DeFi has grown a lot. And in the process of its growth, it has become extremely foreign and complex for new users to enter. That’s why Yearn.Finance was created.
Yearn.Fiance is a yield aggregator built on the Ethereum network that is able to maximize yield by dynamically allocating liquidity to a number of different protocols.
That was a mouthful. So what does this mean in English?
It’s basically an Ethereum dApp that automatically supplies your crypto to different pools in the DeFi ecosystem. Based on whatever will make you the most money.
You can look at it as an automated yield farming protocol that searches the market for the best return opportunities, then supplies your pooled liquidity (i.e., the crypto you want to use to make passive income) to the pools that will earn you the highest return. So you can then be sure you’re getting the most bang for your crypto.
Yearn.Finance opens up a lot of complicated yield farming opportunities to the average crypto user. No need to constantly keep updated with the hottest, latest pools to supply or liquidity tokens to earn, or strategies to employ.
You just have to select your desired strategy on their simplified easy-to-understand dashboard, and start earning.
Essentially it’s taking a very complex and involved system encompassing all the different DeFi projects, and making it simple to use and start earning yield from.
All you have to do to use it is supply the liquidity as you would any other DeFi dApp, and the Yearn smart contracts do the rest.
Of course there’s a lot more going on behind the scenes with Yearn.Finance. We’ll get to that in just a bit. But first — let’s look at the creator.
When looking at projects like Yearn.Finance, people often imagine high-profile VC backers invested into it, a team stacked with sixteen software engineers, who sold millions of dollars in a token sale. But that couldn’t be further from the truth with this project.
In fact, Yearn.Finance was started by only one South African guy named Andre Croje. Andre is a self-taught software architect who had 20 years’ experience prior to starting Yearn.Finance.
He was developing his own DeFi yield optimization strategies in early 2020. This was long before yield farming was even a thing. As he was cranking away at the code, he noticed the DeFi strategies he was building for himself could be rolled out and scaled up if made public.
He worked closely with Curve Finance and Aave to create what would become known as Iron. Andre built all of this because he believed DeFi had become so complicated it’s nearly impossible for the average person to navigate.
That’s why he focused on a simple, intuitive user experience that is central to the now-rebranded Yearn.Finance (also known as Y-Earn and Yearn), launched in February 2020.
When Yearn was started, Andre did not keep any of the YFI tokens for himself. There was no pre-mine, no sale, you couldn’t buy it, and there was no auction. There was no team allocation of the token, either.
It was a 100% fair distribution to those who first got involved.. We elaborate more on this rare coin distribution below.
This DeFi protocol has morphed into a jack-of-all-trades profit maximizer with millions locked into it. It’s now a totally community-governed ecosystem churning out updates and improvements quicker than any VC-backed startup ever has.
Andre has constantly innovated the strategies as the lead developer. This includes consecutive rollouts like Yearn.Finance Version 2.
His method of testing in “prod” (or production) has made him very popular in the crypto community. Some say it’s “reckless" but others argue there’s a method to his madness. We’ll lay out the facts below so that you can come to your own conclusion.
Either way, the core smart contract code for Yearn.Finance has been audited by many third party companies like Certik, Quantstamp Labs, and a few others, who all gave it the thumbs-up.
We’ll get to exactly how Yearn became so popular among users so quickly in a moment. But first - how does it actually work?
How Yearn.Finance Works
Let’s say you have crypto you want to earn a yield on, and you go to the Yearn.Finance dashboard. From there, you have four different options:
Earn, Zap, Vaults, and Cover.
Each of these options has a different functionality, but the core premise is the same. Yearn will take tokens that are provided to it from you and move them around to the most profitable lending protocols and liquidity pools in the entire DeFi space.
The yield you’ll earn is a combination of general interest on stablecoins, trading fees in pools, liquidity provider rewards, and other incentivized liquidity mechanisms.
So let’s start with the most basic example: the “Earn” function.
The “Earn” function on Yearn is a yield aggregator for lending platforms which re-balances for highest yield during contract interaction.
So basically, you can deposit stablecoins like DAI, USDC, USDT, TUSD, etc…
…and it will automatically lend to the highest lending rate between platforms like Compound, DY/DX, or Aave.
It will find for you the best rates you can currently get on the market through any of the lending platforms like Compound, Aave, etc.
Of course, you could go over to any one of those platforms and supply the liquidity yourself once you figure out which one has the best rates through Yearn. But that would be doing more work that is necessary.
