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What is yearn.finance & How Does it Work? - YFI for Beginners

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Author: Hassan Maishera Updated: January 25, 2022

One of the biggest aspects of the cryptocurrency industry is decentralised finance (DeFi). Decentralised finance has made it possible for people to enjoy financial services that are mostly offered by the traditional financial institutions. 

The ultimate aim is to provide financial services to people in various parts of the world without the negative aspects of the traditional financial system.

yearn.finance is one of the leading DeFi platforms in the world. It offers lending aggregation, insurance and yield generation on the Ethereum network. The native token of the network is known as YFI. 

Why Was yearn.finance Invented?

yearn.finance is a leading DeFi protocol designed to allow people to earn profits from cryptocurrencies. It is a suite of DeFi protocols that allow holders to optimise their cryptocurrency earnings via lending and trading services.

yearn.finance, like several other DeFi protocols, realised the flaws of the traditional financial system and sought to eliminate them. As a DeFi platform, yearn.finance provides financial services to people but has eliminated the need for intermediaries such as banks and other financial institutions.

The primary goal of yearn.finance is to have products that create a simple and intuitive interface for the entire DeFi space. The YFI token is the native coin of the Yearn.Finance platform. YFI is the governance token of the DeFi platform. At the moment, the total supply of YFI tokens is 36,666 and all of them have been issued. 

However, the community has said that more YFI tokens could be minted by changes if agreed by the governance board. The scarcity of the YFI token is one of the reasons why its price is so high. Each YFI token is currently trading above $24,345. Bitcoin is one of the few coins that has a higher trading price than YFI at the moment.

Ready to invest in yearn.finance?

How Does yearn.finance Work and What Technology is Behind It?

yearn.finance is one of the leading DeFi platforms in the world. It has four major products that are described below.

Vaults

The vaults are staking pools on the yearn.finance platform that generate returns for investors based on the opportunities available in the market. The users get to enjoy the benefits of vaults thanks to processes such as crowdsourcing gas costs, automatically shifting capital according to the needs and automating the yield generation and rebalancing procedure. Basically, the Vaults is a collection of investment strategies carefully developed to generate the highest returns from a wide range of DeFi projects.

Earn

This was the first product launched by yearn.finance. Earn is the lending aggregator on yearn.finance. The funds here are moved between other DeFi protocols such as dYdX, AAVE and Compound. The shifting is done automatically as the interest rates change among these protocols. This is to ensure that users can take maximum advantage of the rates at all times. Basically, Earn is the yearn.finance product that allows users to identify the highest interest rates they can earn when lending their assets.

Zap

The Zap product allows yearn.finance holders to swap in and out of liquidity pools on the CurveDAO platform. This can be done using stablecoins like the USDT, USDC, DAI, BUSD and TUSD. The Zap product basically bundles several trades in a single click, saving users cost and labour.

Cover

This is an insurance product on yearn.finance that allows people to gain coverage in case of financial losses. The insurance coverage applies to various smart contracts and protocols on the Ethereum network.

Another popular product on the yearn.finance platform is APY. This is a data table that indicates the interest rates across a wide range of lending protocols in the DeFi space.

According to yearn.finance’s rules, the amount of the YFI token a holder earns is usually determined by the amount of the coins locked in a smart contract operating on the Balancer and Curve DeFi trading platforms.

Is yearn.finance Real Money?

The YFI token cannot be described as "real money". The YFI token is used for governance within the yearn.finance DeFi ecosystem. The token holders get to decide on changes within the protocol. It can also be regarded as an investment coin since the holders can earn profits by staking it or lending it to others within the yearn.finance platform.

If there are discussions about cryptocurrencies that could serve as real money, then stablecoins could probably take the lead. This is because the value of stablecoins is tied to fiat currencies in a ratio of 1:1. For instance, the value of 1 USDT is the same as 1 US Dollar. Since their values are stable and not subject to the volatility of the cryptocurrency market, stablecoins could be regarded as money.

We also have other cryptocurrencies that were created to serve the purpose of being a medium of exchanges. Bitcoin, Litecoin, Bitcoin Cash and DASH are some of the leading cryptocurrencies that could be regarded as money within the crypto space. However, their volatile prices are an issue that needs to be overcome before they can be used as alternatives to fiat money.

Fees & Expenses of yearn.finance

yearn.finance is a leading DeFi protocol with various products on offer for users. This means that there are various fees and expenses involved when using the platform and its YFI token. The yearn.finance vault version 1, has a withdrawal fee of 0.5%, a performance fee of 5% and no management fee. For version 2, there are no withdrawal charges, but the performance fee is 20% while the management fee is 2%. The interest rate on the Earn product differs at each point. Hence, ensure you check the best interest rates for you as a lender.

In addition to these, you will have to pay transaction fees when you buy the YFI tokens from cryptocurrency exchanges and other trading platforms. The deposit, trading and withdrawal fees differ from one exchange to another. Ensure you properly check the transaction fees operated by a platform before you buy YFI tokens.

What Are the Benefits of yearn.finance?

As one of the top DeFi lending protocols in the world, yearn.finance offers users a wide range of benefits. They include;

Multiple streams of income

One of the key benefits of the yearn.finance platform is that it offers users multiple streams of income. The four major products available on the DeFi platform allow users to earn extra income via staking, lending and investing. Vault, Earn, Insurance and Zap are all designed to help users earn profits with their cryptocurrency holdings.

