What is yearn.finance?
In the summer of 2020, decentralized finance (DeFi) took off. As of May 2021, the DeFi crypto market cap is over $152 billion.
Contributing to this growth is something called “yield farming,” or liquidity mining, which is (put simply) the process of optimizing your participation in DeFi liquidity pools to earn the highest yield. Protocol activity, token value, and interest between platforms fluctuates, sometimes dramatically, which creates the opportunity to actively search for the best option at any moment and move capital accordingly.
Yearn.finance, previously known as iearn.finance, designed an algorithm that automatically invests in DeFi protocols to maximise yields and generate as much interest as possible. Consider it a kind of algorithmic trading bot for interest accounts. Users deposit capital and yearn.finance does the market research and money movement behind the scenes to optimize returns.
Yearn.finance was created by Andre Cronje, a South African software developer. Since the summer boom, Cronje and his team have expanded the project, which as of January 2021 comprises a lending bot, a yield bot, an insurance protocol and a governance protocol. This governance protocol is powered by the YFI token which conveys voting rights to its holders, in effect decentralizing decision-making over yearn.finance development decisions.
What is YFI
In order to provide structure and decentralization to its governance, yearn.finance minted 30,000 YFI tokens to distribute to users. That was initially intended to be a firm limit, but a YIP (Yearn Improvement Proposal) to mint 6,666 more YFI tokens succeeded in early 2021.
In part because of its limited supply and yearn.finance’s growing popularity, as of May 2021 one YFI is worth over $86,000 with a market cap of over $3 billion. In contrast, one BTC is worth $60,000 but with 18.7 million in circulation.
The yearn.finance team wrote at the time of the token’s launch that YFI “has 0 financial value. There is no pre-mine, there is no sale.” Instead, “Earning YFI is simple, provide liquidity to one of the platforms above, stake the output tokens in the distribution contracts (we will provide an interface for this), and you will earn a (governance controlled) amount per day.”
But, like all decentralized projects, the fate of the token is out of their hands. The YFI token is used as part of yearn governance to decide on the future of the protocol, and there is also much speculation on the potential future revenue from the YFI tokens which fuels YFI’s price appreciation. DeFi enthusiasts see potential in yearn.finance’s model and want to be a part of it by buying YFI and its voting rights. yearn.finance also promotes development proposals from its community (which lead to YIPs and voting) which encourages a variety of folks to work towards its success.
How is YFI different than Bitcoin?
YFI differs from Bitcoin in a few key ways.
First, YFI is an ERC-20 token, meaning it is a token that runs on—and is backed by—the Ethereum blockchain. This means that YFI does not have its own miners. Ethereum miners perform the task of processing and validating YFI transactions, just like how Bitcoin miners process and validate bitcoin transactions. Since YFI isn’t mined and all of its supply has already been minted (unless another YIP to mint more succeeds in the future), the simplest way to buy YFI is on a supporting exchange, unless you’re patient enough to earn it in interest over time by staking assets on some DeFi platforms.
The second major difference between YFI and Bitcoin is that while the Bitcoin blockchain is secure, yearn.finance is relatively new and with more vulnerabilities. Founder Andre Cronje himself says that users should understand that it cannot be 100% secure, and the development team coordinates audits regularly (which are logged on GitHub.) Protocols have suffered from hacking events in the past and they usually negatively impact the associated token’s value.
Similar to Bitcoin, a malicious participant or group of participants who gain enough control could negatively impact the value of the asset. If one person or an aligned group of YFI holders decided to manipulate its development, they could draft a malicious YIP and vote it through (similar concentration risk to a 51% attack on the blockchain.) This risk is much higher for an asset like YFI that has such a limited supply of tokens.
Before trading any crypto assets it is important to understand the risks. This overview is a starting point for you to perform your own research prior to investing in a crypto asset. First and foremost:
No Canadian securities regulatory authority has expressed an opinion about yearn.finance, including an opinion that YFI is not itself a security and/or derivative.
Wealthsimple has performed a legal assessment of YFI prior to making it available on Wealthsimple Crypto and has concluded that YFI is not and is unlikely to be deemed a security or derivative. However, there is a risk that this conclusion could change in the future and the impact of this on an asset’s value is outlined in our Product Disclosure.
We evaluated yearn.finance based on publicly available information, including (but not limited to):
- The creation, governance, usage and design of yearn.finance, including the source code, security and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that first created yearn.finance;
- The supply, demand, maturity, utility and liquidity of YFI;
- Material technical risks associated with yearn.finance, including any code defects, security breaches and other threats concerning yearn.finance and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them; and
- Legal and regulatory risks associated with yearn.finance, including any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of YFI.
Like all other crypto assets, there are some general risks to investing in YFI. These include short history risk, volatility risk, liquidity risk, demand risk, forking risk, cryptography risk, regulatory risk, concentration risk, electronic trading risk and cyber security risk. Each of these risks are described in more detail in our in-app Product Disclosure. In addition to these general risks, we note that as with any DeFi protocol, yearn.finance presents a slightly elevated short history risk relative to more established cryptocurrencies like Bitcoin. Further, the yearn.finance community is not under any legal or regulatory obligation to disclose material information to the public regarding its activities. Holders of YFI have no recourse to yearn.finance or Wealthsimple if YFI declines in value for any reason.
We emphasize that this Crypto Asset Statement is not exhaustive of all risks associated with trading YFI. Investors should perform their own assessment to determine the appropriate level of risk for their personal circumstances.
WDA is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Wealthsimple Digital Assets Inc. dated June 18, 2021. Please be aware that the statutory rights of action for damages and the right of rescission in the securities legislation of each province and territory of Canada would not apply to a misrepresentation in this Statement.
Last updated: July 26, 2021