There have been several innovations in the Decentralized finance (DeFi) space which seeks to improve financial services for everyone. As DeFi continues to gain popularity, more investors find ways to diversify their earnings on different lending and borrowing platforms.
One aspect of DeFi that has gained popularity is yield farming, and the interest in this alone has helped the DeFi space grow exponentially. Yield farming involves lending or staking cryptocurrency in exchange for interest payments. Users contribute liquidity or funds to DeFi protocols and are rewarded for doing so.
One of the DeFi projects that offer attractive yield farming opportunities to users is Yearn.Finance.
In this article, you will learn about Yearn.finance, how it works, and the various utilities of its YFI token.
What is Yearn Finance?
Yearn.finance is a DeFi platform that seeks to simplify the yield farming process for investors. It aims to get the most profits from digital assets by using automated processes for yield farming through its yearn protocol.
Yearn.finance network aims to be the gateway to several yield-generating products in the Ethereum ecosystem. It does this by partnering with several DeFi projects like Curve and Aave to integrate staking services and assist investors who don’t want to spend a lot of time searching for the platform with the best interest rates.
Yearn.finance was launched in February 2020 as yEarn by Andre Cronje. He is a famous developer in the DeFi space. Due to the DeFi boom of 2020, yearn.finance YFI token surpassed the price of Bitcoin, becoming one of the most valuable coins in the market. However, the token has fallen significantly from its all-time highs.
Use Case: Voting Proposals
The YFI token was solely designed to be used in the yearn governance by holders to decide on the future of the protocol. The voting on new changes is done on proposals submitted on the yearn governance platform.
The proposal is known as the Yearn Improvement Proposal (YIP). The process for managing Yearn.finance is largely similar to that of other DeFi protocols. The governance token, YFI, must be staked for the holder to qualify to vote on network governance decisions.
One YFI token is worth one vote, and the votes can change any code on the protocol, including the ability to mint more YFI tokens, burn the minting keys, and set the standard fee structures in the Yearn Protocol.
Recently, token holders also voted on a change in the protocol to allow only those who stake YFI to partake in the decision-making process in Yearn governance and to earn rewards from the transaction fees that Yearn products generate.
To introduce a new proposal via the YIP process, a user needs to discuss the proposal in standard Yearn communication channels to know the opinion of the community. Such proposers are responsible for building approval and convincing others to support their idea.
If there is enough support, a formal YIP can be submitted, which must include the specifics of how Yearn’s smart contract code would change if the proposal is approved. Only YFI token holders can officially vote on a proposal.
YFI votes occur on Ethereum, which ensures that the process is transparent for all to see and permanently recorded on the blockchain.
Use case: Yield-farming on Yearn Finance v2 Vault
YFI tokens can be used in partaking in yield-farming on the Yearn Finance YFI v2 yVault. This vault lets you deposit YFI tokens and you can focus on other things, while it earns yield for your digital assets at the most profitable protocols.
The vault allows you to use your YFI to mint new DAI stablecoins and use the DAI minted to farm new earnings. Also, the yVault lends out YFI to other lending protocols like CREAM to generate more earnings for you.
For your assets to be fully insured against loss in the YFI v2 vault, you would need to provide insurance for either Yearn protocol, MakerDAO, AAVE, or CREAM. You can be selective about which coverage to buy and only pay for the protocols you believe to be risky.
Use Case: Collateral to Borrow on Makerdao and Unit Protocol
Lending protocols like Makerdao and Unit Protocol allow you to deposit your YFI as collateral in exchange for a smaller amount of the protocol-issued token, which is usually a stable coin.
You can then use the issued token or stable coin from the protocol to farm and generate yield elsewhere. Using this method to farm yields takes more time and requires constant monitoring of the debt position to make sure you’re above the liquidation ratio.
Most of the protocols set a limit ratio that allows you to borrow from them. This means that if the collateral ratio is 69%, like in Unit Protocol’s case, then if the price of your YFI deposited for minting stablecoins is worth $1000, the max you will be able to mint in their stablecoin is $690.
It’s important to note that this is the highest amount you can borrow and if it goes above this ratio you will get liquidated. It’s best to borrow far below this ratio so that you minimize the risk of liquidation or losing your assets.
To insure your assets, you would need to insure MakerDAO where you deposit your YFI and also the protocol where you lend out or deposit your DAI stablecoins. This will help you have full coverage in case of a smart contract bug that could lead to the loss of funds.
Use Case: Providing Liquidity
First of all, you need to understand what a liquidity pool is. A liquidity pool is a large amount of cryptocurrencies or tokens that several users deposit together and is locked in a smart contract to be used to facilitate trading on a decentralized exchange (DEX).
YFI can be used to provide funds to liquidity pools in yearn.finance. However, you will need to provide your assets to both sides of the pool. For instance, If you want to stake YFI in a YFI/WETH pool, you will add YFI and an equal $ amount of WETH (wrapped ETH) as well.
Generally, in using a liquidity pool like Sushiswap and Uniswap, you want to be in the pool with the most volume as that means more fees as rewards for liquidity providers. SushiSwap liquidity pool generally has higher yields than Uniswap as its pools are subsidized with SUSHI rewards.
Impermanent loss and smart contract error are the concerns to be aware of when providing liquidity with YFI at SushiSwap or Uniswap. To insure your YFI against such risks, you would only need to insure Uniswap or SushiSwap to have full protection in case of a smart contract bug that could lead to the loss of funds.
What Makes Yearn.finance Unique?
It’s beyond any doubt that Yearn.finance is simplifying investments and activities in decentralized finance (DeFi) like yield farming for a large number of investors. It achieves this by introducing several unique tools that help it become an aggregator for decentralized finance protocols like Compound, Aave, and Curve,
Some of the unique tools currently running on the platform include; Vaults: staking pools that Yearn Finance offers to its users to optimize yield farming; Yearn Earn: a “lending aggregator” that helps users attain the maximum amount of earning from stable coins; Yearn Zap: a product that facilitates asset swaps and Yearn Cover: protects users against financial losses on the yearn protocol.
All of these set Yearn.finance apart from other DeFi protocols because it doesn’t seek to become another competitor but to collaborate with other protocols to offer enhanced financial services to users.
Also, while some DeFi protocols focus on offering just lending and borrowing services, Yearn. finance takes an extra step in providing security for assets in its protocol, through its yearn cover product.
Furthermore, Yearn.finance has a target market of investors who are too busy to study the increasingly complex patterns of yield farming and thus helps them simplify the process while optimizing their returns for them.