What is Yearn Finance?

Few DeFi projects are able to make a dent in the world of crypto, and Yearn Finance is one of them! Started out in 2020, Yearn Finance is the brainchild of Andre Cronje, a software developer who became an influential figure in the industry.

To explain the importance of Yearn Finance, let's take a journey back to the DeFi summer of 2020. For the entire world, this was a weird time. With nothing better to do, people started exploring making money trading. In between Netflix and Twitter, the crypto community had started to play around with the idea of DeFi. Then, the concept of yield farming emerged.

Yield farming is associated with "triple digit APYs," "🚀🚀🚀" and "degen" behavior. In reality, users could deposit liquidity into pools, and then use the LP tokens to provide liquidity on other protocols. It only took a couple weeks before the DeFi industry reached its first $1B in total locked value.

There seemed to be no end to the number of yield farming protocols. Every day, a new farm was baiting users with its 10,000% APY, before another project stole the show. The idea of triple digit gains was enticing, especially that users only had to provide liquidity. But for Cronje, this was frustrating. Users had to spend hours at end searching for the highest paying protocol, and before they deposited with it, another project was doubling down on its gains.

Variety wasn't the only problem. Every DeFi project was launching on Ethereum, which meant users had to spend thousands of dollars worth of ETH to migrate from one farm to another. In the midst of the gas wars, Cronje saw the unique opportunity to solve these challenges.

Yearn Finance derives its value from seeking the most profitable yield on behalf of the user. The protocol was an instant hit from day one. All you had to do was to deposit with Yearn and its smart contracts would do all the heavy lifting on your behalf. Ethereum fees were no longer a barrier for the rich. Yearn Vaults aggregate users' crypto, and split the transaction costs among its liquidity providers. 

On July 17, 2020, Andre Cronje announced he was giving away control. Anyone providing liquidity on Yearn could earn YFI. Not only that, but he also gave away ALL his YFI tokens, worth over $1b at the time. Andre's message was clear and simple: "The control is in your hands. Good luck."

With this fair launch, Andre unknowingly helped knit one of the strongest communities in DeFi. Yearn had generosity in its DNA, and it reflected in the protocol's vision moving forward.

Yearn Finance has its native token, called YFI (pronounced “wifey”). It is a governance token that it can also be used to provide liquidity on other DeFi protocols. Its price is tightly correlated to the value that Yearn Finance creates. YFI holders are in total control over the protocol and its underlying vault strategies. Because Yearn is such a powerful tool that powers many other DeFi protocols, YFI holders have a vested interest in the long-term health of the protocol. 10% of the generated yield fees by all strategies (performance fee) goes to the Yearn DAO treasury. With a hefty treasury, Yearn is able to pay for development and expand its suite of services.

Although the protocol was audited several times, Yearn suffered a hack on February 5, 2021. The nature of the hack can be categorized as arbitrage. Basically, the hacker used a flash loan to borrow millions in crypto assets, use those assets as collateral to borrow more crypto, then repeatedly deposited those borrowed assets in a Yearn pool.

The exploit consisted in manipulating the DAI price in the pool, and benefitting from that rate by exchanging the liquidity provider tokens earned for stablecoins. In doing this, the attacker essentially gamed the exchange rates on Yearn to accumulate CRV tokens to sell for stablecoins. Though the attacker robbed Yearn of $11M, exorbitant fees yielded only $2.5M in profit. 

The incident serves as a reminder that the permissionless and anonymous nature of DeFi (Yearn Finance doesn't require KYC) is a double-edged sword. Fortunately, the team was quick to respond and voted with the community to refund the affected users. Today, Yearn Finance is regarded as one of the OGs of DeFi.

How does Yearn Finance work?

One of the core features of Yearn Finance is the yVaults, which are automated investment strategies designed to maximize yield for users.

yVaults are essentially smart contracts that automate the process of moving funds between different DeFi protocols in order to earn the highest yield possible. Users deposit their funds into a yVault, and the smart contract automatically deploys them to different yield farming protocols, such as lending pools, liquidity pools, or automated market makers, depending on the strategy being used.

As simple as it sounds, the secret sauce behind the yVaults is how they are configured. In other words, strategists need to come up with a profitable way of rotating funds between farming protocols. The end goal is to maximize profit, and the adaptability of the vault dictates its traction among users.

Users who deposit with yVaults will receive yVault tokens, which are essentially receipts of their position in the liquidity pool. For example, if you deposit WETH in a yVault you will receive yvWETH in return. yvWETH would be the yVault Token. If your yVault generates profit, the share price of your yVault tokens will increase. This happens because there are more underlying tokens in the yVault to redeem upon withdrawal.

The yVaults are managed by the Yearn Finance community through a decentralized governance system, which allows users to propose and vote on changes to the strategies being used by the yVaults. This means that the strategies used by the yVaults can be constantly updated and optimized in response to changing market conditions and user preferences.

