Yield.finance is an Ethereum-based yield farming software that helps investors use maximize yield on funds deposited. You can select from a variety of DAPPs, for different purposes, but start by exploring Vaults.
The main attraction is the ability to earn interest in addition to betting that the value of the coin will go up. For example, on a recent day, the interest on ETH was 1.57%, and DAI paid 6% – not a bad return if you are holding it anyway.
Unlike Uniswap, which always requires liquidity providers to deposit equal amounts of a pair of tokens, you can deposit only one token, or invest combinations of tokens.
Also, unlike Uniswap, you are lending and earning interest, rather than earning a percentage of the transaction fees. If you are holding certain coins longer term, this allows you to earn compounding interest, in addition to betting that the value of the coin will increase.
Here’s a great video that explains it more fully:
Vaults
The main Dapp Yearn provides is called Vault. Start with the Vault Dapp. Click on “Go to Vault” to see the list of all the “Vaults”.
Each vault is essentially a pool of funds with an advanced strategy to maximize return. Most vault strategies can do multiple things, such borrowing USD’s, farming other tokens, taking in transaction fees, etc.
The vault strategy is created by a controller who created the governing protocols. Essentially, you are investing in the strategy as well as the coins.
You can only deposit coins you already hold in your wallet, but the strategy may involve those coins being invested elsewhere by the controller’s strategy. Investor returns are paid in Y tokens, which you can put in your wallet and swap out or cash out in the original coins you invested, at their current value in the Dapp, which may or may not be higher than on an exchange. These potential losses, referred to as impermanent losses, are one of the risks.
Evaluate vaults in a variety of ways:
- Click to sort APY tab by highest and lowest yield paid.
Note, however, that APY is not fixed like a bank loan, and that this interest can fluctuate every day.
A high yields mean that the vault needs to attract depositors and may be riskier.
If you click on the percentage listed for a vault, you’ll see the APR, which is the estimated compounded annual return. This is also a fluid number that changes daily.
You’ll also click to see all the coins in a vault, and whose interest rates are blended, and the vault strategy.
“Vault assets” show you the liquidity, or size of the pool. A vault with a lot of liquidity locked in is safer. But of course, the largest vaults have lower returns, since they are aimed to attract borrowers. It could be as little as .3%. There is no free lunch; the safer the investment, the lower the return.
Today you might get 27% and tomorrow 11%. You need to estimate an average over time.
There may also be a variety of fees, including the price of the Gas to invest, and a percentage of the return to withdraw.
The Earn Dapp
The Earn Dapp is in BETA but it provides a way to earn more on stable coins you are holding. With your wallet connected, you can also deposit any of the stable coins – Dai, USD, USDT etc – into the Earn Dapp.
Earn then programmatically invests your stable coins in and out of the pools to achieve the highest yield as interests rates change. The investments are made by smart contracts with common lending platforms such as AAVE, DYDX and Compound.
So while you can invest directly, you’ll get the best rates without having to watch the rates, and save money on gas fees as well. These are the two key benefits of using Earn, versus depositing directly.
Just select a coin, and the percentage of your current balance.
Pro’s and Con’s of Yearn.Finance
Pro’s
- Even for beginners, Yearn is a savvy way to earn compounding interest on coins you have decided to hold long term, in addition to the bet that the value of the coin will increase.
- For more advanced investors, and those holding a portfolio, the combinations and vault strategies and deliver huge yields typically unavailable for other passive income opportunities.
- For those holding cash, Earn automatically optimizes yield.
- More options to earn, and less risk of trading halts, than custodial experiences such as Binance
Con’s
- Yearn.finance is complicated to understand. The path of the coins is super complex and may be hard to follow, especially for multiple-coin vaults. Fast-moving fluctuations created by complex strategies increase the risk of impermanent loss.
- There are smoother, non-custodial experiences, such as Cake DeFi, though you may pay higher fees for the preference.
- There are lower-fee platforms like Solana and Binance, that are not Ethereum-based
- Some investors prefer Bitcoin-based Defi as a more conservative strategy.
Yearn.finance also has its own coin, FYI, which you can learn about here:
Here are some common terms to know when using Yearn.Finance
- Zap – Zap is a Yearn Dapp that lets you move in or out of pools instantly
- Cover – Cover is a Yearn insurance protocol that ensures your investment against smart contact bugs and hacks, based on a protocol developed by – and integrated with – Nexus Mutual
- YFI – Pronounced Yfu is yearn’s own coin, which has got a lot of attention because it was fully released at the outset, not held by the company or employees. It has zero financial value, its price is based on scarcity and allure. However, holders of YFI are like limited partners that govern the coin and reap rewards.
- Y – Yearn tokens paid out in interest
- Vault – The name of the Yean Dapp that lists all the individual vaults and allows you to deposit into any one of them. Each vault is a pool of funds with a strategy designed and executed by the controller of the vault.
- Vault strategies – Vault strategies can include adding or borrowing stable coin liquidity, investing in transaction fees, investing in other coins.
- APY – Annual percentage yield that may fluctuate daily.
- APR – Annual compounded yield, which may also fluctuation
Tips for beginners:
- Invest coins you are interested in holding long term
- Start with a small amount on Vault
- Use a single token or a pair that will move in price together, such as stable coins. This avoids the risk of impermanent loss
- Avoid pools of multiple coins with crazy high-interest rates – 24 to 27% or more – are super risky, since the controller is pooling a lot of coins together and often newer ones. xDAI, a stable coin, paying 6%, is still a nice return!
- Understand impermanent loss – spend some time with Module 4 on DeFi risk. While you can withdraw your original coins, the value may be less than what you would get on an exchange.
- Understand, you will make mistakes. Make small ones, not big ones!
Yearn.Finance stores interest in y tokens, but pays out in the original coins that the Vault is based on, or you can use their app, Zap, to withdraw coins into five supported assets, TTH, WBTC, DAI, USDC or USDT. One risk is that they build in a 1% slippage, so coins in vaults with low liquidity may fail to withdraw.
Yearn also has its own coin, YFI, that is not tied to its business model.
Go to the Next Module to learn how to invest for the first time on Yearn.finance