Over the past few years, there has been a dizzying growth in the Decentralized Finance (DeFi) space. To put this into perspective, the total value locked in DeFi protocols in Oct 2020 was around $9.31 billion, whereas, in Oct 2022, the same figure stood at $54.70 billion, per data from DeFiLama.

One of the major players in this ever-expanding space is Yearn Finance (YFI). Launched in 2020 by Andre Cronje, YFI offers its users access to high yields on their crypto deposits and has become extremely popular with investors. Let's understand what Yearn Finance is and how it provides users with some of the best returns in the industry.

How does Yearn Finance work?

Yearn Finance is an APY-increasing protocol that is built on the Ethereum blockchain. It functions like a decentralized bank whose sole aim is to maximize returns on crypto assets for its users. It has a simple web interface through which users can access various lending and trading services, including Vaults, Zap, Earn and APY (more on these later).

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Basically, Yearn Finance acts as an aggregator and moves user funds between various DeFi products like DyDx, Aave and Compound. This is done to ensure Yearn Finance users benefit from the best interest rates and maximize their earnings. Furthermore, the entire process is automated and uses smart contracts to decide and invest in the best yield-generating strategy.

Let's look at the four basic product offerings under Yearn Finance

Earn

Earn was the first service offered by Yearn Finance. Users deposit their cryptocurrencies, and the platform will move the funds to the DeFi protocols offering the highest interest rates. Currently, Yearn Finance distributes user funds amongst Aave, Compound, Dydx, and other such DeFi platforms. It automatically allocates user tokens to either or all of these liquidity protocols and earns higher interest rates than traditional finance instruments. However, this feature only supports tokenized bitcoin products and stablecoins such as sUSD, Dai, TUSD, USDC, and USDT.

Vault

Vault is Yearn Finance's primary offering. It is similar to a savings account in a bank; users can deposit their cryptocurrencies, and the platform will use the best strategies to earn maximum yields on the deposited amount. However, instead of ending there, these earnings are used to generate liquidity provider (LP) rewards, interest returns, trading fees, and other gains.

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Users can choose from more than 50 such vaults, and each will have its own strategy. These vaults use pre-programmed logic to shift capital and utilize code automation to decide the ideal yield generation and rebalancing process.

Zap and APY

Zap allows users to make several deposits in one action instead of toggling across multiple platforms. Avoiding all the extra steps of a multi-platform transaction results in low gas fees and less time consumption. On the other hand, APY is a simple tool that collates interest rate offerings from the various DeFi lending protocols and puts them before you for easy reference. This can help investors choose the right platform for their investment needs.

YFI Token

Launched in 2020, YFI is the native cryptocurrency of Yearn Finance's ecosystem. It also serves as the platform's governance token and allows holders to vote on various decisions regarding the platform. Any proposal that garners more than 50 percent of the votes ends up being implemented on the platform. The supply of YFI is limited to 36,666 tokens. This decision was taken to prevent further inflation of the price. Moreover, the entire supply of YFI was distributed to users only; there was no pre-mine through which Andre Cronje, or the Yearn Finance team received any tokens.

Conclusion

Yearn Finance allows users to maximize their passive income by depositing their existing tokens. Users can earn the highest yields without an intermediary like a bank. Moreover, users do not need to go hunting to look out for the best platforms and the highest returns; Yearn Finance does it for them, using nothing but smart contracts and automated code. All these factors make Yearn Finance a popular choice for investors. At the time of writing, YFI was at $8,097 with a trading volume of $12.10 million in the last 24 hours.

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