What is Yearn.Finance?

In the summer of 2020, decentralized finance took off. The industry, a collection of financial crypto projects powered by automated code (smart contracts), had started the year at a valuation of $1 billion, but in the summer added at least an extra $1 billion every week.

Spurring all of this was something called “yield farming,” which involved scooping up lucrative loyalty rewards and interest earned from investing in different decentralized finance protocols and then selling the lump-sum for a profit.

So lucrative was yield farming that people invested money in DeFi protocols—mostly lending protocols and decentralized exchanges—expressly for the purpose of earning these tokens, which could offer yields in excess of 1,000%.

Because the market was growing at such an astonishing rate and new protocols and tokens were created all the time, these yields varied massively each day. This made it incredibly difficult to work out, at any given moment, which protocol offered the highest yield.

Yearn.finance, previously known as iearn.finance, played a central role in guiding this mini gold rush. Deposit money in its smart contracts, and yearn.finance’s algorithm automatically invests in DeFi protocols to maximise yields and generate as much interest as possible. Consider it a kind of algorithmic trading bot for interest accounts, the crypto equivalent of moving your money between different interest-bearing bank accounts to harvest interest and discounts at Applebee’s.

Yearn.finance was created by Andre Cronje, a South African software developer. Since the summer boom, Cronje and his team have expanded the project, which as of January 2021 comprises a lending bot, a yield bot, an insurance protocol and a governance protocol.

This governance protocol, launched in July summer, is the focus of this article. To power it, yearn.finance launched a token, best known as YFI, that holders could use to vote on future proposals to upgrade the network. It’s one of several governance tokens of its kind.

Yet, like so many others, YFI became incredibly valuable. As of January 2021, its all-time high price is $43,873—higher than Bitcoin’s all-time high. In part, that’s because there are so few YFI tokens in existence; the protocol minted just 30,000 of them and can’t mint any more. By contrast, there are about 18.5 million Bitcoin in circulation.

Strangely, the creators wrote at the time of the token’s launch that YFI should have “0 value,” and warned its users: “Don’t buy it. Earn it.”

They wrote: “We reiterate, it has 0 financial value. There is no pre-mine, there is no sale, no you cannot buy it, no, it won’t be on Uniswap, no, there won’t be an auction. We don’t have any of it.” But, like all decentralized projects, the fate of the token is out of their hands. As of January 2021, YFI has a market capitalization of $880 million, making it the 48th largest cryptocurrency by market cap. It trades for $29,212 and traders shift $328 million of it each day. Remember, its creators had written: “And just because we feel we didn’t stress it enough, 0 value.”

So why is YFI worth an infinite amount more than its creators envisioned? Without getting bogged down in the “Why do any cryptocurrencies have value?” debate (or its stomach-churning forefather: why does anything have value?”), it’s likely because of the fact that YFI is scarce, the project is fashionable, and to buy a YFI token is a $30,000 investment into a single voting right for its governance protocol. Yearn.finance’s manifesto states: “Holding YFI entitles you to signal for real, practical change that improves Yearn. It doesn’t give you the right to tell other contributors what to do. You want something done? Do it.”

YFI has been so successful that it spawned a series of imitations; some of them are scams and others have turned into legitimate projects. Among the copycat imitations are YFII, YFIII, and WAIFU, the latter a reference to ultra-effeminate cartoon women, usually from Japan. Odd, but given the bizarre tone of the rest of the tongue-in-cheek community, not entirely unexpected.

How is YFI different than Bitcoin?

YFI differs from Bitcoin in a few key ways.

First, YFI is an ERC-20 token, meaning it is a token that runs on—and is backed by—the Ethereum blockchain. This means that YFI does not have its own miners. Ethereum miners perform the task of processing and validating YFI transactions, just like how Bitcoin miners process and validate Bitcoin transactions.

