One of the most popular Decentralized finance (DeFi) protocols yearn.finance’s YFI price dropped more than USD 4,000 after one of its DAI lending pools was drained of USD 11m in an exploit, whereas the attacker took USD 2.8m. According to DeFi Pulse, Yearn’s total value locked saw a 3.5% drop since yesterday, from USD 508m to the current USD 491m. Despite the hack, the price impact was not significant, and YFI remains the most valuable asset management protocol with a market capitalization of 932mil USD. YFI has earned praise for being one of the most decentralized projects in crypto. It’s also been called the “Bitcoin of DeFi”.
Except for the price and the total value locked effect, the Yearn team’s reaction to the incident was impressive. The response time to mitigate the attack was around 10 minutes. The project remains the most credible and stable and also, according to the Defipulse rating, belongs to the TOP three.
Today we are starting to publish the DeFi project educational articles series, and the first one will be about this revolutionary Year. Finance (YFI).
How It Started
Earlier in the year 2020, Andre Cronje, a self-taught solo developer, began looking into ways to automate his strategy to find the highest paying lending protocols with the growth of Compound and Maker. Andre decided to create yield optimization strategies before there was even a name for yield farming.
So, when Cronje started, he regularly checked which protocol was delivering the highest return and then moved his funds there. The manual effort was repetitive and boring. So, like any good programmer who can’t tolerate redundant activities, he began coding his Yearn protocol to automate the entire process. Later, he realized he could scale it and make it public. And that is how the yearn.finance was born.
Andre Cronje developed a yield aggregating platform on Ethereum. YFI has grown into an ecosystem of protocols that aims to maximize annual percentage yields (APY) for its users. It plays a part in the yield farming mania that kicked off with Compound’s COMP token distribution. It utilizes DeFi protocols such as Curve, Compound, Aave, and dYdX to optimize token lending. It is a sophisticated protocol that diverts liquidity to different DeFi universe sectors to find the best returns in a nutshell.
yEarn is probably best known for its yPool on Curve. When a user deposits tokens, they are converted to “yield optimized tokens” (yTokens) such as yUSDC, yUSDT, and yDAI. This allows the user to earn the usual lending fees and the trading fees off of Curve. yEarn routes liquidity to different sectors across the DeFi space, and yPools earned some of the best lending rates in 2020.
What are Yearn Vaults?
Let’s get straight into the Vaults. The Vaults are one of Cronje’s most compelling creations. They represent combinations of advanced yield farming strategies.
The Yearn Vault strategies seek to find the best possible path for DeFi investment. It works like this. Users supply liquidity to a Vault. The Vault puts those funds to use to maximize returns. It does this by placing the user’s liquidity into yield farming strategies. These strategies generate aggregate liquidity provider (LP) rewards, interest returns, and trading fees.
Another advantage of tapping into these complex strategies is that the user gets to save on Ethereum gas costs. That’s because they optimized the Vaults to save on gas fees. They do this by batch processing transactions. That is a huge bonus because gas costs have been ridiculously high lately.
Users can connect their crypto wallets and click on the Vaults to see the strategies, as well as some of the impressive annual percentage yield (APY), returns that are possible.
How are Yearn Vaults Different from the Earn Feature?
To put it simply, Yearn Vault strategies are more complex and active than the basic activities on the standard Yearn protocol. Yearn Vault strategies multi-task to get the best returns possible. This involves actions like supplying collateral to borrow stablecoins. It can also be things like farming other tokens for profit.
Yearn Vaults were created as a response to the yield farming craze. And their strategies continue to evolve. Also, Yearn Vaults, don’t use up all the funds on implementing a strategy. Vault holdings and strategy holdings are separate. While the Vaults put most of the funds to use in a strategy, some will sit idly in the Vault.
Yearn Finance partnerships
Yearn Finance is already a powerhouse, with its YFI token sitting at the top of the crypto charts. But Yearn is continuously strengthening its position and is well on its way to becoming a DeFi conglomerate.
Since November of 2020, Yearn has merged with SushiSwap, Pickle Finance, Cream, Cover Protocol, Akropolis, and Bounce. Each of these partnerships includes new products and integrations and helps Yearn to be accumulating power to solidify its position as the DeFi powerhouse of the future.
Risks Associated with Yearn Vaults
The typical DeFi risks apply, such as smart contract bugs, stable coins losing their peg, or liquidation risks. We are experiencing even after successful third-party audits, technical issues, and many risks of exploits. There’s also the usual correlation risk that exists between so many DeFi tokens and other protocols. The risk is that if one token crashes, the correlation could cause the whole house of cards to come crashing down.
All in all, Yearn Vault strategies automate the yield farming process, reducing it into a simple process of one deposit and withdrawal transaction for the user. So, it’s no wonder that Yearn Vaults are one of the hottest tickets in DeFi right now.
Andre Cronje never ceases to surprise. Moreover, whatever he gets involved with brings along a host of people ready to heap large doses of trust, confidence, and money to profit off his ability and foresight.
Yield farming can be time-consuming and expensive. And finding the best farming opportunities takes time, as does monitoring collateralization ratios. Not to mention the high gas fees on Ethereum it costs to move funds around. That’s why an automated yield farming strategy is an important benefit to those seeking to prosper with DeFi.
The Crypto field is developing very fast, and everything is still a new technology. Everyone should do his/her own research before considering depositing funds to any farming protocol.