If you’re supplying those funds through Yearn.Finance instead, the Yearn’s smart contracts will automatically shift your liquidity to another protocol that may be providing a better return once it comes available in the future. Because Yearn.Finance was created to give you seamless access to the best rates through all the DeFi protocols, automatically.
There’s one technicality here: You’ll see references to something called yTokens. These are “yield optimized” tokens and you get them in return for providing liquidity.
Essentially, when you deposit liquidity into Yearn.Finance, your deposit is wrapped and then returned back to you as a yToken, so any time you want to get your liquidity back plus interest, you trade the yToken for it.
So for example, if you deposit DAI on yearn, then it will give you yDAI. Deposit USDC, and you’ll get back yUSDC. And so on, with any coin.
The amounts of yToken and deposited token will differ since the yToken represents a share of a pool that is “increasing” in value.
And that’s the crux of the “Earn” feature. The most basic one.
Let’s talk about the next feature:
These are a combination of some of the more advanced yield farming strategies. Vault strategies consist of modular smart contracts for each “vault” that tell it what assets to borrow, which coins to farm, and where it should sell the farmed assets.
So when you’re investing into a vault, you’re essentially investing into a particular smart contract designed to do a particular thing to get yield.
Simply put, when you supply liquidity to these vaults, they’ll use your liquidity as collateral, borrow stablecoins, and put them into some yield farming strategies.
These are strategies that not only generate interest returns, but you also get a share of trading fees, aggregate liquidity provider rewards, and other gains from various DeFi protocols.
Not only that, but these vaults are well-optimized to save on ETH GAS fees. They batch transactions which means the fees you would pay for in GAS are considerably reduced than if you were to replicate them yourself.
And stablecoins earned above the debt are sold for the asset in the vaults and returned to it.
There are a number of strategies being employed with vaults. If you head to https://feel-the-yearn.app/vaults you can get a more comprehensive breakdown, along with all the stats.
The APR for some of the vaults has historically been some of the highest in all of DeFi. Although they’re a bit lower now, when Yearn.Finance first came out, some ETH vaults were earning users around 59% interest, and one Curve stablecoin vault was earning 87.79% interest.
Currently, they’re a bit lower - ranging anywhere from 8 - 20% interest.
The Zap feature allows you to convert Yearn-supported tokens quickly, and with a reduction in transaction costs.
Previously if you wanted yCRV for example, you had to obtain yDAI with your DAI on Yearn, then go to Curve Finance, deposit it there, and obtain that yCRV.
But when you have the Zap feature, that’s inefficient. And it can be a bit daunting for users who have not interacted with Curve Finance before, since Yearn is supposed to aggregate everything for you.
That is why Yearn built the Zap feature. With this tool you can immediately “zap” your yDAI into a yCRV-incentivized liquidity pool.
This final feature is also new and little-known in the DeFi space. It takes you to something called yInsure. Essentially, yInsure is “smart contract insurance”.
If you didn’t know, you can now insure yourself against any losses incurred through smart contract bugs and hacks. Like traditional insurance, only decentralized.
This is all through a decentralized insurance model built on the Ethereum blockchain. One of the projects in this space is called Nexus Mutual. They have developed a smart contract insurance protocol.
This yInsure “cover” feature has integrated with Nexus Mutual. This means you can actively take out insurance on your position, and protect yourself from unforeseen “black swan” contract risks.
YFI is Yearn.Finance’s governance token. Despite the ticker being YFI, this token has been pronounced like “Whyfoo” by Andre himself and the community has run with it. This might be a reference to the anime term “waifu”.
YFI as a governance token allows for the decentralized control of the Yearn ecosystem. This is a direct quote from Yearn:
“We have released YFI, a completely valueless 0 supply token. We re-iterate, it has 0 financial value.”
Even though that was said by Yearn.Finance themselves, that statement seems to be at odds with how much the price of the YFI token has grown -- more than any other coin. It has grown even faster than bitcoin.
Frankly, investors’ attitudes that contributed to the YFI token’s price increase probably comes down to its tokenomics. And not only that, but the YFI token is indirectly tied to the growth and adoption of Yearn.Finance as a whole.
YFI was released through rewards to early users on the Yearn.finance platform. There was no pre-mine, and there were no VC investors who were allowed to pick up early tokens at a largely discounted rate.
The 30,000 YFI supply was released in one go, and made available to those providing liquidity. Andre did not keep any of that YFI for himself, either.
This reduces the risk that sometimes comes from centralized team token control. This is what people mean when they say YFI has the “fairest initial token distribution since bitcoin.”
And unlike bitcoin, the token supply is capped at only 30,000. It can only be changed subject to a broader community vote.