One of the benefits of using yVaults is that they allow users to earn high yields on their crypto assets with relatively low risk. By automating the process of moving funds between different DeFi protocols, the yVaults minimize the risk of impermanent loss and other types of risk associated with manual yield farming strategies.

To understand how yVaults work, let's work out a simple example using the Ethereum v1 yVault strategy.

When a user deposits ETH, the ETH is then lent at MakerDAO as collateral. The collateral is used to borrow DAI. The borrowed DAI is deposited into the DAI yVault, where is deposited into the Curve pools. The resulting yield is split among the LPs and strategists (10%). Over the year 2% of the vault’s total assets are taken as fees which go to Yearn to pay for expenses like gas, developer grants, and other services. 

One of the key functions of a strategy is called “harvest”. When called, it triggers a rebalancing process where profit is realized and reinvested back into the strategy. Basically, the profit generated by yVault tokens will compound over time.

Yearn Finance yCRV

One of the critical components of Yearn’s infrastructure includes a collaboration with Curve.fi. Several Yearn vaults provide liquidity into Curve pools and stake the liquidity provider (LP) tokens into the respective gauges, earning CRV rewards.

The most popular vault is the veCRV-DAO yVault (yveCRV-DAO). This vault converts your CRV into yveCRV, earning you a continuous share of Curve fees which are boosted over what you earn staking at Curve. The more CRV converted, the greater your weekly rewards. Every Friday, these can be claimed from the vault as 3crv (Curve’s 3pool LP token).

Yearn, itself, deposits 10% of all CRV earned into this vault and gives its 3crv rewards to vault token holders which is where the boosted weekly rewards come from. Depositing is non-reversible: You can only convert CRV into yveCRV, as the CRV is perpetually staked in Curve’s voting escrow. All vaults send 10% of earned CRV to this vault to sustain boost levels.

Yearn Finance yBribe

yBribe is a platform where vote-escrowed Curve (veCRV) holders can receive compensation from buyers interested in increasing CRV emissions to their Curve pool’s gauge.

Curve conducts weekly gauge votes that determine the allocation of CRV rewards to various pools. By buying votes, DAOs, protocols, and users can influence the direction of these rewards and boost yields in pools beneficial to them. To do this, use the ‘Bribe a Gauge’ function on yBribe. Once the bribe is posted, voters will see the pending APR for the gauge increase.

veCRV holders can sell their gauge votes to the highest bidder each week by voting on the bribed gauge with the highest APR.

Unlike other platforms, there are no whitelists and you do not have to ask permission (no KYC either) to add your token as a bribe. yBribe only charges a 1% fee in comparison to the 4% charged by others.

Yearn Vault Factory

Until recently, yVaults strategies had to be approved by the Yearn community. From there, the creator of the strategy received 10% of the vault fees. The introduction of permissionless yVaults enables anyone to deploy their own vault. It could be an existing DeFi protocol, or an enthusiastic DeFi user. It is important to note that the yVaults listed on Yearn Finance have been vetted by the community.

The Vault Factory is a simplified interface for creating your own yVault strategy. Everything from the type of supported crypto to the risk parameters will be customizable to fit the users' strategy. 

For now, the only protocol supported is Curve. In the future, more protocols will be supported. All factory-deployed vaults have no management fees and a flat 10% performance fee. Users have 37 vault strategies at their disposal. 

How to make money on Yearn Finance?

As complex as yVaults can get, from the users' perspective it's very simple to make money. All you have to do is deposit with Yearn Finance, and the yVaults will find the most profitable protocols to farm for yields. Compared to other vaults, Yearn doesn't have a deposit and withdrawal fee. To make things simpler, the gas costs and performance fees are automatically deducted, making it simpler to calculate the potential gains.

Yearn Finance offers 4 ways to make money on their protocol: yVaults, yCRV, veYFI, and yBribe.

Yearn Finance Vaults

Making money with yVaults is straightforward: all you have to do is deposit with the pool of your choice and the vault will farm your crypto tokens for you. Just make sure you hold the crypto asset for the pool you desire to join.

To deposit with yVaults, follow these steps:

1. Open the Year Finance app

2. Click on the "Vaults" section

3. Select the pool of your choice

4. Input the amount of tokens

5. Deposit

6. Confirm the transaction

7. Profit.

When you’re ready to withdraw funds you can exchange your yTokens to liquidate your position. If your withdrawal can be covered by the Yearn Vault’s reserve funds, then there is no fee for withdrawal. If the withdrawal comes from a strategy already in use, you will pay a 0.5% withdrawal fee. 

The Vault’s earnings adjust to the new balance each time a user withdraws funds. Also, earnings are calculated on an annual basis but are paid based on the actual time a user’s liquidity is held. So if a Vault offers a 100% return and a user left funds there for six months, they would only get half of that return which would be 50%. 

Yearn Finance yCRV

The yCRV strategy works along the same lines as a normal yVault. The only difference is that you get boosted rewards in the form of CRV. Keep in mind that st-yCRV, yCRV, or lp-yCRV represent variations of staked CVR. By holding the tokens, you continuously accumulate interest. These tokens can be liquidated to unlock the underlying asset plus the interest earned.

