On Monday, August 10, 2020 at 2 p.m. PST, Binance listed yearn.finance, otherwise known as YFI, with a valuation of around $ 6,000. Has the governance token whose initial value was intended to have no value at all? A path such as its course and its characteristics lead some to compare it to a certain… .Bitcoin, of which it has moreover greatly exceeded the value per unit in just a few weeks! To understand how it works, it is important to introduce a few terms.
Coin, Token, Altcoin, Stablecoin… What are the differences?
These different terms spark debate within the community! Let’s admit the following definitions as true until the end of this article:
- A coin is a cryptocurrency associated with the creation of a blockchain.
- Altcoin represents any cryptocurrency that is not Bitcoin
- A stablecoin is a cryptocurrency whose value is intended to be … stable, it is based on another asset for example 1 DAI = 1 $
- A token corresponds to the personalization of a corner, it represents the creation of value by reflection of the corner in question (it is indexed on an existing corner). It is most often used in Dapps (Decentralized Applications). In this asset category, an ERC 20 token corresponds to a standard of tokens from the Ethereum Blockchain. Finally, note that there is a multitude of tokens from different blockchains (NEO, EOS, Stellar).
Very quickly, with the proliferation of projects independent of each other, but part of common ecosystems, a central question arose: how to get two blockchains to communicate with each other?
We call this principle, interoperability of blockchains. This mechanism was used for the first time as part of the installation of TheMakerDAO (Decentralize Autonomous Organization). On this architecture, it became possible to “wrap” Bitcoin in order to make it operable on Ethereum. This process converts the bitcoin coin into a bitcoin wrapped (equivalent to an ERC 20 token) and thus resolves the liquidity gap problem between Bitcoin and Ethereum blockchains. All this makes it possible to make the two ETH and BTC networks interoperable.
YFI continues this logic and uses wrapping to convert the coins and tokens that you deposit on the platform into yTokens. The Yield Farming was born.
What is Yield Farming?
The yield farming where culture of performance in French is a complex process; it consists of receiving a return on your investment after using your capital productively.
We could compare it to classic savings to the extent that your savings are itself loaned to other clients, this delegation of your assets allows you to earn interest. In 2020, in what should be described as traditional finance, the rates are traditionally between 0.5% (Livret A) and 2 to 3% (life insurance, tax-exempt books), produced by the base capital on a year. Enough for a banker to explain learnedly that “The money did not sleep, and was used productively” …
In addition, it should be noted that yield farming has its origin in previous Defi services such as Compound, Aave, Swing or Uniswap. If you want to learn more about Yield farming, it’s here.
Liquidity Pools (LP)
These platforms offer to add liquidity to a network (we speak of a “liquidity pool”) so that it prospers, in exchange for the funds deposited, a variable percentage depending on the cryptocurrency is collected by the depositary, c ‘is the principle of lending.
Quickly, this variation of yield farming has undergone changes while Coumpound introduced his own governance token the token COMP. It is then no longer a question of simply receiving interest with lending (deposit of liquidity in the network). Anyone using the service, whether for lending or for borrow (borrow) earns COMP, the possession of which is accompanied by special privileges. This is an additional reward that does not leave users indifferent and attracts speculators.
Let’s broaden the spectrum of DeFi a bit and take a look at Decentralized Exchange (DEX) Uniswap. The Licorne platform, for its part, allows these custodians to receive fees on trades executed via its liquidity pool. Swing, chooses not to choose and offers both options; the circulation of the BAL – which is itself a governance token – with the possibility of receiving fees on trades for liquidity providers.
This is when yield farming takes on another dimension, generating profits by making your capital available to the pool is good, but optimizing your returns by maximizing the obtaining of governance tokens is even better.
Yield Farming, the sole cause of the DeFi pump?
The DAI is the stablecoin of Maker. It is possible to lend DAI that will be used as collateral (asset deposited as collateral) to borrow USDT for example, these two currencies being stablecoins of different kinds. The USDT borrowed once traded in DAI can add liquidity and increase the amount of collateral. This barbaric explanation correctly illustrates one of the means used to maximize the number of tokens won by the lending and the borrow.
You don’t have to be an expert to try your hand at yield farming, today tools like Instadapp can automate these tasks.
To be profitable, many factors must be taken into account, in particular which service offers the most interesting rate for the deposited cryptocurrency in order to move its funds to where they bring in the most.
What the yTokens will do for you
The yToken literally means, yield optimized tokens, performance optimization token in French. It therefore functions as a comparator between the various DeFi (Decentralize Finance) companies represented on yearn.finance. The protocol selects the one offering the best return depending on the cryptocurrency deposited. All thanks to wrapping we remind you.
YTokens and YFI an inseparable duo!
Earn.finance bECOMES Yearn.finance when in July 2020 the YFI governance token is launched, then it has a zero value. When created by Andre cronje, the latter establishes that the only way to obtain it will be by depositing liquidity in the reserve (pool). This architecture allows holders who store their YFI to have the right to vote on the evolution of the protocol, regardless of the number of tokens at their disposal.
A totally decentralized system where even the creator has no say since, unlike other ICO (Initial Coin Offering) type models Andre Cronje did not keep any YFI out of the 30,000 created. A great example of how to create a DAO (Decentralized Autonomous Organization).
The virtuous YFI loop
YFI staking allows you to receive a percentage of the fees accumulated on the various products of Yearn Finance. The products are varied in this comparator 2.0, we can use the yliquidate to instantly track where the liquidation threshold is highest or ytrade in order to find the platform where a trade would be the most advantageous or the ypool to find the DeFi service offering the best return on investment when adding liquidity for the purpose of lending (ref GIF).
This GIF is in no way representative of the ROIs offered by these different companies. The numbers chosen are random, their sole purpose is to illustrate the point.
The 6 companies compared being: Avee, Compound, Fulcrum, dYdX, ddex and dForce.
Furthermore, it is interesting to note that this diagram is not exhaustive insofar as curve.fi allocates part of its liquidity to the various DeFi protocols such as YFI.
These are so many things that make the YFI attractive and that has differentiated it from its indirect competitors seen above in the article; it makes yield farming accessible to more people while providing new ways for subject matter experts to maximize their performance.
An uncertain future …
In essence, the choices of the community could derail the project, just as a bug in the execution of smart-contracts (intelligent contracts) as the recent history of DeFi has demonstrated (industrial disaster of Yam, mistakes of Curve…). Another possibility could be that Andre Cronjre simply decides to stop the development of the project.
However, if the planets remain aligned and there is no problem along the way, we can foresee a prosperous future for Yearn Finance, which has been able to innovate with the yTokens by relying on DeFi technology.
However, remaining the sole player in an open-source environment is rather difficult. YFI was no exception to this rule and many copy-cats (clones) quickly appeared some more honest than others … The best known being the YFII the Chinese version of YFI.
We will agree that for the moment, by its success and the elegance of its protocol, YFI is unique. However, it won’t be long before new initiatives flourish in the field of DeFi. This rapidly evolving market will take this protocol head on and make it evolve even further over time, in probably new and surprising forms. For the moment some are announcing a YFI at 100,000 dollars.
Freelance artist who became passionate about Blockchain. I explore this vast universe a little more every day with a penchant for DeFi.
Also I like the sushi pools and chopsticks! (ps: this is not investment advice)