Confused about how Yearn Finance works? And what is the YFI token all about? You’ll find out all of this and more in this video.
Okay, let’s start with what Yearn Finance is all about.
The main element of Yearn Finance is the Yearn protocol.
The Yearn protocol, in essence, is a yield optimiser that focuses on maximising defi capabilities by automatically switching between different lending protocols.
Before we explain the mechanism of the protocol itself let’s see how yEarn came into existence. In early 2020, the author of Yearn protocol – Andre Cronje, started looking into automating his strategy for choosing the highest paying lending protocol for his stable coins.
The protocol, in essence, creates a pool for each stable coin. By depositing a stable coin to a pool, the user receives their yTokens that are yield-bearing equivalents of the coin that was deposited. For example, if a user deposits DAI, the protocol issues yDAI. The DAI that is pooled together can then be moved between different lending protocols to always maximise the yield.
For instance, if Aave offers a better yield on DAI than Compound, the yearn protocol can decide to move all or some of the DAI to Aave. The protocol checks if there is a better yield available at the time a user deposits or withdraws money from the pool, triggering a rebalance of the pool if necessary. If a user wants to withdraw their initial DAI + accrued interest they can redeem their yDAI and receive the underlying DAI.
One thing that the protocol always assures is to never swap the initially deposited stable coin to a different stable coin, even if there is a higher yield available. So for example, if a user deposits DAI, the protocol would never swap it to USDC, even if USDC has a higher yield. This is because most users want to withdraw the same stable coins as they initially deposited.