Yearn Finance: Everything to Know

By  Beluga Research September 26, 2023

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Summary

  • Yearn Finance is a decentralized suite of products that allow investors to engage in yield farming, the practice of staking or lending crypto assets to earn returns and rewards
  • Products offered by Yearn Finance include yVaults, yCRV, veYFI, yBribe and yETH
  • The Yearn Finance governance token, YFI, allows holders to participate in decision-making
  • Yearn Finance is governed by YFI holders

Overview

Yearn Finance is a decentralized suite of products that allow investors to engage in yield farming, the practice of staking or lending crypto assets to earn returns and rewards. Yearn allows individuals, decentralized autonomous organizations (DAOs) and other protocols earn yield, or rewards, on digital assets.

Yearn accepts a number of cryptocurrencies, including ether (ETH), wrapped bitcoin (WBTC), sushi and link, as well as stablecoins such as USD Coin (USDC), True USD (TUSD) and Liquidity USD (LUSD). One of the primary offerings of Yearn Finance is yVaults. This program accepts a deposit of a cryptocurrency and utilizes strategies to seek out high yields in the decentralized finance (DeFi) ecosystem.

A Brief History

Yearn Finance, formerly known as iEarn, was launched in February 2020 by Andre Cronje, a software developer who is a prominent figure in DeFi. Early on, Yearn Finance gained attention for its innovative approach to yield farming and commitment to decentralization. Yearn Finance initially focused on stablecoins. It has expanded to accept more assets and develop strategies related to them.

Yearn Finance: Everything to Know

  • veYFI : Yearn allows a user to lock their YFI for veFYI. The benefit is that holders of veFYI can take part in governing Yearn. A user should set an expiration date for the lock of their YFI tokens.
  • yBribe : A user is able to sell their vote to govern Yearn to the highest bidder. They can receive a reward for this action.
  • yCRV : Yearn allows a user to swap any token within the yCRV ecosystem for any other token.
  • yETH: A user can stake this liquidity pool token to mint st-yETH, staked yETH. Later they can unstake st-yETH to receive yETH back, according to their earning.
  • YFI: YFI is Yearn Finance's governance token. The platform initially distributed it through liquidity mining. YFI gives holders voting power on proposals and protocol changes.
  • yVaults: yVaults are essentially savings accounts for crypto assets. A user that deposits funds benefits by automatic yield generation. Every time a vault harvests a strategy, Yearn Finance deducts a performance fee from the yield earned. Yearn also deducts a management fee, a flat rate that is taken from vault deposits over a year.
  • Zap: Zap is a feature of Yearn's yVaults app that allows a user to deposit any token into any vault. This means a user does not need to navigate multiple platforms or execute complex transactions to deposit different coins into vaults. The Zap feature is different from "Zapper," a tool to batch transactions.

Getting Started

  • Acquire a wallet such as MetaMask. As of 2023, Yearn Finance offers its products on Ethereum, Fantom, Arbitrum and Optimism. After setting up the wallet, a user should access Yearn Finance through its web interface or compatible decentralized applications (dapps).
  • Deposit cryptocurrency assets into the platform. A user can choose from the numerous tokens that Yearn supports.
  • Realize returns. Yearn Finance automatically allocates assets to different yield farming strategies to generate the highest possible returns.

Unique Aspects

  • Vaults are smart contracts . They manage users' funds to generate optimal returns. The vaults leverage the expertise of the Yearn Finance community to execute yield farming strategies. These strategies involve lending assets on platforms like Compound and Aave. The strategies provide liquidity on decentralized exchanges like Uniswap or participate in other DeFi protocols.
  • Vaults are non-custodial. Users retain control over their funds. Smart contracts execute transactions on users' behalf. The funds always remain in the users' wallets. A non-custodial approach ensures users have full ownership and control over their assets. This reduces the risk of loss or compromise.
  • YFI. YFI holders can participate in the decision-making process for the platform by voting on proposals. The decentralized governance model allows the community to influence the platform's development. It ensures transparent and inclusive decision-making.

Advantages

  • High Yield Potential: Yearn Finance allows investors to earn high yields by automatically finding the best yield farming opportunities across different DeFi platforms.
  • Automated Yield Optimization: Yearn Finance intelligently allocates funds to yield farming pools. It continually monitors and reallocates funds for maximum returns. This automation saves users time and effort.
  • Diversification: Yearn Finance enables users to spread investments across multiple yield farming strategies and platforms. This reduces risks associated with a single platform or strategy.
  • Community Governance: Yearn Finance operates as a decentralization autonomous organization, or DAO. YFI token holders collectively make decisions about the protocol's development and management.
  • Security: Yearn Finance prioritizes security through rigorous audits, timelocks and multi-signature wallets to protect user funds.

Disadvantages

  • Smart Contract Risks: As any DeFi protocol, Yearn Finance is vulnerable to smart contract bugs or vulnerabilities. Yearn Finance conducts security audits but these do not catch all of the concerns.
  • Market Volatility: Returns generated by Yearn Finance are subject to cryptocurrency market fluctuations. This can result in investors suffering losses.
  • Complexity: Yearn Finance operates on a complex system of smart contracts. It interacts with various DeFi platforms and it's challenging for newcomers to understand and navigate these interactions. Yearn's governance documents are online and provide clarity and guidance to users.
  • Gas Fees: Users must pay gas fees for transactions and interactions. These can be expensive during periods of high network congestion.
  • Congestion: It can take time to confirm a transaction. A user can speed up the confirmation time by paying a higher gas fee to the network. Still, a transaction can get stuck. A user should read Yearn's guide on how to speed up or cancel a transaction if this occurs.
  • Not Compatible With All Tokens: A user should check Yearn's list of approved tokens. The goal is to make certain that they can use the holdings they currently have with Yearn's products.
  • Regulatory Uncertainty: Yearn Finance and other DeFi protocols face regulatory challenges due to their decentralized nature. As governments enact new regulations, users could see their accessibility limited.