Yield Finance: A 5 Minute Guide to Profit in Yield Farming
Decentralized Finance (DeFi) is one of the most exciting and emerging opportunities in the rapidly evolving cryptocurrency space. At its core, it offers an alternative to traditional systems of borrowing and lending through the introduction of decentralization.
In the summer of 2020, the DeFi ecosystem was launched in mainstream attention with adoption of yield farming through a revolutionary platform: Yearn Finance. In a short period of time, Yearn.Finance has become a leading DeFi coin and platform for investors looking to earn passive income in crypto.
What is Yearn Finance?
Based on the Ethereum blockchain network, Yearn Finance – often referred as Yearn.finance – and its native DeFi coin YFI have brought DeFi and Yield Farming to the mainstream in 2020.
earn.Finance has earned its reputation in the DeFi space for kickstarting the yield finance and the liquidity mining craze along with the price of YFI tokens shooting rapidly after launch.
What is yield farming?
Yield farming is a crypto investment strategy that aims to generate as high returns as possible on investments. While this may seem like a no-brainer, a yield farmer is dedicated to moving assets around in an attempt to chase down the highest annual percentage yield from week to week.
What is yearn protocol?
In a short definition, the Yearn protocol is a yield optimizer that seeks to maximize the DeFi capabilities by automatically switching between different lending platforms.
How Does Yearn Finance Work?
Decentralized protocol Yearn.Finance has been developed by FinTech software developer Andre Cronje as a means of growing blockchain-based finance. The open-source protocol promotes the classic principle of lending and borrowing as seen in traditional finance through the use of liquidity pools.
However, Yearn Finance does this in a decentralized manner by leveraging the Ethereum blockchain network. It rewards also those users who lending their crypto holdings by providing liquidity and depositing their virtual digital currencies.
Yearn.Finance receives user funds, via its varying liquidity pools, and further distributes it to other DeFi lending protocols like Aave, Compound, and others based on the ROI parameters of their investments.
To maximize the annual percentage yield (APY), the Yearn.Finance platform automatically switches user holdings between different yield-farming platforms. This way it ensures that the user funds always remain in some of the most rewarding liquidity pools.
The Yearn Finance platform supports some of the stablecoins like USDT, TUSD, USDC, sUSD, and DAI. As said, the platform first determines which of the yield-farming systems is offering a handsome APY.
Later, it converts the stablecoin deposits of liquidity providers to an equivalent amount of yTokens – often referred as “yield optimized tokens”. The platform also charges a small fee for its efforts and network maintenance which ultimately goes in the Yearn.Finance pools accessible to YFI token holders.
For liquidity providers to earn additional YFI Tokens, it is mandatory they are first converted to yTokens. This allows easy switching of funds between different protocols. To achieve this, Yearn has worked with an automated market maker (AMM) Curve to set up a pool of yDAI, yUSDC, yUSDT, and yTUSD.
The YFI Token: A Leading DeFi Coin
The YFI is an ERC20 Ethereum-based token that arrived in the market in July 2020 with a maximum supply of 30,000. YFI is also called the governance token of Yearn.Finance as it governs different protocols within the ecosystem.
Since Yearn Finance is a community-governed platform via a voting system, YFI is utilized as a governance token. The amount of YFI tokens that one possesses dictates how much influence that individual has on the decision-making process on the Yearn.Finance platform.
Note that none of the YFI tokens is premined. Thus, apart from trading on the exchanges, the only other way to get YFI tokens is by providing liquidity to any one of the Yearn.Finance’s platforms.
Since its inception in July 2020, the YFI token gained massive traction within a month’s time during the DeFi mania. At launch, the Yearn Finance price was ~$1,000; however, YFI quickly climbed the top of the DeFi coin list in terms of price and overall market cap by the end of August 2020.
As one of the most in-demand and top DeFi coins, YFI became the fastest cryptocurrency token to cross a $1B market cap. As one of the top DeFi coins in the market, it drew strong demand from cryptocurrency exchange users and subsequently its inevitably listing on Coinbase and Gemini.
Yearn.Finance Features & Products
Apart from just liquidity mining and yield farming functionalities, the Yearn.Finance platform has also got other products and features. It has a host of other functionalities to cater to the DeFi revolution. Here are some of the expected features that make Yearn.Finance a leader in the DeFi market:
As the name suggests, this feature allows users to build long and short positions on stablecoin with 1000x leverage. Crypto traders are looking for liquidity to make the most of their trading calls and Yearn.Finance helps them realize their dreams.
This feature of the Yearn Finance protocol is specifically developed for the Aave protocol for automatic liquidations and offering flash loans. These flash loans infuse liquidity as and when required and in the desired manner.
This feature will tokenize the debt of other protocols while taking assistance from Aave. After tokenization, the debt is used in other DeFi protocols thereby opening up multiple liquidity streams for the industry.
This feature facilitates leveraged trading facility between DAI and USDC while offering leverage up to 5x and a profit of nearly 16 percent.
While DeFi is still in its infancy, we have experienced an impressive array of yield-creating products from Yearn Finance. By aggregating liquidity, as well as leveraging buying and selling, investors benefited from returns that seem unbelievable when you compare them to yields from traditional investments.
While investors clamored to find investment options in the wake of COVID, Yearn Finance delivered excitement into the cryptocurrency space by creating a multi-billion dollar ecosystem where individuals can borrow and lend in a decentralized and secure manner.