Lending financial services outside the traditional system

While cryptocurrency holders can earn money due to their investments, people and organisations can gain access to loans. Unlike the traditional financial system, the lending process on yearn.finance and, in fact, other DeFi lending protocols don’t have intermediaries. This makes it easy for people to gain access to such services.

Easily accessible

The yearn.finance platform is easy to access for both lenders and borrowers. Since it is a decentralised platform, the administrative bottlenecks in traditional finance are not present to make things tough for the users.

Governance option for the YFI holders

The YFI token holders also get to participate in how the yearn.finance DeFi protocol functions. The token holders get to decide on some crucial project changes within the community. Hence, giving them the power to implement positive changes.

Can yearn.finance Be Used Anonymously?

Anonymity is a luxury only a few cryptocurrencies can afford. The privacy-focused coins and tokens are solely designed to be anonymous. However, the YFI token is not a privacy-focused token. It is a governance token for the yearn.finance platform.

Furthermore, it is now harder for crypto transactions to be anonymous, thanks to the implementation of Know Your Customer (KYC) and Anti Money Laundering (AML) policies by trading platforms in a bid to eliminate the negative use of cryptocurrencies.

How Safe is yearn.finance?

yearn.finance, like several other DeFi protocols, has experienced a hack before. The protocol suffered an exploit earlier this year, resulting in a loss of $11 million. yearn.finance’s DAI Vault was exploited, with the attacker only getting away with $2.7 million, with the liquidity pool fees and staker fees taking roughly $7 million from the attack.

However, the YFI token is hosted on the Ethereum blockchain, which is one of the most secure networks in the crypto space. As an investor, you should ensure that the security of your YFI tokens is your sole responsibility. Ensure you store the YFI tokens on cold storage wallets for maximum safety. You can also add extra security features like 2FA to your wallet.

What Teams Are Working On yearn.finance Development

yearn.finance was developed by Andre Cronje. Since it was developed, the protocol has been maintained by numerous independent developers. The developers contribute to the protocol while the governance is handled by the YFI token holders. There is no specific team that is in charge of the developments on the DeFi platform.

Which Financial Institutions Are Invested in yearn.finance?

Currently, there are no major financial institutions with holdings in the yearn.finance ecosystem. The DeFi sector is still in its early stages, and financial institutions might not be sure of how it would work out. Furthermore, the DeFi platforms like yearn.finance provide similar services and are direct competitors to some of these traditional financial institutions, hence, making it complicated for them to invest in these types of projects.

yearn.finance Mining

The yearn.finance protocol doesn’t have mining involved. This is because the YFI token is an ERC-20 token, and since it doesn’t have its own blockchain, mining is not possible. The total YFI supply is currently 38,666, but more of the tokens can be minted based on a governance agreement. YFI can be acquired by buying it from broker/exchange platforms. 

yearn.finance Wallet

YFI is one of the top DeFi tokens in the world, and it is also among the 100 most valuable cryptocurrencies by market cap. As such, it is supported by a wide range of wallets, which include both cold storage and hot wallets. Some of the wallets that support the YFI token include;

  • Ledger Nano X (cold storage wallet)

  • Ledger Nano S (cold storage wallet)

  • Trezor (cold storage wallet)

  • KeepKey (cold storage wallet)

  • MyEtherWallet

  • MetaMask

  • Atomic wallet

  • Trust Wallet

  • Coinomi

You can use any of these wallets to store your YFI tokens. However, we recommend implementing extra security protocols such as the 2FA to ensure maximum security for your YFI tokens.

Is yearn.finance Worth The Investment?

If you are interested in the YFI token, then you must decide if it is a worthy investment by carrying out research about the project. To do so, you have to study the yearn.finance project, what it does and evaluate its future prospects. Once you have enough information on the project, you can make an informed and objective analysis and decide on whether to invest in it or not. The DeFi space is still in its early days and could experience massive growth over the coming years.

We always encourage cryptocurrency investors, to only invest an amount that they can stand to lose. The DeFi market is volatile, and there are numerous uncertainties for investors.

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Frequently Asked Questions

  1. It is very expensive because Yearn.Finance has one of the smallest token supplies in the cryptocurrency world. There are only 38,666 YFI tokens in existence, which makes it only logical that the price would be high considering the platform’s massive adoption.
  2. YFI is a popular token and can be purchased on numerous crypto trading platforms. Due to its popularity, YFI can be bought on numerous crypto exchanges, brokerage platforms and P2P exchanges. We recommend buying the YFI tokens from regulated cryptocurrency trading platforms.
  3. Several wallets and exchanges have mobile apps, and you can easily access the YFI token from there.
  4. The legality of yearn.finance depends on laws governing the DeFi sector or cryptocurrency laws in your country. Try and find out the local regulations for cryptocurrencies and DeFi tokens.
  5. It is too early to say if yearn.finance and other DeFi protocols can challenge the traditional financial systems. DeFi is providing an alternative to the traditional financial services, but it could take years for massive adoption.
  6. Yes. Like other DeFi protocols, yearn.finance is prone to exploits and attacks. The protocol lost $11 million in an exploit this year. However, the DeFi sector is still early, and it is likely that these protocols will work to improve their security over the coming months and years.
  7. APY in yearn.finance stands for annual percentage yield, and it gives the user an estimate of the interest they can expect to earn annually for a specified amount of capital.
  8. yearn.finance is a unique protocol because it seeks to make DeFi investments very simple for everyone. It leverages custom-built tools to serve as an aggregator for various DeFi protocols like Aave, Compound and Curve.
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