What is Yearn.Finance?
Updated: Apr 15, 2021
The blockchain space is filled with DeFi DApps that provide yield earning opportunities. Tokens can be staked in liquidity pools or deposited in lending protocols to earn a return. This opportunity has made the term “Yield Farming” such a fad. For the uninitiated, Yield Farming is the moving of funds around the DeFi ecosystem in the hunt for attractive yields.
Yield Farming however is fairly complicated to execute. You need to keep track of all the new hot protocols, the Annual Percentage Returns (APRs) offered by them (which change by the minute), the impact of your trades on the APRs, forecast how much liquidity each pool will attract and the impact of that on APRs, the tokenomics of the governance token of those protocols, the gas cost of moving funds between protocols, etc. Things that the average Jane would find overwhelming. So what should Jane do if she still wants to participate in Yield Farming opportunities?
Yearn Finance is her answer.
Yearn Finance automates Yield Farming. It scouts the DeFi world for yield opportunities, allocates your funds to the most lucrative protocols, and constantly monitors the protocols to determine where and when the funds should be moved as APRs change.
In other words, Yearn is like a Robo-Advisor for yield. Jane just needs to deposit her funds in Yearn and sit back and earn. Under the hood, the algorithms will do the rest.
A little about the history of the protocol
Yearn Finance is the brainchild of Andre Cronje. A former law student who left midway to learn computer science and soon got interested in DeFi. He started managing funds for friends and family manually moving funds between different protocols to optimize yields. The monotony motivated him to code smart contracts to automate the process. Soon he realized the strategies could be scaled by making the smart contracts publicly available and that is how Yearn was born.
Let’s get into the details of what Yearn offers
Andre Cronje’s pet peeve with DeFi has been that it is user-unfriendly. Hence he has tried to make interacting with DeFi protocols more intuitive. Yearn hosts intuitive User Interfaces for the following functions:
1. Earn - This optimizes your Stablecoin allocation among lending protocols based on offered APRs, i.e. it accepts deposits in DAI, USDC, USDT, TUSD, SUSD, and WBTC and moves them around lending protocols like Compound, Aave, and dYdX to maximize the yield for you.
2. Vault - This executes more sophisticated yield farming strategies. Vaults accept a wide variety of crypto assets. It uses said crypto assets as collateral to borrow stablecoins and utilizes the stablecoins to earn yield, optimizing for interest returns, trading fees, liquidity provider rewards, etc. The user avoids having to constantly scout protocols for best returns, constantly monitor collateral, and maintain it at a safe debt/collateral level to prevent liquidation and saves on gas fees.
3. Zap - Zap converts Yearn supported tokens quickly. You won't always be holding the tokens for the most promising Vaults. Let’s say you only own DAI and want to deposit funds into an aLink Vault. Without Zap, you would need to (1) Take DAI, (2) Convert the DAI to Link, (3) Deposit the Link to Aave to generate aLink, (4) Deposit aLink in the aLink Vault. Zap reduces the above 4 steps to a single step and saves a ton of gas fees in the process.
4. Cover - Provides you with insurance against losses that you might incur due to bugs or hacks in the smart contracts. The insurance is underwritten by Nexus Mutual.
Let’s talk about money- YFI
The governance token of Yearn is called YFI. YFI gives users the right to propose and vote on decisions regarding the protocol. Voting requires that they stake their tokens for which they earn a return.
How does Yearn make money to pay token holders a return?
Yearn makes money from:
Vault Withdrawal Fees - 0.5%
Additional Yield Fees - 5%- (Formerly called Subsidized Gas Fees) - Technically, this is not a performance fee but a fee on some profit-generating strategies that incur a high gas cost and are technically critical for the Vault’s internal functioning.
The earnings first go to the Yearn Treasury Vault” which must have a balance of US$500,000. Anything above this amount is distributed among YFI token holders who stake their tokens.
Some interesting points about YFI:
It is the most expensive token out there. At. At the time of writing it is trading at US$ 17,200 a pop (more expensive than bitcoin. It had reached a high of US$43k on 13 Sept’2020).
Only 30,000 YFI tokens have been minted. This is one of the reasons for the high unit value. At the time of writing, the total market cap of YFI is ~US$500mn making it only the 35th largest cryptocurrency according to coinmarket.com. An argument against the token being overvalued is that the ratios of MarketCap:Revenue and MarketCap:TotalValueLocked are on the lower end among governance tokens.
Andre Cronje didn’t keep a single token for himself. There was no pre-mine for developers, no ICO, and no discounted tokens distributed to VCs., Each of the 30,000 tokens went to the early users of the protocol. This makes it the fairest distribution of tokens since Bitcoin.