What is Yearn Finance (YFI)? How does it open up a DeFi yield aggregation era?

Who is Andre Cronje?

Before exploring Yearn.finance, it is necessary to know its founder Andre Cronje (hereinafter referred to as AC). Actually, AC did not study computer science initially. He studied at the Faculty of Law at Stellenbosch University before turning to a degree in Computer Science, which then earned him the opportunity to teach at the Computer Training Institute. It was then that he got into the field of computer science.

AC achieved a lot in the area he holds a strong passion for, which is demonstrated by his successful participation in several entrepreneurial DeFi projects. Some of the well-known DeFi projects he participated in were Keep3r, Chainlist, and Sushiswap, which made him one of the most influential figures in DeFi. Within two months after AC announced his plan to launch a project called Solidly on Fantom, Fantom’s total value locked surged to $12.2 billion, making it the third largest blockchain.

(Andre Cronje, Image source: BLOCK TEMPO)

Cross-chain technology is another sphere that AC has spent huge energy on. Since different chains have different functions and they cannot interact with each other, cross-chain token transfer has become an urgent need of DeFi users with the development of the public chain ecosystem. Given this, AC and the Anyswap team jointly developed Multichain, a cross-chain platform that allows for token swapping and transferring across chains. Currently, Multichain supports over 10 mainstream blockchains, including Ethereum, Fantom, Binance Smart Chain (BSC), and Fusion, along with more than 190+ tokens. Multichain works by locking tokens on one blockchain and then mint wrapped tokens on another. If this is not feasible, a cross-chain liquidity pool will be used to trade bridged tokens. This way, Multichain makes it easier to transfer funds across different blockchains.

However, things changed when Andre Cronje posted an article titled “Building in DeFi sucks” on social media in February 2020 and January 2021. Later, he, together with his coworker Anton Nell, announced on Twitter on March 6, 2022 that they decided to leave the crypto space and would terminate about 25 apps on April 3. Neither of them have so far explained why.

Afterwards, domain names of several projects were migrated and handed over to other teams for subsequent maintenance. Among them, Solidly.exchange domain name was handed over to the Solidex team. AC’s decision of leaving the crypto space had soon shocked the market, resulting in a plummet in prices of relevant projects. The total value locked of Solidly, YFI, and other projects encountered a slump, causing an uproar in their communities. AC himself faced an even greater criticism. Some think that AC did not really quit DeFi, but will instead participate anonymously behind the scenes. Anyway, we will never know the truth.

Despite AC’s quitting, many projects are in continuous development. For example, Velodrome, the fork of Solidly, is making good performance on the Ethereum Layer 2 network; and Chainlist, though closed already, has seen many alternative sites created because AC has open sourced its code. Many other projects that are linked to Yearn.finance now have dedicated teams to upgrade and operate, and their teams are even expanding.

What is Yearn.finance?

Yearn.finance is a decentralized smart financial product built on Ethereum, which can be regarded as a smart contract-based fund manager. Yearn replaces centralized advising teams with decentralized smart contracts of codes to formulate investment strategies. The strategies include lending out assets, mining YFI tokens, providing liquidity, or combining other investment strategies to be used in various DeFi lending protocols.

(Image source: Yearn)

The main function of the Yearn.finance lending protocol is commonly known as “vault”. Based on the real-time mining income, it automates the investment of crypto assets that users had put into the vault to generate the highest profits. The vault will switch between different protocols to bring the highest profits for investors. In a vault, the computing power is pooled together. Instead of specifying which coin to mine, the vault will focus on the coin with the highest income in the same mining algorithm. Some of the famous vaults are Beefy.Finance, Reaper Farm, etc.

How does Yearn.finance work?

Yearn.finance has two main products, of which the vault is at its core. At present, there are two versions of the vault - v1 and v2, and v3 will be launched in the future. Each vault adopts different investment strategies, such as maximizing the return or minimizing transaction fees. There are no fees required when depositing your assets into the vault. However, you will be charged a certain fee in withdrawing and 20% of your profits as the handling fee.

(Vault, image source: Yearn)

Another product of Yearn.finance is Earn, which allows users to lend their assets to platforms such as Aave and Compound. It uses algorithms to calculate which platform offers the highest lending rate, thereby automatically maximizing returns.

The vault is important as it reduces the high transaction fees on Ethereum. Users will only need to pay the transaction fees once through fundraising, which significantly lowers the transaction costs. However, the vault is never risk-free. On August 2, 2022, Reaper Farm was maliciously exploited. Hackers discovered a vulnerability of its contract that allowed them to transfer 62 ETH and 1.6 million DAI from multiple vaults, resulting in a loss of ~$1.7 million.

