Author: Nick Chong

Summary

YFI is the native cryptocurrency of the Yearn.finance protocol. This is a governance token that allows users to vote on the direction of the protocol.

Since its launch in July, YFI has gradually grown into one of the largest tokens in Ethereum due to the main protocol's focus on automated liquidity mining strategies. In a sense, you can think of Yearn.finance as a bot that is constantly searching for the best yields in Ethereum DeFi.

Introduction

Decentralized finance (more commonly known as “DeFi”) has experienced parabolic growth as the yields offered by protocols have skyrocketed. An important force driving this growth is the introduction of governance tokens, which allow holders to determine the direction of the protocol. Governance tokens are a critical step in decentralized DeFi protocols.

Riding on the wave of governance tokens, Yearn.finance launched YFI in July 2020. In just one month, its price rose from $3 to $30,000, quickly gaining a foothold in the cryptocurrency field.

What is Yearn.finance?

Before we get to know YFI, it’s necessary to have some background information about Yearn.finance (also known as “yEarn”).

Yearn.finance was launched by Andre Cronje in early 2020 and is an Ethereum-based protocol. The main goal is to generate the highest yield for users' deposited ether, stablecoins, and altcoins. Andre Cronje is a South African financial technology developer who started to create Yearn.finance after noticing the inconsistent returns offered by different DeFi applications.

Soon after the protocol was attacked, Cronje subsequently overhauled the protocol and provided users with a new set of products.

Key Features

The main feature of the protocol is called the Vault. Users can deposit cryptocurrencies into it and earn returns. The deposited funds are managed through a strategy that strives to maximize returns while minimizing risks. At the beginning of its launch, the Vault was mainly for stablecoins, and later supported Ethereum, tokenized Bitcoin products, Chainlink and other currencies.

Smart Pools are very important because they can reduce the high transaction costs of Ethereum. Through this fundraising method, only one account (the controller of each Smart Pool) needs to pay transaction fees (fuel fees) to conduct liquidity mining.

Yearn.finance also offers other services. Earn is a streamlined version of the machine gun pool that only supports stablecoins and tokenized Bitcoin. Zap allows users to exchange traditional stablecoins for liquidity provider tokens representing stablecoins.

Currently, Yearn.finance is developing other products such as yInsure, a decentralized insurance protocol for DeFi users, and StableCredit, a lending service that facilitates decentralized lending.

Getting to know YFI

Yearn.finance had been a fairly niche product until July, with many users hesitant to use the then-new protocol after a vulnerability attack in early 2020 and the crypto market crash in March.

That changed when Cronje published a Medium blog post announcing the launch of YFI: an ERC-20 token that would give users the power to govern the Yearn.finance protocol.

YFI can be “mined” in a variety of ways, including providing liquidity to the decentralized trading platform Balancer and depositing funds into Yearn.finance’s products.

Although the post in Medium argued that YFI had "no intrinsic value," the market began to buy in. After trading at $3 in the Balancer pool, investors gradually realized the value of governing Yearn.finance. As a result, the value of this cryptocurrency soared and soon accumulated tens of millions of deposits.

Soon after launch, the community determined a maximum supply of 30,000 tokens, choosing to keep YFI scarce rather than expand further. Users unhappy with this decision forked the project, creating what is now known as “DFI.money” or “YFII.”

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Decentralized Yearn.finance

YFI attracted deposits and attention, driving the development of Yearn.finance. However, the token also has another role: delegating the development and control of the protocol to users.

The mining mechanism allows any user (whether they have $100 or $1 million) to earn YFI at the same time and at the same cost. Therefore, every user can influence Yearn.finance by obtaining YFI.

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 made so far include hiring a team of marketers and developers and adding certain strategies to the machine gun pool.

Holders also made a key decision to provide YFI holders with a portion of the protocol's profits. Fees earned by Yearn.finance products are credited to the treasury and then distributed between YFI holders and the team. In this way, YFI becomes an asset that generates dividend income, unlike Bitcoin or Ethereum.

Why YFI is important

Many people are paying attention to the price changes that YFI has experienced, but most importantly, it marks a transformation in the way the protocol incentivizes token users. Some people believe that YFI is "the fairest token issued since Bitcoin" and anyone can participate in the generation of tokens while paying the same price.

Unlike the initial coin offering (ICO) model, where users pay a certain price for each new coin, YFI users must personally participate in the protocol. This mechanism allows the community to build quickly around the project because all users have the same ability to influence Yearn.finance through governance tokens.

Even with the initial price volatility, Yearn.finance has built one of the most active communities in the decentralized finance space and the entire cryptocurrency market.

challenge

YFI also faces challenges. Andre Cronje has been the mastermind behind Yearn.finance and YFI, and investors closely follow his every move. If he chooses to take a leave of absence, many people will think that YFI will suffer a blow. Therefore, some people believe that the project is still centered around this key player, at least to some extent.

This was further highlighted earlier this year when Cronje was reported to have expressed his desire to leave the DeFi space. Fears of the project being shut down caused the price of YFI to continue to fall.

As new members continue to join the Yearn.finance team, this “Cronje premium” trend (as some traders call it) is gradually losing its meaning. If decentralized governance can continue to develop without the influence of Cronje, all concerns and doubts will disappear.

Summarize

The launch of YFI marks an industry-wide transformation in the way cryptocurrency projects distribute tokens. Various projects set up incentive mechanisms for early users to accelerate token adoption and community growth. This is in line with the concept of "skin in the game," where investors who invest money or emotional interests will do their best to drive project profitability.

Yearn.finance is an interesting protocol that is building unique decentralized financial products. They have hired a team of developers and marketers, and the future seems bright. However, it remains to be seen whether this project can survive long term in the Ethereum DeFi space.