Author: Nick Chong
Carefully! Lots of text.
YFI is the native cryptocurrency of the Yearn.finance protocol. This is a governance token that gives users the ability to decide in which direction the protocol will evolve.
Since its launch in July of this year, YFI has managed to become one of the largest Ethereum-based tokens as the protocol focused on automated yield farming strategies. In a sense, Yearn.finance is a robot whose goal is to find the best returns in Ethereum DeFi.
Introduction
Decentralized finance (DeFi) has seen parabolic growth as protocol returns have outperformed. This growth is largely due to the introduction of governance tokens, which allowed their holders to determine the direction of development of protocols. Governance tokens have become a key step in the decentralization of DeFi protocols.
In July 2020, shortly after the launch of governance tokens, Yearn.finance launched YFI. This token quickly conquered the cryptocurrency space, rising from $3 to $30,000 in a month.
What is Yearn.finance?
Before jumping into YFI, it's important to understand the nuts and bolts of Yearn.finance, also known as yEarn.
Yearn.finance was launched by Andre Cronje in early 2020 as an Ethereum-based protocol that aimed to provide users with maximum returns on deposits of Ether, stablecoins and altcoins. Andre Cronje is a South African fintech developer who decided to create Yearn.Finance after discovering a discrepancy in the profitability of different DeFi applications.
Shortly after its launch, the Cronje Protocol was hacked and redesigned to provide users with a new set of products.
Main characteristics
The main component of the protocol is called Vaults. With its help, users deposit cryptocurrency and receive income. Funds deposited are managed by a strategy aimed at maximizing profits and minimizing risks. At launch, Vaults focused primarily on stablecoins, but today it supports Ether, Bitcoin tokenized products, Chainlink, and other coins.
The value of Vaults is that it helps reduce the cost of transactions on Ethereum. When pooling capital, only one account (the controller of each Vault) needs to pay a transaction fee (in gas) to farm returns.
Yearn.finance offers other services as well. Earn is a simplified version of Vaults that only supports stablecoins and tokenized bitcoins. Zap allows users to exchange traditional stablecoins for liquidity provider tokens that represent stablecoins.
Yearn.finance is currently working on other products including yInsure, a decentralized insurance protocol for DeFi users, and StableCredit, which aims to facilitate decentralized lending and borrowing.
Meet YFI
Up until July 2020, Yearn.finance was a fairly niche project. After the hack earlier this year and the cryptocurrency market crash in March, many users were hesitant to use the new protocol.
That all changed when Cronje published a blog post on Medium announcing the launch of YFI, an ERC-20 token that would allow users to self-manage the Yearn.finance protocol.
YFI can be created in a variety of ways, such as by providing liquidity to a Balancer pool or decentralized exchange, and depositing capital into Yearn.finance products.
Although the Medium post mentioned that YFI “has no intrinsic value,” the market continued to distribute the coins. After starting trading at $3 on the Balancer pool, the cryptocurrency soared as investors saw value in Yearn.finance's management, which began attracting tens of millions in deposits.
Shortly after launch, the community settled on a maximum supply of 30,000 coins, choosing to keep YFI scarce rather than allowing the token supply to grow further. Users unhappy with this decision created a fork of the project known as DFI.money, or YFII.
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Decentralization Yearn.finance
YFI has been extremely important to Yearn.finance, driving deposits and attention to the protocol. However, the coin also had another goal: to decentralize the development and control of the protocol among users.
The pharming mechanism allowed any user, regardless of their wallet balance, to simultaneously earn YFI at the same price. In other words, one could simply acquire YFI and exert influence over Yearn.finance.
Following the launch of YFI, a comprehensive governance portal was launched where token holders could vote on various solutions proposed by community members.
Decisions made so far include hiring a team of marketers and developers, as well as adding certain strategies to Vaults.
The holders also decided to give YFI holders access to the protocol's profits. Commissions paid in Yearn.finance products go to the Fund and are further distributed between YFI owners and the team. This makes YFI a dividend-paying asset, unlike Bitcoin or Ethereum.
Why is YFI important?
While many focus only on the cost of YFI, what is much more important is the shift in thinking about how protocols can drive adoption of the technology. The YFI launch was considered "the fairest launch since Bitcoin" because anyone could create coins for the same price.
Instead of using the Initial Coin Offering (ICO) model, where you have to pay a certain price for each new coin, YFI users were given the opportunity to participate in the governance of the protocol. This mechanism gave a significant boost to the development of the project's community, since each user had equal influence on Yearn.finance thanks to the governance token.
Even after the initial price volatility, Yearn.finance has developed one of the most active communities in the decentralized finance space and cryptocurrencies in general.
Difficulties
However, YFI has to overcome its own difficulties. Andre Cronje has been the mastermind behind Yearn.finance and YFI for a long time, which makes investors focus more on him. In other words, if he decides to take a break, many will consider it a blow to YFI. Some argue that the project is still centered around this key figure (at least to some extent).
This was most noticeable at the beginning of the year when Cronje announced plans to exit the DeFi space. Then prices for YFI collapsed amid fears related to the possible closure of the project.
The “Cronje Premium” trend (as traders themselves called it) will gradually lose relevance as Yearn.finance continues to expand its team. And if decentralized governance continues to develop without Cronje's influence, this will cease to be a problem in the future.
Summary
The launch of YFI marked the birth of a new principle for the distribution of coins in cryptocurrency projects. And this affected the entire industry. By incentivizing early adopters, projects can expect faster adoption and community expansion. This approach is associated with the concept of “risking your own skin,” which assumes that people interested in investing, either financially or emotionally, will do whatever it takes to make the project successful.
Yearn.finance is a very interesting protocol that creates unique decentralized financial products. With a team of experienced developers and marketers, Yearn.finance shows a lot of promise, but only time will tell if this project will be able to thrive and grow in the Ethereum DeFi space.
