Yearn Finance

Understanding Yearn Finance | The Crypto That Surpassed Bitcoin’s Price

Nicoleta Balan Avatar
Oct 26, 2022
8 min reading time

Big numbers draw attention, and so is the case for Yearn Finance, as after the explosion of the DeFi sector in 2020, the YFI reached an all-time high of $82,835.78 on May 12, 2021.

Although it wouldn’t have made it even in the top 10 cryptocurrencies by market cap, YFI became the most expensive crypto asset in 2020. It had maintained its position for a short while at least, when in 2021, Yearn Finance announced an aggressive buy-back program, and the price of YFI skyrocketed by 30% in a day.   

However, after that peak, the Yearn Finance token followed a downtrend.   

Let’s see what’s going on there.   

What is Yearn Finance? 

Yearn Finance is an Ethereum dApp that utilizes advanced tools to act as a crucial aggregator for DeFi protocols, including Aave, Curve, and Cosmos. It was developed to automate the allocation of supply liquidity to different pools and choose the landing protocol that offers the best APY (Annual Percentage Yield). In a way, it is an automated yield farming protocol that allows allocating funds to the best return opportunities.   

The base element of Yearn Finance is not the YFI token but its protocol. The Yearn protocol is a yield optimizer that has the main role of automatically switching between a number of different DeFi landing protocols.   

By creating dedicated-automated investment methods, the protocol allows investors to deposit liquidities to a pool, receiving back yTokens that show the property over the investment, just like a receipt would do.   

Once the investors’ funds are in the pool, the protocol will eliminate the manual tasks of checking the lending evolution and the decision process of switching between different options.   

The Importance of yTokens 

In Yearn Finance, there are multiple investing ways. But at its core, the protocol will switch between landing protocol and liquidity pools like Cosmos, Aave, Compound, Curve, or other DeFi to maximize profits from iInterest on stablecoins, trading fees, or liquidity provider rewards.   

And as mentioned before, once an investor deposits its liquidity in the dedicated pool, he will receive yTokens to show for it. The yTokens are the ‘wrapped’ version of the deposited token, which is optimized for yield.   

When the users want to withdraw their funds and receive their interest, they can just redeem their yTokens and get their cryptocurrency back.   

So, for DAI, USDC, USDT, and TUSD, an investor will receive wrapped yield-aware tokens such as yDAI, yUSDC, yUSDT, and yTUSD.   

Although the platform will switch between landing protocols, it will not change the cryptocurrency even if one offers a higher yield. Therefore, an investor that deposited USDT will get back USDT as well.  

Understanding the YFI Coin 

Firstly, YFI is not a coin but a governance token, just as it was announced on the official medium profile. It was distributed to the early users that got involved. When released, YFI couldn’t be pre-mined, bought, or auctioned. It was just a financially valueless token that allowed for the decentralized governance of the Yearn ecosystem. And since July 2021, YFI has become one of the largest Ethereum-based tokens due to the protocol’s focus on automated yield farming strategies.   

The token holders can vote on decisions regarding the protocol’s future. And besides voting, YFI can also be used for staking. An important thing to mention is that holders can vote on the development of the protocol only if they have staked tokens.   

When it comes to growth potential, YFI has:   

  • A great degree of scarcity, with only 30,000 tokens;   
  • Voting power, the voting takes at least 5 days and needs more than 50% passing votes;   
  • No gas consumption in the voting transaction;   
  • A limited hedge fund-like characteristic, in which the partners are rewarded with all the treasury funds that go over the $500k bar.   

And when it comes to its use, YFI can be used as:   

  • Direct deposit or possible IL;   
  • Collateralized debt position;   
  • Lending and borrowing; 
  • Liquidity providing;  
  • Leveraged liquidity providing.   

Moreover, the more people use Yearn Finance, the more the fees will be generated for the treasury and the governance pool.   

What’s New with Yearn Finance? 

Even though Yearn Finance has undergone several modifications, the most major upgrades throughout the years have impacted its evolution. Yearn Finance has adopted YIP-54 at the end of the year 2020. The update enables community members to audit hackathons, security audits, grants, bug bounty, and payroll costs on a quarterly basis.   

