Decentralized finance – better known as DeFi – has seen parabolic growth as the yields provided by protocols have exploded higher. A crucial part of this growth can be pinned to the introduction of governance tokens, which allow holders to determine the direction they want protocols to develop. Governance tokens are a crucial step in decentralizing DeFi protocols.
Riding the wave of governance tokens, Yearn.finance rolled out YFI in July 2020. It quickly captivated the cryptocurrency space as it proceeded to rally from $3 to $30,000 in a month. For those wondering what is YFI crypto, read on to grasp an understanding of the Yearn Finance (YFI) protocol.
What is YFI Crypto?
Yearn.Finance is an open-source, decentralized finance (DeFi) lending protocol based on the ETHereum blockchain. It works as a yield aggregating platform to maximize the user’s investment by automatically moving the user funds between DeFi lending protocols, such as Compound, Dydx, Curve, or Aave.
As of now, Yearn is one of the most popular and most decentralized DeFi projects in the crypto sector. While the YFI is the native cryptocurrency of Yearn.finance, unlike Bitcoin, YFI is a governance token that boasts of the autonomous protocol.
That means users of the platform have the right to cast a vote on the protocol’s direction that favors their intention the most. As of now, YFI is one of the largest ETHereum-based tokens prioritizing automated yield farming strategies.
How Does Yearn.Finance Work?
Yearn.Finance is designed to autonomously move users’ funds to more profit-giving providers by locating the protocol offering the best annual percentage return (APR). It is considered a revolutionary breakthrough in the DeFi sector due to the potential yields parallel with stablecoins.
Think of Yearn.Finance as a decentralized lending platform that lets users deposit ERC-20 stablecoins such as DAI, USDC, USDT, TUSD, or SUSD into the protocol, and receive an equivalent amount of yTokens in return. The Yearn Finance platform then automatically switches the tokens into a protocol with the highest yield to maximize the user’s profit.
How Do YFI Tokens Work?
YFI is the native token of the Yearn.Finance platform. It is purely and simply a governance token, allowing holders to vote on decisions that affect Yearn, like voting on a protocol upgrade/change proposal.
To participate in the protocol, users need first to stake their YFI in a governance contract. They then receive voting rights and a percentage of protocol profits for each of Yearn’s products at regular intervals. To claim rewards, users need to vote, and once they have voted, their YFI tokens will be locked for three days, i.e., they won’t be able to un-stake the asset.
Yearn.Finance’s Key Features
The protocol's main feature is called Vaults. It allows users to deposit cryptocurrency and earn yields. The deposited funds are managed by a strategy that attempts to maximize yields and minimize risk. When launched, Vaults were focused mainly on stablecoins, but they have since expanded to support ETHer, tokenized Bitcoin products, Chainlink, and other coins.
Vaults are important because they mitigate the high cost of transacting on ETHereum. By pooling capital, only one account (the controller of each Vault) has to pay transaction fees (gas) to yield farm.
Yearn.finance also offers other services. Earn is a slimmed-down version of Vaults that only supports stablecoins and tokenized Bitcoin. Zap allows users to swap 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.
Challenges of Yearn Finance
YFI is not without its challenges. Because Andre Cronje was the mastermind behind Yearn.finance and YFI for so long, investors are watching his moves with keen intent. This means that if he takes time off, many may see it as a blow to YFI. As such, some argue that the project is still centralized around this key player (at least to some extent).
This was accentuated earlier this year when it was reported that Cronje said he wanted to leave the DeFi space. YFI prices proceeded to crumble amid fears of the project shutting down.
This "Cronje Premium" trend (as some traders have dubbed it) is slowly losing relevance as Yearn.finance introduces new team members. It might no longer be a concern if decentralized governance continues to develop without Cronje's influence.
Closing Thoughts
YFI's launch marked an industry-wide shift in how cryptocurrency projects distribute coins. By providing an incentive for early users, projects can get quick adoption and community growth. This ties in with the concept of "skin in the game," which suggests that those that have a monetary or emotional stake in an investment will do what they can to allow it to succeed.
Now that you understand what is YFI crypto, Yearn.finance is an interesting protocol that is building unique decentralized finance products. The future seems bright as they hire a team of developers and marketers, but only time will tell if the project will manage to thrive longer in the ETHereum DeFi space.
