DeFi 101: What Is Yearn Finance (YFI) And How Does It Work?

2021/07/30 09:56:40

With over $54B in total value locked, the DeFi sector still holds its value in the bearish market. Despite FUD affecting a lot of investors, the Defi sector continues to flourish. Defi laid the foundation for an inclusive financial ecosystem where users worldwide can access financial services without going through the hassles they usually go through in traditional finance.

Source: Defi Pulse

Today, anyone with a smartphone and an internet connection can access a myriad of financial services, thanks to Defi. Over the last year, the emergence of Defi proved that it could significantly disrupt the traditional financial system with its extreme liquidity, composability, and digitization. However, Defi has its drawbacks.

While there has been an emergence of Defi platforms in the industry, almost all of them are very complex to use. The user experience is notoriously complex, and learning how to interact with various Defi protocols has a learning curve, which is why we haven’t seen the mass adoption of Defi protocols yet.

There’s no denying that one of the major limitations to mainstream adoptions of Defi apps is the lack of emphasis on user experience design and user-friendly interface, which is where Yearn.Finance jumps in. Today, in this article, we’ll be diving into how Yearn.Finance emerged as the face of Defi.

What Is Yearn.Finance?

Yearn.Finance is a set of protocols established on top of the Ethereum mainnet that enables users to generate earnings on their crypto assets through lending and trading services. With over 95% of crypto assets sitting idle and not accruing any value, Yearn.Finance is the key to generate significant returns.

Seeing how the Defi sector struggles at the hands of poor user experience designs, Yearn.Finance serves as the ideal portal to various Defi projects. The total value locked in Yearn.Finance currently stands at $3.67B.

Source: Defi Pulse

How Does Yearn.Finance Works?

Initially, Yearn.Finance was based on Yearn Protocol. The Yearn protocol was a yield optimizer that aimed to maximize Defi capabilities. It did so by automating the process of providing users with the highest yields from an array of diverse Defi protocols.

In essence, the Yearn Protocol created pools for each asset where users could deposit their assets in return for yTokens that represents the yield of the assets deposited into the pool, and then moved the assets to different pools depending on the yield.

However, soon after its release, the protocol started having a host of different problems, and Yearn.Finance had to reevaluate its platform. Today, Yearn.Finance is composed of four core products that function together seamlessly to enable a smooth entrance to Defi.

Yearn.Finance Vaults

Considering how Yearn Protocol’s initial automation process failed because it had not evaluated various factors, Yearn.Finance introduced vaults. Yearn Vaults, similar to the Yearn Protocol, is a yield optimizer that aims to maximize Defi returns by improving the initial automation process with an associated strategy.

Yearn Vaults benefits users by socializing gas costs, improving the automation of yield generation and rebalancing process, and automating capital shifting relative to the opportunities present in the market. Given that the Defi sector continues to welcome a rising number of investors, Yearn Vault is the ideal product for passive-investing strategies because users don’t have to go through steep learning curves to understand how it works.

Yearn.Finance Earn

The Yearn.Earn is a lending aggregator based on the original Yearn.Protocol automation process. The Yearn.Earn moves funds between selected protocols as interest rates between these protocols vary. Yearn.Earn is optimized to facilitate the best interest accrual process so users can ensure they are getting the highest interest rates at all times among the supported protocols. Currently, Yearn.Earn supports dYdX, Aave, and Compound.


Zap is a sophisticated tool on Yearn.Finance that enables users to move into and out of several liquidity pools supported by Curve. Users can ‘zap’ into various pools on Curve protocol using either one of the supported stablecoins: BUSD, DAI, USDC, USDT, and TUSD. Consequently, users can also ‘zap’ out of these pools into either one of the supported stablecoins.

Yearn.Governance And YFI Token

The Yearn ecosystem is a community-driven Defi infrastructure, and is entirely driven by a set of developers and YFI token holders. YFI token holders submit and vote on off-chain proposals that govern the ecosystem. Proposals that generate majority support are then implemented by a nine-member multi-sig wallet that is voted in by YFI token holders and is subject to change from future governance votes.

YFI token is undoubtedly leading the conversation and hype for Yearn.Finance, mainly because the founder gave all of the tokens away to its users, ensuring that the platform is, after all, true to its aim. Initially, only 30,000 YFI tokens were distributed. However, 6000 more tokens were minted according to the governance proposal.

Wrapping Up

Yearn.Finance aimed to establish a solid alternative for users to enter the Defi and digital asset ecosystem. Seeing how well the Defi sector has been doing as it currently holds over $54 billion in total value locked despite the bearish market, Yearn.Finance aims to welcome traders by maximizing Defi capabilities through its line of products. Defi is in a position to create considerable long-term value, and Yearn.Finance is here to catalyze that.

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