To supercharge your yield with yCRV, follow these steps:

1. Open the Year Finance app

2. Click on the "yCRV" section

3. Select the type of CRV token and the amount to swap

4. Click "Swap"

5. Confirm the transaction

6. Profit.

If you have st-yCRV and notice that lp-yCRV is generating better yield, you can swap anytime on the main page. Or vice versa. You are free to jump in between CRV assets and settle for the highest paying version. 

Yearn Finance veYFI

As a YFI holder, you can stake your tokens for voting power and YFI rewards. By design, veYFI is a vault where the longer you stake your tokens, the higher the voting power and rewards. However, like a fixed deposit account in a traditional bank, it has a penalty for early withdrawal, which is for a withdrawal request of less than one year in the vault.

veYFI auto-farms the locked YFI and then distributes the profits among the stakers. The amount of rewards is decided on a weekly basis by the Yearn DAO. 

To stake FYI, follow these steps:

1. Open the Year Finance app

2. Click on the "veYFI" section

3. Select the amount of YFI tokens you would like to stake

4. Select the lockup period

5. Approve the transaction

6. Profit

You can choose to extend the lockup period or withdraw early (with a penalty). After the lockup period expires, you can click on the "Claim" tab and withdraw your YFI tokens.

Yearn Finance yBribes

As previously mentioned, Curve conducts weekly votes to allocate that determine the allocation of CRV rewards to various pools. By buying votes, DAOs, protocols, and users can influence the direction of these rewards and boost yields in pools beneficial to them.

To make things easier, Yearn Finance has come up a simple way for the vote buyers to meet veCRV voters. As a voter, there is no cost to use yBribe. Bribers pay a 1% maintenance fee which is applied when posting the bribe. The only requirement is that you hold veCRV.

veCRV can either be bought from exchanges, or you can clock the CRV tokens yourself on Curve and receive veCRV.

As a veCRV holder, you can sell your vote to the highest bidder each week by voting on the bribed gauge with the highest APR.

To participate in yBribes, follow these steps:

1. Open the Year Finance app

2. Navigate to the "yBribes" section

3. Once you identify the gauge you want to vote for, head over to Curve to vote by clicking “Vote for Gauge”

4. After you vote, you’ll be able to claim any applicable rewards at the start of the next period

Price Prediction for Yearn Finance — Can it hit $1000?

Buying and hodling YFI — the native token of Yearn Finance — is one way of potentially making money on Yearn Finance.

By looking at its current price, it’s natural to think about the chance of YFI hitting $1000 per token. This can happen sooner, or way in the future, and is determined by a couple of ever changing factors.

Let’s examine the potential growth of the YFI token by analyzing its tokenomics. YFI’s current market cap sits comfortably at ${MARKET_CAP}. With {CIRCULATING_SUPPLY} YFI tokens being in circulation today, that means a price of {PRICE} per YFI.

How did we come to that calculation? It’s quite easy, the price of a YFI token is equal to its current market cap divided by the number of tokens in circulation. Dividing ${MARKET_CAP} by {CIRCULATING_SUPPLY} gives us a result of {PRICE} for each YFI coin. 

By changing the order in the simple formula above we can use it to calculate other things as well. This helps us a lot because we can deduce the market cap of YFI at different token prices. Then, we can use the result to compare it to the current state of the network and see what would be required for YFI to hit that price.

At a price of $1000 per token, that means the current market cap of YFI would equal ${{CIRCULATING_SUPPLY} * 1000}. Remember that we arrived at this number by multiplying the amount of circulating tokens by $1000.

Now let’s shift our attention to the fully diluted market cap.

Some blockchains may have their tokenomics built in a way that only a small percentage of tokens are circulating at the beginning. This can be misleading because we don’t have the full picture and only take into account the current number of coins released in the market.

The fully diluted market cap represents the total value of a coin if all tokens were in circulation. YFI’s whole supply of tokens is {MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} YFI which means that no more coins above that number will ever be created.

These tokens are not created at the discretion of a specific entity. They are created automatically by the network to reward different actors that keep it secure.

How does this impact the price of YFI? Taking into account the current price of a YFI token, that would result in a fully diluted market cap of ${MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY * PRICE}. YFI coins that have been burned are not taken into consideration because they have been permanently removed from circulation.

Whether it seems gigantic or not, the number we came to above only takes into account the current price of a YFI token. Doing the same calculation but with a price of $1000 gives us a result of ${{MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} * 1000} for the YFI protocol fully diluted market cap.

These are all crucial details to know when calculating if YFI can reach the price of $1000 per token. If the diluted market capitalization is way too high, the token has little room left to grow. Blockchains in general have no cap on the value they can reach, whether that number seems possible it’s totally up to you.

The future of YFI depends solely on its growth as a network used by tens and hundreds of millions of users.

If you’re looking to add some YFI to your portfolio, the most trusted places to get some are Binance and Coinbase.