What is YFI?

YFI is the governance token of Yearn.finance. Many crypto projects will allocate the majority of their tokens to the founding team or early investors, so a small group of users could hold the majority of the coins and gain significant control over the project. However, when YFI was initially launched, the developer AC distributed all the coins to the market instead of setting aside some of them for the company to ensure a “fair launch”. This makes the community now governed in a fully decentralized way.

Through the fair launch, YFI holders can participate in decision-making of the project by staking and voting. The future of the project will not be solely controlled by developers, but by all token holders, which demonstrates the founder’s vision for true decentralized governance.

YFI additional issuance proposal
The initial circulating supply of YFI was 30,000. Later, community members voted to issue another 6,666 coins (equivalent to ~$210 million), of which 4,444 went to the Operation Fund and the other 2,222 went to the development team. Although it is a good intention to reward the development team as a way of promoting the project, it inevitably triggers concerns about its risk of undermining decentralized governance and giving core members more power.

(Image source: yearn)

The supply of YFI is fixed unless its token holders vote to issue more. Another feature of YFI is that holders can earn shared revenue from Yearn.finance, which is distributed to holders based on a fixed ratio.

Statistics show that the current annual fee income of Yearn.finance is $21-30 million, which will be allocated to YFI holders in a fixed proportion. This attracts more investors to hold YFI. If you want to hold one, you need to buy it from the market.

What problems have Yearn.finance addressed?

In the current crypto space, there are extremely high fees incurred when funds switch between different vaults, which is unfriendly to users. What’s worse, since DeFi projects are faced with high risks like hacking and liquidation, users find it rather difficult to appropriately assess smart contract risks, especially in a situation where investors are overwhelmed by massive information. Regarding these problems, Yearn.finance proposes a solution: it automatically identifies the vault with the highest yield and then transfers the assets to this vault for mining. It executes the protocol in a way similar to funds raising. It not only focuses on exchanges, but also on smart contracts, which eliminates the need for users to have technical knowledge and bear multiple transaction fees.

Though Yearn.finance brings investors high rewards, it should be noted that high rewards often come with high risks. As YFI is linked to many smart contracts, among which are Curve, Aave, dYdX, and Balancer, it will be affected if any one of these contracts have a problem.

The history of Yearn.finance

When YFI token was initially issued, its price soared to $60,000 due to its limited supply, which is a miracle of ten thousand times’ growth. After that, the concept of YFI yield aggregation exploded in popularity, with its code copied by plenty of projects. While DeFi was booming, there were insufficient incremental funds in the market and no practical use case scenarios, the price of many tokens had hence dropped.

With a maximum supply, all YFI has been mined. To ensure liquidity, the community proposed an additional issuance plan, proposal #8 (known as YIP 8), which is intended to imitate Bitcoin halving and increase the supply of YFI tokens from 30,000 to 60,000. The proposal was rejected because the overall upvote rate was below 33%. Then a Chinese team launched YFII, calling it the fork of YFI.

(Image source: YFll)

YFII adopts the Bitcoin halving model that reduces the weekly issuance rate of all the additional 60,000 coins, and the proportion is allocated according to the share of liquidity each user provided for the vault. YFII has been controversial since its launch. Many think that YFII uses unaudited smart contracts, and is suspected of centralized control and security risks. Some even proposed to attack YFII through mining. On May 25, 2022, the price of YFII plummeted, with a maximum drop of over 73%. Balancer even blacklisted YFII. ChainLinkGod, a Twitter influencer, said that YFII is exactly a fork of YFI, not a scam project, but it has no actual value. Some other investors even commented that YFII is “super garbage”.

After Andre Cronje exited the project, the team that took over Yearn.finance announced on May 3, 2022 that it was to launch Vaults v3, which will be written in Solidity and adopt the new token standard ERC-4626. As soon as this news came out, the price of YFI rose by as much as 2.9% within 24 hours. Is YFII trustworthy? Will Vaults v3 lead another DeFi craze? It has aroused heated discussion in the community.

Conclusion

Yearn.finance, created by Andre Cronje, redefines the ecosystem of a product through the aggregation and the compositionality of multiple protocols. Yearn Finance lending aggregator serves as one of the essential boosters that drives DeFi to boom. YFI holders can not only earn income but also participate in governance. In the future, we will see more new concepts and products, including new token standards, income strategies that will be expanded to the fields of insurance, futures, and liquidation. Its future is promising and deserves our attention.