Yearn & the vaults
Yearn.finance initially started as a family business : a single man wanting his family to profit from the advantages of DeFi (Decentralized Finance) lending and borrowing platforms, such as AAve or Compound. These new protocols allow users to earn yields on the assets they lend, or borrow from assets they deposit as collateral.
To leverage these platforms effectively and make them accessible to the non tech-savvy, Andre Cronje developped a platform where his family could deposit their stablecoins and earn the best yield available on the market.
In the background, the smart contracts he developped would compare the available yields and associated risks of the different platforms for different stablecoins, and invest the funds in the best one. At this point, Yearn was basically a private yield arbitrage fund.
In early February, he decided to open it to the public. This doesn’t only mean opening access to the platform, but also making the smart contracts and vaults strategies public and auditable by everyone.
Fast forward to mid-July 2020, Andre announced the launch of YFI, the governance token for Yearn (I’ll tell you about it in a few paragraphs). Immediately, a lot of fresh funds came into the vaults (where assets are deposited and invested) : AUM went from 10M$ to 300M$ in about a week. Then, strategies became more elaborated and in early August vaults for cryptocurrencies were created. Instead of just lending stablecoins, these vaults use the assets as collateral on DeFi platforms, borrow stablecoins against them, put these stablecoins to work, and use the profits to buy more of the initially deposited cryptocurrency.
It allows people to profit both from an increase in price of the underlying asset, and from the stablecoins’ yields available on lending platforms.
After these delegated vaults were out, two types of fees were introduced : a 0.5% withdrawal fee, and a 5% fee on realized profits (it’s a little be more complicated than that but a similar idea). Out of these 5%, 10% are distributed to the vault’s strategy designer/coder : we now have a public yield arbitraging cryptocurrency fund, for which anyone can design & code a strategy, and get paid if implemented.
The remaining 90% plus the 0.5% withdrawal fee go to the governance. Now, how does governance of such a platform work?
Example : yETH vault v1 strategy
Yearn Governance and the YFI token
Most DeFi platforms today have an associated governance token. This makes them not only decentralized in terms of usage (who can acces the platforms and how), but also in terms of governance. Anyone can own these tokens and take part in the governance of a protocol by using them to vote. The snapshot website facilitates this process for different protocols.
On July 17th, Andre Cronje announced that Yearn would transition into a community governed protocol using the YFI token. 30,000 YFI were created and gradually distributed to all the people that were participating in the yearn platform at the time. What makes YFI so special is its “fair launch” : Andre didn’t keep any tokens for himself, nor did he give some to early supporters.
As of today, all the tokens have been distributed and can now be used for two things : Staking and Voting on ygov.finance.
The staked tokens are the one that are taken into account when voting. Anyone staking YFI tokens can vote on any proposals made by the community : what vaults to create next, changing the strategy of a vault, modifying YFI supply, …
People participating in governance by staking their tokens are the ones earning the 0.5% withdrawal fees and 90% of the 5% performance fees. But there is more : to fund the development of the platform, a 500,000$ Treasury has been voted for. Before going to the stakers, the earnings go to this fund until it reaches it’s 500,000$ cap. This allows Yearn to naturally fund itself.
This governance process makes of Yearn a decentralized, community-owned, self-funded, public yield arbitraging fund.
I find that completely mind-blowing.
- I have covered mainly the Vault product of Yearn, but they have many more services available. You can learn more about them here docs.yearn.finance and here learnyearn.finance.
- This project is very experimental and moving fast. Some information in the article could be inexact or outdated.
- Yearn FAQ: https://faq.yearn.finance/
- Delegated Vaults explained : https://medium.com/iearn/delegated-vaults-explained-fa81f1c3fce2
- yETH vault explained : https://thedailygwei.substack.com/p/how-the-yeth-vault-works-the-daily
- LearnYearn : https://www.learnyearn.finance/start-here/what-is-yearn-yfi
- Bullish case by maple leaf capital : https://www.learnyearn.finance/start-here/yfi-maple-leaf-capital
- YFI token introduction post : https://medium.com/iearn/yfi-df84573db81