The Beginner’s Guide to Yearn Finance And YFI Tokens

Last Updated: October 4, 2020

If you’ve been holding off from investing in cryptocurrencies because of its high risk, Yearn Finance is exactly what you need. But as always with trading in crypto, you should know what you’re putting your money into.

And that is just what we’re here for. We’ll tell you everything you need to know about Yearn Finance before you invest in it. So if you’ve been yearning to get into the world of cryptocurrencies, make sure to read the entire article carefully.

For those of you who are already trading in crypto, here’s what you’ll find in the article. Feel free to skip to the section that interests you the most!

Yearn Finance And YFI Token Explained

What is Yearn Finance?

Yearn Finance is a decentralized application (dApp) based on Ethereum that maximizes the returns on your investment. It does that by taking cryptos from you and using it on different lending protocols to maximize yield.

A lending protocol is the crypto version of intraday trading. It is a way for crypto traders to earn some interest (also called yield) on their investments.

You could also think of Yearn Finance as a mutual funds scheme for crypto investors. Much like you would have to give your money to the fund manager, you give your crypto investment to the system.

The fund manager would then invest it in the stocks with maximum yield. Likewise, Yearn Finance’s protocol would move your investment across different lending protocols. Switching lending protocols allows it to give you the best yield.

Don’t worry if you don’t understand how it works yet, we’re going to discuss it in depth later.

The History of Yearn.Finance

To look at Yearn Finance’s history, let’s dial back a little bit on the time machine.

In early 2020, Andre Cronje, the man behind Yearn, used to invest whatever he earned from stablecoins. And he did that using Decentralized Finance (DeFi) lending protocols. DeFi is what you would get if the finance industry decided to shift to blockchain.

And stablecoins, in case you’re wondering, are low-risk cryptocurrencies linked with a stable asset. One of the most popular stablecoins is Tether (USDT) whose value is linked with the USD. So, at any given point, it would be trading at more or less 1 USD.

Let’s get back to Cronje again. He got tired of searching for the best yield, shifting his stablecoins to the other protocol, and paying the gas fees again and again. So he developed his own smart protocol based on Ethereum to automate this process.

And he decided to keep the system open for everyone since that won’t hurt the protocol. If anything, it would make it more efficient. And that is when he decided to rebrand it to what it is right now and announced the governance token, YFI. Anything that happens within Yearn is managed with YFI.

Since its launch on 21st July 2020, YFI has grown from its initial value of $6 to more than $30,000. It was the first token of its kind as it hadn’t been premined before launch. Nor was it available on exchanges. You could only earn it by using the protocol.

And that just about sums the history of Yearn Finance. Do you know what that means? It means it’s time to get into how it works!

The Mechanics of Yearn

The way the whole system works is pretty simple – at least on the user-level. Let’s try to understand it with the help of an example.

Let’s say you’re looking forward to investing 500 DAI (an Ethereum-based stablecoin). When you give that to Yearn, its Earn protocol invests it and returns you 500 yTokens. In this case, you get 500 yDAI since you invested your DAI tokens. The yTokens you get represent your share in the liquidity pool.

The protocol keeps moving your investment between lending protocols to ensure maximum yield.

Let’s say the protocol put your money in dYdX, an Ethereum-based lending protocol, because it was giving the highest yield. But now another Ethereum-based lending protocol, Compound, is giving better yield. In that case, the Earn protocol would move your money to Compound to ensure you get the maximum profit.

Now when you want to get your DAI back, you can turn your yDAI over and the protocol would return you your DAI tokens.

And that is just one of the many products that make up the Yearn Finance ecosystem. We’ll discuss the other products as well later in the article.

What is Yearn.Finance’s Earn Product?

You can imagine Yearn.Finance’s product, Earn, to be a middle-man between the user and the lending protocols. So you don’t have to take the time and effort to track and find the best lending protocol.

Earn supports Dai (DAI), USD Coin (USDC), Tether (USDT), TrueUSD (TUSD), sUSD (SUSD), and Wrapped Bitcoin (WBTC). Hopefully, the team would add support for more cryptos later but for now, these are the only supported cryptos.

When you invest using either of these cryptos, Earn shifts it between a few Ethereum-based lending protocols. And it does that automatically using a set of codes, making the process efficient.

Between the three supported lending protocols – AAVE, dYdX, and Compound—the one with the highest yield is where your tokens go.

As the interest rate changes, the set of codes switching the protocol come into action again. This ensures you receive optimal interest on your deposit at all times.

What are yEarn Vaults?

When you give your cryptos to Yearn, they go to pools of funds called yVaults. These pools of funds have a strategy associated with them to maximize the returns on the funds in them.

Most strategies do a lot of things (instead of going specific) to get the highest possible returns.

The best part of these vaults is the fact that the Yearn community decides the strategy for the vault. This way, the community feels empowered and makes the best out of the platform.

It is worth noting here, that yVaults charge 0.5% per withdrawal. It also charges a flat 5% on additional yield every time harvest() is called.

There are nine yVaults available as of now where your funds go:

1. ETH/WETH 

2. YFI 

3. yDAI+yUSDC+yUSDT+yTUSD (yCRV) 

4. crvBUSD 

5. crvBTC 

6. DAI 

7. TUSD 

8. USDC 

9. USDT

These vaults aren’t left unchecked. There’s a Controller who creates and maintains them. It is the responsibility of the Controller to keep an eye on the strategy execution. And it is our responsibility to make sure you know what Yearn does with the Vault deposits. So read on!

What’s Yearn doing with all these Vault deposits?

There’s a lot that’s happening with the Vault deposits. Let us take you on a journey through the lifecycle of a deposit. Remember the 500 DAI you deposited while trying to learn the mechanics of Yearn? Let us track its journey!

