Author: Nick Chong
Résumé
YFI is the native cryptocurrency of the Yearn.finance protocol. It is a governance token that allows users to vote in which direction they want the protocol to evolve.
Since its launch in July, YFI has become one of the largest Ethereum-based tokens, due to its emphasis on automated yield farming strategies. In a way, you can think of Yearn.finance as a robot that is always trying to find the best returns on DeFi Ethereum.
Introduction
Decentralized finance, better known as DeFi, has seen parabolic growth as the yields provided by the protocols have exploded. A crucial part of this growth can be attributed to the introduction of governance tokens, which allow holders to determine the direction in which they want protocols to develop. Governance tokens are a crucial step in the decentralization of DeFi protocols.
Riding the wave of governance tokens, Yearn.finance rolled out YFI in July 2020. It quickly captivated the cryptocurrency space by growing from $3 to $30,000 in a month.
What is Yearn.finance?
Before covering the YFI token, it is important to put Yearn.finance in context, also known as “yEarn”.
Launched by Andre Cronje in early 2020, Yearn.finance is an Ethereum-based protocol that aims to give its users access to the highest returns on deposits of Ether, stablecoins and altcoins. Andre Cronje is a South African financial technology developer who wanted to create Yearn.finance after seeing inconsistencies in the returns offered by different DeFi applications.
After suffering a hack shortly after launch, Cronje overhauled the protocol to provide users with a new suite of products.
main Features
The main feature of the device is called Vaults. It allows users to deposit cryptocurrencies and generate returns. Deposited funds are managed by a strategy aimed at maximizing returns and minimizing risks. Once launched, vaults focused primarily on stablecoins, but have since expanded to support Ether, tokenized Bitcoin, Chainlink as well as other currencies.
Vaults are important because they mitigate the high cost of transactions on Ethereum. By pooling capital, only one account (the manager of each vault) must pay transaction fees (gas) to the yield farm.
Yearn.finance also offers other services. Earn is a smaller version of vaults that only supports stablecoins and tokenized bitcoins. Zap allows users to exchange traditional stablecoins for liquidity provider tokens representing stablecoins .
Yearn.finance is currently working on other products such as yInsure, a decentralized insurance protocol for DeFi users, and StableCredit, which will facilitate decentralized lending and borrowing.
Let's move on to YFI
Until July, Yearn.finance was niche. After the hack at the start of 2020 and the cryptocurrency market crash in March, many users were hesitant to use the then-new protocol.
That changed when Cronje published a blog post at Medium announcing YFI, an ERC-20 token launched so users could control the Yearn.finance protocol.
YFI could be “farmed” through a number of methods, including providing liquidity to Balancer, a decentralized exchange, and depositing capital into Yearn.finance products.
Although the Medium article mentions that YFI has "no intrinsic value", the market bought it, and its price subsequently climbed. After starting trading at $3 in a Balancer pool, the cryptocurrency soared as investors saw added value in Yearn.finance's management, which saw tens of millions in deposits.
Shortly after launch, the community agreed on a maximum issuance of 30,000 tokens, choosing to make YFI scarce instead of allowing it to inflation. Users who were unhappy with this decision forked the project and named their version DFI.money or YFII.
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Decentralization of Yearn.finance
While YFI was essential for Yearn.finance in the sense that it generated deposits and attention, the token also served another purpose: to decentralize development and control of the protocol among users.
The farming mechanism allowed any user, whether they deposited $100 or $1,000,000, to earn YFI at the same time and at the same cost. This means that any user could acquire YFI and participate in Yearn.finance's decisions.
Since the launch of YFI, a comprehensive governance portal has been launched, where token holders can vote on various decisions proposed by community members.
Decisions that have been made so far include hiring a team of marketers and developers and adding some strategies to Vaults.
Holders also made the crucial decision to provide YFI holders with access to a portion of the protocol's profits. Fees implemented within Yearn.finance products apply to cash, which is then distributed between YFI holders and the team. This makes YFI a dividend-producing asset, which differentiates it from Bitcoin or Ethereum.
Why is YFI important?
Although many focus on YFI's uptrend, this event is more significant because it marked a shift in how protocols can encourage adoption. The launch of YFI was claimed to be the “fairest launch since Bitcoin” because anyone could participate in token generation while paying the same price.
Instead of using an Initial Coin Offering (ICO) model, where users pay a certain price for each new token, YFI users had to participate in the protocol. This mechanism allowed a community to quickly develop around the project, because each user had the same ability to participate in the governance of Yearn.finance.
Even after the initial volatility, Yearn.finance has one of the most active communities in the decentralized finance space and cryptocurrencies as a whole.
Challenges to overcome
YFI also presents challenges. Andre Cronje has been the brains behind Yearn.finance and YFI for a long time, which is why investors are watching his moves with great attention. This means that if he stops participating in the project, many might consider it a major blow to YFI. As such, some argue that the project is still centralized around this key player (at least to some extent).
This fear arose earlier this year after a rumor that Cronje wanted to leave the DeFi space. YFI prices began to fall for fear that the project would stop.
This “Cronje Premium” trend (as some traders have dubbed it) is gradually losing its relevance as Yearn.finance introduces new members to its team. This may no longer be a concern if decentralized governance continues to grow without Cronje's influence.
To conclude
The launch of YFI marked an industry-wide shift in the way cryptocurrency projects distribute tokens. By offering an incentive to early adopters, projects can be adopted quickly and the community can grow. This relates to the concept of having a "stake," which suggests that those who have a monetary or emotional stake in an investment will do what they can do to enable it to succeed.
Yearn.finance is an interesting protocol that creates unique decentralized financial products. The future looks bright as they hire a team of developers and marketers, but only we will tell if the project will manage to thrive longer in the DeFi Ethereum space.
