Yearn Finance is in the top 10 DeFi platforms in terms of the locked value. Its governance token, YFI, set a record yield of 140,000%. From this article you will learn what kind of protocol it is, how it works and whether you can make money on it.
What is Yearn Finance
It is an ecosystem of several DeFi protocols. The first protocol is yearn.finance. It has been operating since February 2020 and is intended to make money by providing liquidity to other DeFi projects. In August 2020, the developers implemented the Yearn Vault system into the protocol
During 2020, the project team is working to create the Yearn Finance ecosystem. They released several projects in test mode. It includes the yTrade decentralized exchange and the yborrow.finance protocol, in which you can borrow and provide loans. While these projects are at the testing phase, the developers don’t recommend using them to make money.
How yearn.finance works
Yearn.finance protocol has already passed the testing phase and technical audits. You can deposit only stablecoins to it. When the user deposits assets, he gets yTokens. For example, if you’ve deposited DAI, then you’ll receive yDAI. If you’ve deposited USDT, then you’ll receive yUSDT. These tokens are needed to withdraw your funds from the app along with the yield.
When you deposit stablecoins in yearn.finance, the protocol is able to move them between liquidity pools of other DeFi projects. With the help of oracles, the system tracks the yield in liquidity pools and automatically moves them to the pool with the highest yield.
The yTokens’ rate takes yield into account. For example, you deposited 100 DAI and received 100 yDAI. The yield can change with each new Ethereum block, so liquidity pools usually calculate the average yield. Suppose that for the year the yield averaged 3% per annum. You have decided to receive your income so you return 100 yDAI to yearn.finance. In exchange you will receive 103 DAI. That is, you will receive the entire amount, taking into account the yield accumulated during this time.
If you would like to try yearn.finance on your own, you can buy USDT stablecoins with fiat money on the Bitzlato platform.
How Yearn Vaults invests your assets
Many DeFi projects’ developers motivate liquidity providers not only with yield, but also by issuing governance tokens. These tokens give owners the right to vote on protocol changes. The more tokens you have, the more opportunity you have to influence the app. Therefore, governance tokens have their own value. They are traded on cryptocurrency exchanges and can rise and fall in price. Given these tokens, the most profitable liquidity pool is not necessarily the one with the highest yield.
To track the real efficiency from liquidity providing, Yearn Finance creator Andre Cronje created Yearn Vaults. Unlike the original yearn.finance protocol, the Vault has more options for working with user’s assets. It can:
- provide liquidity to liquidity pools;
- collect governance tokens as a reward for the liquidity providing and sell them;
- leave user’s funds as collateral in other protocols and take loans in more profitable coins.
Each Vault follows a specific investment strategy. A strategy is a smart contract that performs a set of actions on a user’s assets. For example, a user has deposited USDC stablecoins in a vault. It provides stablecoins in the Compound liquidity pool and receives yield and governance tokens. The Vault then sells these tokens on Uniswap in exchange for USDC stablecoins. As a result, it returns the profit in USDC to the user.
Users can propose their own investment strategies and vote for other users’ strategies on a dedicated community platform. You need a YFI token to vote. The strategy creator gets 0.5% of the storage transactions that contain the «harvest ()» function. These are transactions that collect profits. Therefore, users with the skills of writing smart contracts’ code can also make money by creating investment strategies. At the same time, the strategy has no time frame. If someone proposes a more profitable strategy and the community supports it, then the Vault will change its strategy. And, if another person offered it, then he will be the one receiving 0.5%.
In the Vaults, you can block not only stablecoins, but also cryptocurrency. For example, an ETH Vault investment strategy starts with using MakerDAO. The Vault will move your assets to MakerDAO and borrow DAI from it. Then the Vault will invest these DAI according to the strategy. For example, it will move them to the liquidity pool with the highest yield. It should be borne in mind that loans in MakerDAO are secured by collateral. The Vault leaves your assets as a collateral, which is 200% of the loan amount. For example, if you’ve deposited 200 ETH, then the Vault will only be able to borrow DAI in the amount of 100 ETH. Therefore, it is more profitable to deposit stablecoins to a Vault.
Also, you shouldn’t forget about the volatility of the cryptocurrency when investing ETH in the Yearn Vault. If the ETH rate falls and the collateral in MakerDAO is less than 150% of the loan, then the collateral will be sold. The user can add ETH or return all or part of the loan with interest to avoid this. Since the Vault takes the loan instead of the user, it independently monitors changes in the ETH rate and in the amount of loan collateral. If the collateral is at 150% of the loan, the smart contract will automatically return part of the borrowed DAI in order to increase the collateral amount.
Otherwise, the way Yearn Vaults work is similar to the main Yearn Finance protocol. You also deposit your assets to the Vault and receive yTokens in exchange. When you return yTokens, you receive deposited assets with a yield. If the Vault strategy includes receiving governance tokens, then the protocol will exchange them for a deposited asset. For example, you have deposited ETH, and the Vault provides your funds to the Compound liquidity pool in exchange for yield and COMP tokens. In such a case, the Vault sells these COMP tokens in exchange for ETH. When you return yTokens, you will receive the entire amount in ETH only.
If you want to try making money by using Yearn Vaults, you can buy ETH with fiat currency on the Bitzlato platform.
Vaults are used by other protocols in the Yearn ecosystem as well. For example, the yinsure.finance insurance protocol is powered by two Vaults, one holding the insured assets and the other holding the premiums from which the insurance is paid.
The YFI token as an investment asset
Yearn Finance gained its popularity mostly after the release of the YFI governance token. In 2.5 months, the token increased in price from $90 to $40,000, and its yield was more than 140,000%. The project’s creator, Andre Cronje, couldn’t explain such an increase in cost. According to the developer, the token is intended for voting only and shouldn’t be considered as an investment asset. By November 2020, the cost of YFI is in the range of $7,000-$14,000.
It’s no longer possible to receive YFI tokens for providing liquidity. They can only be bought on centralized and decentralized platforms. The YFI token distribution took place in July 2020 and consisted of 2 stages. First, it was necessary to put yTokens in the Yearn Finance liquidity pools jointly with other projects. At the second stage, Andre Cronje added two more liquidity pools joint with the Balancer project to the distribution. The project distributed 10,000 tokens to each of these pools. The total issue was 30,000 tokens and no further distribution of YFI is planned.
Yearn Finance is an ecosystem of multiple DeFi protocols that provides several earning opportunities:
- users can deposit stablecoins in yearn.finance protocol and it will automatically move them to liquidity pools with the highest yield;
- users can deposit cryptocurrency or stablecoins in the Yearn Vaults. They will collect not only the yield, but also governance tokens;
- users with the skills to write smart contract code can write an investment strategy for the Vault. If the community supports it, the strategy creator will be receiving 0.5% of the transactions which collect profits.
If you want to check yearn.finance yourself, you can buy USDT stablecoins or ETH cryptocurrency with fiat currency on the Bitzlato platform.