When it comes to the use cases for this token, there are two primary ones:
The first is governance, where holders of the token are allowed to vote on protocol decisions. These are called “YIPs”, or Yearn Improvement Proposals.
The other use case is staking. This is kind of tied in with the governance use case as you have to stake your YFI if you want to vote.
So you can kind of view it as a proof-of-stake system where votes are weighted based on stake.
These staking returns are funds generated on Yearn.Finance that are not being used in order to fund the treasury. They’ve set the target for the treasury at $500,000 USD. Anything above that will accrue to the users who are staking.
Before you read the next section, here’s a disclaimer: this is all provided to you for information purposes only--we want you to get the best information possible, then come to your own conclusions.
But if you want to know the whole story behind YFI’s price increase, you might want to look over this bull case for YFI and decide for yourself.
We ourselves are not bullish or bearish on YFI and acknowledge that the case below might be ignoring crucial information. The bull case below simply outlines the sentiment of many YFI investors, and even hedge funds have taken notice of this.
With that said, here’s the…
YFI Bull Case:
There are a few components unique to YFI to take into account:
First, you have the scarcity point. 30,000 is a really, really low token supply. And those who hold the token are “in.”
So that scarcity component is not seen with any other crypto project.
Then, you also should consider the rights that holding YFI gives you. As a YFI holder, you have a pretty important say in the evolution of the Yearn ecosystem. This includes voting on potential strategies that could be implemented in the Yearn pools.
Don’t forget, these strategies are fundamentally designed to make money. That’s the whole point. So by voting on these strategies, you have a hand in how Yearn can make money for its users. And after the treasury is funded, the YFI holders get what’s left.
You can think of this process as a decentralized, automated mini hedge-fund. Where the limited partners are those that govern the Yearn ecosystem. Or in other words, hold the YFI token.
Not only do they decide on this strategy, but they’ll also reap the rewards.
In a series of tweets, Maple Leaf Capital laid out how Yearn compares to the most profitable traditional hedge funds in CeFi — in terms of purely how they make money.
Of course, a big difference between Yearn.Finance and hedge funds like Soros Fund Management, Citadel, Bridgewater, or Renaissance — is that Yearn is decentralized and inclusive. You don’t need a PhD, any special connections, or millions of dollars in order to participate.
All you need is a portion of that 30,000 YFI pool, and some ideas around yield optimization. You don’t even have to propose those ideas. You can just vote on them.
Maple Leaf Capital laid out charts that compare:
If you look at the above graphs, TradFi hedge funds straddle the line between “Directional” and “Delta-Neutral”.
This means it's exposed to market risk to some degree.
However, Yearn Finance (Top DeFi chart, bottom right corner) is designed to only Arbitrage yield, and spread.
This means it should theoretically be less risky. Which is a long-winded way of saying YFI holders have an opportunity to participate in financial arbitrage in a way that “common people" with no Stanford connections and no PhDs have never had in the past.
Maple Leaf Capital’s full explanation in tweets is here: https://twitter.com/MapleLeafCap/status/1292230400857837574
All of this couldn’t be more evident when we look at…
YFI’s Price Movement
YFI debuted at $34.53 at the beginning of 2020.
By September, it peaked at $41,104.00, then came back down to around $9,000.
YFI reached an all-time-high in May 2021 of $90,098. And now it hovers around $32,000.
Are these prices justified?
Well, remember: the supply is super tiny. Despite each YFI surging above bitcoin, the market cap of Yearn.Finance is far less than the market cap of bitcoin. Currently, the market cap is at 1.62B.
But it's not just a matter of looking at the market cap. You have to look at the relative value of the market cap compared to the underlying assets — total value logged. As well as the revenue-generating potential — fee generation.
We don't have the scope in this preview report to go in-depth into that. But in short, you can use traditional valuation metrics to determine this. We’d also look at the market cap, the TVL, and the relationship between the two compared to other DeFi protocols.
Yearn.Finance is yet another project to show the world the new things that can be done with DeFi. It’s on the radar of every hardcore DeFi enthusiast. There are so many layers, and so much more I just couldn’t cover in this small preview report.
While easy to get lost in the potential of it all, It’s prudent to let risk management and measured reasoning bring us down to the ground. We need to be fully aware of the risks. Yes, it’s delta neutral and does have market risk, but it still has smart contract risk as well.
This falls into those black swan risks that really cannot be quantified.
There are always risks. But then again, life has risks. And it’s all about choosing based on your own risk tolerance, weighed up against potential rewards.
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