What is Yearn Finance (YFI) and what makes it unique?

Paul Sazan
| Editor:
March 25, 2024
9 min read

An Overview of Yearn Finance

Yearn Finance (YFI) is a cornerstone in the decentralized finance (DeFi) landscape that has gained significant attention due to its innovative approach to optimizing yield farming. Let's dive into its origin and purpose to better understand what Yearn Finance (YFI) is all about.

Origin and Founder

Yearn Finance is an Ethereum-based protocol launched in February 2020. The brainchild of the platform is Andre Cronje, a prominent figure in the DeFi sector. Initially, Yearn Finance started as an experiment in automating DeFi yield farming strategies. However, it quickly gained traction and expanded into a holistic suite of DeFi services.

Andre Cronje, founder of YFI. Source:

In less than a year since its inception, Yearn Finance's ecosystem experienced rapid growth, with over $3 billion in total value locked (TVL) recorded as of November 2020. This swift expansion showcases the high demand for efficient, automated, and high-yield DeFi strategies.

Purpose of Yearn Finance

The primary aim of Yearn Finance is to simplify and optimize the process of earning yield through lending platforms in the DeFi space. It serves to create a user-friendly gateway for investors to navigate the often complex DeFi landscape.

Yearn Finance's main product, known as Vaults, is at the heart of its operations. Vaults allow users to automatically earn the highest yields on their assets. They achieve this by dynamically moving them between various lending platforms, such as Compound, Aave, and Curve Finance, depending on where the most favorable returns can be found at any given time.

The Yearn Finance platform also offers other products, including Earn, Zap, and Cover, each contributing towards an all-encompassing DeFi experience. The Earn product optimizes lending yields, Zap facilitates efficient transactions within DeFi, and Cover provides smart contract insurance.

By providing an accessible, automated approach to DeFi yield farming, Yearn Finance is helping to usher in a new era of open finance and reshaping the way investors interact with DeFi platforms.

Understanding YFI Token

At the heart of Yearn Finance is its native token, YFI. This token is central to the operation and governance of the Yearn Finance platform.

Features of YFI Token

The YFI token is not just another cryptocurrency. It's a governance token that allows holders to participate actively in the decision-making process of the Yearn Finance platform. With a capped supply of 30,000 tokens, YFI holders have voting rights to determine the direction of the protocol.

This includes proposing and voting on changes to the platform's code or deciding on fee structures. YFI holders can participate in the governance of the Yearn ecosystem by voting on Yearn Improvement Proposals (YIPs). These proposals outline how Yearn governance operates, with delegated authority from YFI holders to yTeams. Holding YFI provides control over how power is distributed among teams and exclusive voting power to approve or deny changes within the protocol.

Token Distribution and Value

The distribution of YFI tokens is unique in the sense that there was no pre-mine, pre-sale, or allocation to the team. Instead, the tokens were distributed to users of the platform, rewarding those who engage with the protocol.

The value of YFI is directly tied to the success and growth of the Yearn Finance platform. As the platform grows and evolves, so does the demand for YFI tokens, which can potentially lead to an increase in value. However, it's important to note that the value of YFI, like all cryptocurrencies, can fluctuate due to various factors, including market demand, technological advancements, regulatory news, and macroeconomic trends.

To summarize, the YFI token plays a pivotal role in the Yearn Finance ecosystem. It not only provides holders with the power to shape the platform's future but also represents an investment in the platform's success. As you delve deeper into what is Yearn Finance (YFI), the importance of understanding the role and value of YFI becomes increasingly clear.

How Yearn Finance Works

Understanding the functionality of Yearn Finance is key to unlocking its potential as a player in the DeFi (Decentralized Finance) space. Primarily, Yearn Finance aims to simplify and optimize the process of earning yield through lending platforms.

Yield Farming Optimization

Yearn Finance automates the yield farming process, which enables users to earn interest on their cryptocurrency holdings without actively monitoring and managing their DeFi investments. The protocol automatically moves the user’s funds between lending platforms like Compound, Aave, and Curve Finance to achieve the highest possible yield.

Through yield farming optimization, Yearn Finance takes away the complexities and challenges of navigating the DeFi landscape, allowing users to maximize their returns with minimal effort. This is part of Yearn Finance's broader objective to make DeFi more accessible and profitable for a wider audience.

Using Vaults in Yearn Finance

A key component of Yearn Finance is its main product, Vaults. Vaults allow users to automatically earn the best yields on their assets. When a user deposits their assets into a Yearn vault, the protocol automatically starts to earn yield on those assets by moving them between different lending platforms.

In addition to generating yield, Vaults also offer users additional benefits, such as saving on gas fees and reducing the risk of liquidation. The Vaults system is designed to be user-friendly, requiring minimal input from the user once their assets are deposited.

Yearn Finance includes multiple products within its ecosystem, such as yVaults, Earn, Zap, and Cover. Each of these products offers unique ways for users to optimize and maximize their crypto returns.

Here is a brief overview of Yearn Finance's products:

  • yVaults - Automated yield farming optimized for best returns
  • Earn - Automatically shifts assets between lending platforms for highest yield
  • Zap - Provides seamless token exchanges and movement across different protocols
  • Cover - Offers decentralized insurance coverage for DeFi risks

The Yearn Finance ecosystem has experienced rapid growth, with over $3 billion in total value locked (TVL) recorded as of November 2020. This success is largely attributed to the protocol's innovative approach to yield farming and its commitment to making DeFi more accessible to all users.

Yearn Finance Governance

Yearn Finance's governance model is a cornerstone of its protocol, ensuring the project remains decentralized and community-driven. The governance structure revolves around the use of the platform's token, YFI, and the proposal and voting system.