SIDENOTE. YIP – Yield Improvement Proposal. 

YIP-54 allows a newly established operations fund to repurchase YFI or other assets at its discretion. 

Yearn Finance passed four significant YIP proposals in 2021. Their successful integration into the Yearn Finance protocol permitted the implementation of new charge structures, YFI-enabled incentive distribution, quarterly financial audits, and operational funding.   

In 2021, the protocol released a new product named yvBOOST, a yield generator. This product, part of its vault suite, will complement the “Backscratcher” vault by allowing users to earn and improve incentives in the Curve-based token 3CRV. 

According to the protocol’s creators, the yvBOOST-ETH pool on  SushiSwap is intended to provide liquidity for their new vault. This pool provides a better rate of return on SUSHI-based prizes.   

Furthermore, Yearn Finance developed Fixed Forex in the same year, with important features including 0 governance, 0 configurations, 0 fees, 0 value extraction, gentle liquidation, dynamic minting caps depending on-chain liquidity, and dynamic LTVs based on on-chain protocols.   

The Fixed Forex incorporates gentle liquidations into the Yearn platform, where the exact least amount of debt is returned to bring a user’s position back to even, eliminating the need to worry about the entire stack being liquidated during drawdown events.   

Furthermore, they have introduced Liquidity Mining Rewards v2. It is intended to solve liquidity locusts, also known as “stickiness,” and token loyalty or opportunistic dumping, which helps when liquidity quickly disappears when incentives cease.   

In September 2021, Yearn Finance took a significant step forward with the introduction of Yearn UI V3.0, in which the team rebuilt the project from the ground up. Version 3 prioritizes user experience, scalability, and the multi-chain future.   

However, the entire integration is not yet complete, but the major point is that the V3 is intended to enhance all core components of Yearn vaults. V3 is designed to improve security, automation, development, modularity, strategy, and product adaptability. However, the team’s plans do not end there; they intend to create various new fascinating services and functionalities.   

Yearn Finance in the DeFi context 

Yearn Finance works like a bridge for yield farmers to different earning protocols. But as nice as the idea behind it sounds, we can’t help but see how the YFI token is performing.   

As of November 3,2020, it went under $10k, in a context where the DeFi hype seems to have died down.   

As for Yearn Finance, a few factors might keep the token from coming back.   

Andre Cronje developed a gaming protocol called Eminence, in which investors threw millions out of nowhere. On September 28, the funds were lost after a hacker exploited a bug in the protocol to steal all the funds.   

Yearn Finance had a comeback, as expected, and it finally happened in 2021, when Yearn Finance reached an all-time high. On May 12, the protocol hit a peak of $82,835.78 and remained around there for about 5 days. Following this event, the price of Yearn Finance decreased and gradually increased. At the moment, Yearn Finance stands at around $7,000, with small daily fluctuations. 

Key takeaways 

  • Yearn Finance is an Ethereum dApp built by Andre Cronje, developed to automate the allocation of supply liquidity to different pools and choose the landing protocol that offers the best APY (Annual Percentage Yield).   
  • The ytokens are the ‘wrapped’ version of the deposited token, which is optimized for yield.   
  • So, for DAI, USDC, USDT, and TUSD – an investor will receive wrapped yield-aware tokens such as yDAI, yUSDC, yUSDT, and yTUSD.   
  • YFI is the governance token of the Yearn Finance protocol that allows holders to vote on decisions regarding the protocol’s future. It can also be used for staking.   
  • As promising as it started, since October 2020, YFI has seen a lot of selling pressure that can be correlated to the unfavorable opinion regarding the testing in production approach employed by its developer. And, with the DeFi hype dying down, over 86% of YFI addresses are currently at a loss.   
  • Yearn Finance, reached an all-time high of $82,835.78 in 2021.   
  • Over the years, the project has added several new features. The most significant are YIP-54, yvBOOST, Fixed Forex, Liquidity Mining Rewards V2, and Yearn UI V3.0. 
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