Yearn Finance is a next-generation yield aggregator protocol that is sending shockwaves through the DeFi space.
The protocol first appeared on 17th July 2020, and rapidly set about becoming one of the most established and talked about DeFi projects.
Within two months of launching, the total value locked in Yearn Finance smart contracts exceeded a staggering $960 million. This, in turn, led to Yearns Governance Token (YFI) increasing by 1350% to just under $44,000.
As you can imagine, this caused quite a stir in the crypto community, especially given Bitcoin’s $12,000 valuation at the time. However, some unheralded attention soon brought the project crashing down to earth.
And now the dust has settled, let’s check out if Yearn Finance can finally live up to all the hype.
What is Yearn Finance
In essence, Yearn Finance is a decentralized ecosystem that aims to provide users with the highest possible annual percentage yields (APYs) on their cryptocurrency.
The project is the brainchild of South African software engineer and crypto enthusiast Andre Cronje. Who after carrying out extensive research on the crypto market, became drawn to the high returns for Stablecoins on DeFi protocols. As a result, he began to invest extensively in the yield farming sector.
However, the process of manually searching various protocols to find the best daily APY’s soon became a time consuming and repetitive task. This led Andre to begin developing his own automated yield farming strategies to maximize profits by capitalizing on the highest-earning yield protocols on any given day.
How Does Yearn Finance Yield Aggregator Work
Yearn Finance is a yield aggregate protocol for ERC-20 Stablecoins such as DAI, USDC, USDT, TUSD and SUSD.
The protocol works by creating liquidity pools for each Stablecoin. And in return for depositing funds in a pool, users will receive Y tokens which are the yield-bearing equivalent of the deposited Stablecoin.
Y tokens are then distributed among various DeFi protocols to maximize yield returns.
For example, say Compound offers a better yield than Aave on DAI at the time of deposit. The Yearn Finance yield aggregator will automatically identify this and allocate funds to Compound. And to optimize returns it will also spread funds across multiple protocols to offset liquidity.
When it comes to withdrawing funds from the Yearn protocol, users can burn their YDAI to receive the underlying DAI.
YFI is the Yearn Finance governance token. YFIs’ limited supply of 30,000 tokens is a very low number when compared to other crypto projects. Thus, if the project flourishes, YFI has the potential to become a very valuable coin. This is a great appeal to investors who truly believe in the project.
Furthermore, to build trust in the project, Andre Cronje chose to distribute all tokens amongst the Yearn Finance community and did not set any aside for himself.
The purpose of YFI token is to give holders a say in the future of the project by allowing them to vote on all matters relating to the protocol.
To cast a vote, YFI holders first have to stake their tokens. A slight drawback to voting is once a vote is cast, the tokens remain locked in the staking protocol for a further 3 days. However, on the flip side, voters receive a small fee for participating in governance.
Despite its stellar reputation within the DeFi space, Yearn Finance is not without controversy.
First of all, whilst the protocol has never been exploited, it has faced security concerns in the past. A security audit in August 2020. exposed a number of flaws that could have led to the protocol being compromised. Luckily, they were found and patched up before they could be taken advantage of.
Controversy also surrounds Yearns founder Andre Cronje and his work on the secretive Eminence (EMN) project. The highly anticipated project was intended to combine DeFi protocols and NFT’s to create a blockchain gaming multiverse.
Shortly before Eminence was due to launch, and with $15 million in funds deposited on the platform, it was hacked. The subsequent hack resulted in the protocol being entirely drained of investors’ funds.
The fallout from the scandal rocked the Yearn community. Many within the DeFi space laid the blame for the incident squarely on Cronje who swiftly scrapped the project. The ramifications of the hack are still ongoing and Cronje is currently facing a class-action lawsuit from investors whose funds were stolen.
Yearn Finance Products
Yearn Finance offers a number of strategies to optimize returns.
yVaults automated yield farming strategies make it easy for anyone to deposit funds and begin farming. The strategies follow a buy and hold approach. This means the yVaults will recycle the profits back generated back into the deposited token.
Earn is a lending aggregator that seeks the greatest yield. In other words, it will constantly move your funds across multiple exchanges, depending on which one has the highest rate of return.
Zap allows you to swap between different tokens within liquidity pools. Therefore, users can effortlessly switch between Ethereum and various Stablecoins depending on which offers the best returns on the day.
yInsure, otherwise known as Cover is the protocol’s smart contract insurance feature that aims to provide a decentralized protection mechanism. The feature contains three core components which you can read more about here.
Yearn Finance is an amazing project and it’s easy to see why it is very much the darling of the Defi community. With the broad potential it offers, there’s no wonder it is attracting so much interest.
Nevertheless, there are risks. And despite the protocol being fully audited, the fear of vulnerabilities in the code still exists. Particularly, a ‘black swan’ event similar to what occurred on the Eminence project.
That said, Yearn Finance is no more vulnerable than any other fully audited protocol. And the fears have done little to put investors off with the total value locked in contracts exceeding $500 million at the time of writing.
All in all, Yearn Finance is a revolutionary project with the potential to change the face of finance.