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Understanding Yearn Finance | The Crypto That Surpassed Bitcoin’s Price

Basics of Cryptocurrency
Last updated November 4, 2020

Big numbers draw attention and so is the case for Yearn Finance. With the explosion of the DeFi sector in 2020, the YFI reached an all-time high of $43,873.82 on September 12, 2020.

Although by market cap it wouldn’t have made it even in the top 10 cryptocurrencies, YFI became the most expensive crypto asset in 2020. At least for a short while.

However, after that peak, the Yearn Finance’ token followed a downtrend, even if the prospects were expecting for it to skyrocket.

Let’s see what’s going on there.

What is Yearn Finance

What is Yearn Finance

The base element of Yearn Finance is not the YFI token, but its protocol. The Yearn protocl is a yield optimizer that has the main role of automatically switching between a number of different DeFi landing protocols.

Yearn Finance is an Ethereum dapp built by Andre Cronje. It was developed to automate the allocation of supply liquidity to different pools and choose the landing protocol that offers the best APY (Annual Percentage Yield). In a way, it is an automated yield farming protocol that allows the allocation of funds to the best return opportunities.

By creating dedicated-automated investment methods, the protocol allows investors to deposit liquidities to a pool, receiving back yTokens that show the property over the investition, just like a receipt would do.

Once the investors’ funds are in the pool, the protocol will eliminate the manual tasks of checking the evolution of lending protocols and the decision process of switching between different options.

The importance of yTokens

The importance of yTokens

In Yearn Finance you have multiple ways of investing. But at its core, the protocol will switch between landing protocol and liquidity pools like Dydx, Aave, Compound, Curve, or other DeFi, in order to maximize profits from Interest on stablecoins, trading fees, or liquidity provider rewards.

And as mentioned before, once an investor deposits its liquidity in the dedicated pool he will receive yTokens to show for it. The yTokens are the ‘wrapped’ version of the deposited token which is optimized for yield.

So, for DAI, USDC, USDT, and TUSD an investor will receive wrapped yield-aware tokens such as yDAI, yUSDC, yUSDT, and yTUSD.

When the users want to withdraw their funds and receive their interest, they can just redeem their yTokens and get their cryptocurrency back.

Although the protocol will switch between Landing Protocols, whenever one offers a higher yield, it will not change the cryptocurrency even if one offers a higher yield. Therefore, an investor that deposited USDT will get back USDT as well.

Understanding the YFI coin

Understanding the YFI coin

Firstly, YFI is not a coin but a governance token, just as it was announced on the official medium profile. It was distributed to the early users that got involved. When released, YFI couldn’t be pre-mined, bought, or auctioned. It was just a financially valueless token that allowed for the decentralized governance of the Yearn ecosystem. 

The holders of the tokens are allowed to vote on decisions regarding the future of the protocol. And besides voting, the YFI can also be used for staking. An important thing to mention is that holders can vote on the development of the protocol only if they have staked tokens

When it comes to growth potential, YFI has:

  • A great degree of scarcity, with only 30,000 tokens;
  • Voting power;
  • A limited hedge fund-like characteristic, in which the partners are rewarded with all the treasury funds that go over the $500k bar.

Moreover, the people use Yearn Finance, the more the fees will be generated for the treasury and the governance pool.

Yearn Finance in the DeFi context

Yearn Finance in the DeFi context

Yearn Finance works like a bridge for yield farmers to different earning protocols. But as nice as the idea behind it sounds, we can’t help but see how the YFI token is performing.

As of 3 November, it went under $10k, in a context where the DeFi hype seems to have died down.

However, Genesis lending’s report shows that it increased by more than half in Q3 of 2020 when compared to Q2 of 2020, so the DeFfi’s might see a comeback.

As for Yearn Finance there are a few factors that might keep the token from coming back. 

Andre Cronje developed a gaming protocol, Eminence, in which investors threw millions out of nowhere. On September 28, the funds were lost after a hacker exploited a bug in the protocol to steal all the funds. 

The testing in the production method approached by Cronje became even more unpopular with the investors. The developer of Yearn Finance expressed himself publicly that he’s not fond of DeFi speculators. Luckily, he received $8M to his Yearn address, and used the funds to refund the speculators.

Yet the selling pressure on the YFI token is growing while over 86% of YFI addresses are currently in a loss.

Key takeaways

  • Yearn Finance is an Ethereum dapp built by Andre Cronje, developed to automate the allocation of supply liquidity to different pools and chooe the landing protocol that offers the best APY (Annual Percentage Yield).
  • The ytokens are the ‘wrapped’ version of the deposited token which is optimized for yield. 
  • So, for DAI, USDC, USDT, and TUSD – an investor will receive wrapped yield-aware tokens such as yDAI, yUSDC, yUSDT, and yTUSD.
  • YFI is the governance token of the Yearn Finance protocol that allows holders to vote on decisions regarding the future of the protocol. It can also be used for staking.
  • As promising as it started, since October 2020 YFI has seen a lot of selling pressure that can be correlated to the unfavorable opinion regarding the testing in production approach employed by its developer. And, with the DeFi hype dying down, over 86% of YFI addresses are currently in a loss.
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