But if Ethereum miners earn Ethereum from mining Ethereum, how can you earn YFI? Well, you can’t—at least, not anymore. Upon launching the project, yearn.finance issued YFI to people who had invested in the YFI protocol. The team wrote: “Earning YFI is simple, provide liquidity to one of the platforms above, stake the output tokens in the distribution contracts (we will provide an interface for this), and you will earn a (governance controlled) amount per day.” However, those tokens were snapped up quickly as the price soared. Now, the only way to “earn” YFI is to earn it as interest from other DeFi protocols or to buy it on spot markets.

The second major difference between YFI and Bitcoin is that while the Bitcoin blockchain is secure, yearn.finance is very risky. The term “beta” is splattered around yearn.finance’s site and founder Andre Cronje says that the project is “experimental.” Upon launching a new protocol, yCredit, Cronje the caveat that his new system could be “economically exploited.”

And decentralized finance is prone to hacks and scams. For instance, yearn.finance recently integrated pickle.finance, a financial protocol that was hacked for some $20 million. Remember: although these vulnerabilities may not affect the YFI token itself, they could damage the value of the ecosystem that YFI powers. After the pickle.finance hack, the price of its token, PICKLE, fell by 43.8%, according to metrics site CoinGecko. Imagine if the same happened to yearn.finance, an equally experimental project?

Moreover, since YFI was minted by yearn.finance’s contracts, someone (or a group of people) that hold enough YFI could vote to alter the future of the token, for example by minting a rival token or damaging the entire protocol irreparably, dragging down the value of YFI with it. This sort of thing is much harder to do on Bitcoin; its market cap is about 600 times that of YFI.

How to buy YFI

Lots of DeFi tokens are too small to be picked up by major exchanges. But YFI is one of the greats, and it’s available on most major exchanges these days. Even Coinbase, the San Francisco-based crypto exchange giant known for listing a small selection of coins (lest it draw the ire of regulators), lists the token. It’s even listed on the decentralized exchange Uniswap, despite its creators saying the opposite when they launched the token. It’s also listed on brokerages, such as Wealthsimple.

It’s pretty easy to buy. All you have to do is sign up for an account on the exchange platform of your choice. Most require you to live in a certain jurisdiction and provide some form of personal identification, such as a passport or a driving license. Others, such as decentralized exchange Uniswap, don’t require such information.

You can either buy YFI using another cryptocurrency, or directly for fiat currencies (like the US or Canadian dollars). The most liquid market (i.e. the most popular one, meaning that it’s easier to fill trades), is the YFI/USDT market on Binance. This pairing accounts for 8.43% of all trading volume. In fact, 16% of the total trading markets are formed from the three most popular USDT markets; the other top markets are on OKEx and MXC.COM.

If you’re not buying YFI with a fiat currency, you’ll first have to buy the corresponding pair and trade that with YFI. For some coins, such as Bitcoin, note that the price of Bitcoin can change very quickly. If you buy $100 worth of Bitcoin before bed, intending to trade it for YFI in the morning, that Bitcoin might be worth far more or far less by the time you wake up.

Different platforms also charge different fees. Decentralized exchanges such as Uniswap charge the highest fees, sometimes as high as $15 for a single transaction. This is because they’re based on the sluggish Ethereum blockchain and you must pay off miners to process your trades. Other crypto exchanges do the bulk of their work off-chain, meaning that you don’t have to pay huge network fees. Instead, you may have to pay hefty exchange fees, which can be charged on anything from transactions, deposits, withdrawals, or conversions. There’s also the “convenience” fee charged by platforms such as Revolut, Coinbase and Wealthsimple for the privilege of using easy-to-use platforms.

What you can do with your YFI depends on the platform you use. On many platforms, you can move your YFI to external cryptocurrency wallets and do whatever you please with them (like sell them on other exchanges, or invest them into DeFi smart contracts, like yearn.finance). Others, such as Wealthsimple and Revolut, don’t let you move your coins to other platforms; you must keep them on the platform you bought them on and hope that the companies that control those coins are true to their word.