What is Yearn Finance? | DeFi for Beginners | Crypto

Risk is probably the one things people are most concerned about regarding the crypto space. What to invest in, whether it breaks down, how sustainable it is. These are all big questions you have to ask yourself before you take the plunge.

This comes with the disclaimer that this is not financial advise, do your own research. I’m an avid user of Yearn and a big fan of their vaults.

Today I’m sharing something that is perhaps a bit risk off (of course there are still smart contract risks, which I’ll go into in more detail on further down in this post). Yearn Finance, put simply, is Defi for beginners. It is finding the best sustainable strategies on earning yield for your assets given in a very simple to understand interface.

This mainly covers earning yield on stablecoins - which I think is something that I think people overlook when talking about the crypto space in general - but there are yields to be found, far better than what you would find in your usual FD accounts in the crypto space.

Yield Farming isn’t Pixies and Unicorns

Let me tell you from experience that when it comes to yield farming, it is very hard to make it worth it if you don’t have a lot of capital. Let me just give you an example - and I think this is something that a lot of people will resonate with.

Let’s say you want to put 100USD worth of coins to yield farm (of course if you’re yield farming with USD100,000 or something big, this article isn’t really for you). For the sake of this example, I will be using USDT as the example.

The yield farm states that you can expect the APY to be around 14% (which is really high as is). But, in doing so, you need to account for a few transactions. Here are a few just as examples.

Transaction 1: Approve transaction (~USD2)
Transaction 2: Deposit 100USDT (~USD6)
Transaction 3: Remove 100USDT (~USD6)
Transaction 4: Convert 14USDT (volatile) worth of rewards into USDT (~USD25 on Uniswap)

Total cost on gas alone: USD39 (and these are VERY conservative numbers, even at low gas fees)

And voila, it really isn’t even worth it anymore. If anything, you’re throwing money away. Not to mention that although it states that APY is 14% at the start, my experience is such that most yield farms don’t end up with 14% APY from governance token rewards after 1 year.

So if you do it alone, you are exposed to a few risks:

1) The yield farm may no longer be profitable, so you want to take it out early and maybe even yield farm somewhere else. This exposes you to gas fees.

2) You are exposed to the risk of the volatility of the price of those rewards - you don’t really want to convert bits by bits because of the gas fees, so in some ways you are forced to hold onto those governance tokens. Reducing risk into USDT would be ideal in order to earn that consistent yield.

Why Yearn is Important

Yearn vaults, for me, are Defi vaults for dummies, simply put. In order to optimise performance, they will have a few DIFFERENT strategies in place for what the vault can do. And when it is viewed that one strategy is more profitable, it will use that strategy instead.

For example, with their USDT strategy, they have 4 strategies:

1) Lend USDT on AAVE to earn interest
2) Supply USDT on Idle Finance (Farm COMP + IDLE tokens —> Convert them to USDT and deposit back in vault)
3) Deposit onto Curve finance USDT curve pool
4) Lends USDT on Alpha Homora V2 to generate interest

So, with Yearn you get 2 things. You have the power of finding the best yields (i.e. you’re not stuck in one Yield farm, trapped in a shitty yield (to put it succinctly), gas fees are significantly reduced by the power of yield aggregation and suddenly become negligible AND whatever yield will ALWAYS come back to you in the form of USDT - so you don’t have to do any additional transactions in order to get it back in the form of USDT.

This is fundamentally, at its core a passive investing strategy.

Of course, there are many other coins on Yearn that you can earn yield on, but I think that if you want a way to earn stable income in the form of dollar denominated value, this is one of those options.

The Risks of Yearn

In terms of risks, you have smart contract risks with regard to Yearn. The one famous example when a Yearn vault failed would be just this year (2021), when the DAI vault was hacked. Most of the details are articulated in the article linked. On that instance, Yearn used their treasury to restore the DAI lost as a result, effectively using their treasury to cover the losses of vault participants, although they did mention that this was a one-off.

But saying that, Yearn is a project that undergoes numerous audits which are public. Not to mention that their track record to this day has generally been clear bugs (I say this because they have a LOT of vaults with very few hacks over the years).

My general thoughts are that it remains safer that a lot of other passive yield options, but it has the inherent risk of smart contract failures (which for me, remain very low given the numerous audits that these vaults have undergone).