The first place your DAI tokens find themselves at is a vault. There are two pools of funds in each vault. One of them acts as a reserve from which the tokens are returned to the user upon a withdrawal request. The protocol invests the other one completely. 

There are, however, conditions for both withdrawal and investment. So let’s take a look at what they are.

Let’s start with the reserve. If there’s a need for funds in the reserve, some of your tokens go into the reserve. They stay idle until you request for withdrawal. When that happens, the protocol tries to take tokens out of the reserve and give them to you. 

But what if there aren’t enough of your tokens in the reserve? What if you ask to take all 500 DAI tokens back but the reserve only has 100 DAI tokens? In that case, the protocol would take tokens out of the other pool and give them to you. And when that happens, you need to pay a 0.5% withdrawal fee.

The withdrawal fee charged here is because of the computational power used in getting your tokens back from the lending platform.

While that is low, there’s more you might need to pay. There are some profit-earning transactions that use more computational power to perform. To keep the fee for these transactions low, you need to cough up an additional 5%.

Out of this 5%, 10% goes to the creator of the strategy that led to the profit-earning transaction. And the rest goes to the treasury which has a threshold of $500,000. Everything beyond that goes to the governance staking contract. It is worth noting here that this only happens when the strategy is community-made.

What is the YFI token?

While the Yearn protocol seemed decentralized when Cronje made it, he was a central entity. He could code and implement any changes he wanted to the protocol. But decentralization is what the blockchain movement is all about. And Cronje believed in that.

So he made a system that allowed members of the community to govern the future of the protocol. And he did that by introducing a governance token called the YFI token.

To ensure further fairness, he didn’t mine any tokens before launch. Nor was there any team reward or VC allocation. All the tokens were to be mined by and for the community.

Can you Mine YFI token?

Not really. All the YFI tokens that had to be mined are already circulating in the market. The community voted against mining any new tokens so it won’t be mined in the future. Unless, of course, the community votes to start mining the tokens once again.

Until that happens, you can buy YFI tokens—which is what the next section is all about!

Where can I Purchase YFI?

YFI is being traded on almost all major trading portals. However, if you need a quick suggestion, we have two:

  • Binance: It has been in the industry for a very long time and has gained the trust of countless crypto traders. If you’re new to trading, it can be a good platform to start out with.
  • OKEx: Most of the new and old cryptocurrencies can be found on this platform. With an interface that is easy to understand and navigate, OKEx might be the platform for you.

What Else can Users do with Their yTokens?

You have a few options here. Let’s start with the most obvious option. You can deposit it at a later stage to get your original tokens back. 

Continuing with the example from earlier, you could give Yearn the 500 yDAI you have. And the platform would return you your 500 DAI along with the profits you’ve made. 

Alternatively, you could invest it in another Yearn service and get a yToken against it.

But perhaps the most interesting use for the yToken is to move between stablecoins. So, imagine if you want to turn 100 of your DAI tokens into Tether tokens, you can head to Curve and get it done.

Curve is the platform Yearn worked with to make yUSDT, yUSDC, yDAI, and yTUSD.

What is yInsure?

The Yearn team has big plans for expanding the system in the future. For now, however, we have a handful of services, one of which is yInsure.

Underwritten by Nexus Mutual, yInsure is a pooled insurance coverage. It is non-KYC and consists of the following components:

  • Insurer Vaults: These vaults hold assets used to insure those making insurance claims.
  • Insured Vaults: These vaults hold the assets that the claimants ask to be insured. 
  • Claim Governance: These are the rules as per which the insurance claim process is to be carried out.

What is ySwap?

Yearn uses Uniswap to create decentralized trading pools right now. But there is an automated market maker (AMM) the team has created and is currently testing out – ySwap.

ySwap would be used to create pools that the traders can use for trading. With this AMM, users can bypass Uniswap’s conditions of having an equal share of both tokens in the pool. This would allow them to provide liquidity using one token (instead of two). So the market makers who don’t have both the tokens in the pool can participate as well.

What is yTrade?

yTrade is perhaps the closest this platform gets to intraday trading. You can borrow up to 1000 times the amount of stablecoins you’re investing from your own pocket.

So if you’re coming here with your 500 DAI, you can borrow and trade on up to 500,000 DAI. You would have to deposit your 500 DAI as collateral though. 

Once you see that the value has appreciated enough, you can sell it off. You can then use the profits to buy back the 500,000 DAI you borrowed.

What is yBorrow?

Smart contracts use credit. With the internal tool yBorrow, Yearn can use this credit on smart contract lending instead of smart contracts.

How is Yearn Governed?

Yearn’s active community shoulders the responsibility of its governance. People post strategies on the governance forum about how things should go about. This could be how different vaults should be handled or what the future of Yearn should look like.

The way it works is that a proposal for making some change in the strategy is raised. To participate, YFI holders stake some YFI and vote whether they want to invest in the change or not. 

If passed, the strategy is put into action. Since the community gets to decide if the strategy is passed or not, it always benefits them.

It is worth noting here that when you stake your YFI tokens for voting, it is locked for three days. This minor inconvenience is remedied by rewarding the voters with a small fee.

The Risk of Yearn Finance and YFI Token

To take care of the risks involved, Yearn has come up with yInsurance. Through this collaboration with Nexus Mutual, the platform helps users mitigate risk.

This way, you don’t have to worry about the volatility of the crypto market and can invest in peace.

The Final Note

Yearn truly cares about its community and hence has their full support. It has already grown astronomically and is expected to continue doing so with all the products still in the pipeline. 

We are no fortune-tellers. All we can tell you is what we feel about the platform. And seeing the team and the community of yearn.finance, it can be said with some certainty that it would grow a lot in the future.

That said, we hope you enjoyed reading this as much as we enjoyed writing it!


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