Role of YFI in Governance

With the passing of YIP-61: Governance 2.0 on April 25th, 2021, the Yearn Finance protocol began its transition into a multi-DAO (Decentralized Autonomous Organization) structure. This transition was managed by constrained delegation, allowing protocol development to remain agile without sacrificing decentralization. The key player in this system is the protocol's native token, YFI.

However, with the launch of veYFI, YFI token holders transitioned from using YFI to veYFI as voting power. This gives them the authority to create and vote for proposals that enhance the protocol. Ultimately, the role of the YFI token in governance is pivotal, as it empowers the community to steer the direction of the protocol.

Proposal and Voting System

The proposal and voting system within Yearn Finance is an integral part of its governance model. Token holders, through veYFI, can propose changes and improvements to the protocol and vote on them. This democratic process ensures that decisions made are in the best interests of the community.

Under this governance system, yTeams within the multi-DAO structure have distinct powers allocated by token holders. These teams can be organized into membership pools, further subdividing contributors working towards common goals within the team. Currently, the Multisig within Yearn executes decisions made by yTeams until a more decentralized system is established, controlling aspects like future implementations until then.

Yearn Finance aims to strike a balance between DAO decentralization and productivity. Currently, the focus is primarily on social layer changes, but plans are in place to shift towards software implementations in the future. This blend of productivity and decentralization is what makes Yearn Finance's governance model so unique and powerful, contributing to its reputation as a top DeFi protocol.

The governance structure of Yearn Finance is a shining example of how DeFi protocols can leverage blockchain technology to create a fair and democratic decision-making process. With the power in the hands of the token holders, Yearn Finance is setting the standard for future DeFi projects aiming to implement robust and inclusive governance systems.

Risk and Reward in Yearn Finance

In the dynamic world of decentralized finance (DeFi), Yearn Finance stands as a prominent project that promises both potential rewards and risks. This section will provide an insight into the growth of Yearn Finance and the potential risks you should consider.

Success and Growth of Yearn Finance

Yearn Finance has grown to become one of the leading projects in the DeFi space, offering various products and services that cater to the needs of users seeking optimized yield farming strategies. The platform's ecosystem experienced rapid growth, with over $3 billion in total value locked (TVL) recorded as of November 2020. This reflects the trust and acceptance it has garnered among users seeking high-yield DeFi strategies and automated portfolio management.

Yearn Finance's native token, YFI, achieved an impressive feat in the cryptocurrency market. The token reached an all-time high price of over $90,000 in September 2020. Interestingly, the token's supply was capped at 30,000, leading to its relatively high price.'s YFI was launched without any pre-mine or ICO (Initial Coin Offering), making it a notable example of fair token distribution in the cryptocurrency space. The success of and its YFI token can be attributed to its community-driven nature, audited smart contracts, and the platform's commitment to decentralization within the DeFi ecosystem.

Potential Risks to Consider

Like any investment, getting involved with Yearn Finance and its YFI token comes with its own set of risks. Here are some potential risks to consider:

  1. Market Volatility: The price of YFI, like other cryptocurrencies, is subject to high volatility. This means the value of your investment can rapidly increase or decrease.
  2. Smart Contract Risk: While Yearn Finance's smart contracts are audited, there's still a potential risk of bugs and vulnerabilities that could be exploited by malicious actors.
  3. Regulatory Risk: The regulatory environment for DeFi is uncertain and can change rapidly. Any regulatory changes could potentially impact the operation of Yearn Finance and the value of YFI.
  4. Risk of Impermanent Loss: If you provide liquidity to Yearn Finance's pools, you may be exposed to impermanent loss. This happens when the price of your deposited assets changes compared to when you deposited them.

Investing in Yearn Finance, like any other DeFi project, requires careful consideration and risk assessment. It's crucial to understand these risks and consider your risk tolerance before getting involved. Always remember, in the world of finance and particularly in DeFi, there's no such thing as a guaranteed return.

Comparing Yearn Finance to Other DeFi Platforms

To fully grasp the essence of Yearn Finance (YFI), it's beneficial to review its unique features and compare it to other DeFi platforms.

Unique Features of Yearn Finance

Yearn Finance is a decentralized finance (DeFi) protocol that is designed to simplify and optimize the process of earning yield through lending platforms in the DeFi space. It has several unique characteristics that set it apart from other platforms:

  1. Yield Farming Optimization: Yearn Finance is designed with a primary focus on yield farming. This feature allows users to generate returns with their cryptocurrency holdings by lending or borrowing assets.
  2. Vaults: One of Yearn Finance's main products, Vaults, provides an automatic way for users to earn the highest yields on their assets. Vaults achieve this by dynamically moving assets between lending platforms like Compound, Aave, and Curve Finance to secure the best lending rates.
  3. Simplification of DeFi Sector: Yearn Finance aims to simplify the ever-expanding DeFi sector by offering an easy-to-use platform. Its objective is to help users maximize their returns on crypto assets by finding the best lending services across various platforms.

Yearn Finance Vs. Other Platforms

An analysis of Yearn Finance in comparison to other platforms reinforces its unique position in the DeFi sector.

  • Yearn Finance specializes in yield farming, while some platforms don't even support it
  • Yearn Finance allows for Automated Yield Maximization by using Vaults that move assets between platforms, while most other platforms require manual management
  • Yearn Finance greatly simplifies the DeFi experience by finding best rates whereas on most other platforms users have to navigate different platforms independently

From the table, it's clear that Yearn Finance has a unique focus on yield farming optimization, resulting in automatic yield maximization and simplification of the DeFi sector. These features differentiate it from other platforms, making it a popular choice for users seeking to maximize their returns with minimal effort. Understanding 'what is yearn finance (YFI)' and how it compares to other platforms can help users make informed decisions about their DeFi investments.

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