fees and other liquidity rewards.

There are many different Vaults that have their own strategies that are executed automatically. Many people compare Vaults to hedge funds because they allow many different people to pool their funds together. The main advantage of this over simple, manual yield farming is that users can save on gas fees. Each individual transaction on Ethereum costs its users gas fees that are paid in ETH. By pooling their funds together, Vault users can save ETH because they are moving their funds together so there are fewer total transactions.

Other Features of Yearn.finance

Yearn also has a feature called Zap that allows its users to swap Yearn-supported tokens in a cheap and fast way. There is also Cover, which allows users to get insurance on some of the cryptocurrencies they are investing into smart contracts in case a black swan event happens.

Yearn is still a growing ecosystem, so there will likely be more features added soon to make profiting from DeFi even easier.

The YFI Token

YFI is the governance token of Yearn.finance. It has a fixed max supply of only 30,000, so there will never be more tokens. YFI has a rather high value for a single coin due to this very limited max supply, 1 YFI can be worth more than 1 Bitcoin because of that.

There was no pre-mine, there were no early investors that were able to invest in it before the token was launched, and the developers didn't keep any of the tokens for themselves. Instead, the entire supply of YFI was given to liquidity providers of Yearn.finance as a reward. Because of that, many claim that Yearn had the fairest token distribution since the Bitcoin network launched.

Fun Fact: The creator of Yearn, Andre Cronje, pronounces "YFI" as "Waifu" as a joke about anime fans.

The YFI price performance from August of 2020 to July of 2021

The YFI price performance from August of 2020 to July of 2021

The primary use case here is for governance. Token holders have voting rights for potential changes to the Yearn protocol. To incentivise participation in governance, YFI holders are able to earn rewards if they use their tokens to vote.

Yearn.finance collects its fees in a treasury that can hold, at max, 500K USD. Everything beyond that is paid out to YFI holders that participate in voting. This means that token holders are likely to make good decisions for Yearn because the more successful it becomes and the more users it has, the more rewards they can get.

Yearn.finance has many great features that make it easy to get the best interest rates on Ethereum and has a governance system that incentivises proper governance. The protocol will likely grow together along the decentralized finance sector and so the YFI token, with his limited supply, may grow quite a lot in value as DeFi increases in popularity.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2021 Krypton Currency

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