Jul 252020
Understanding YFI token DeFi

This guide will help you understand what the YFI token from yearn.finance is, what the role of the token is, its economic and governance rights and future potential and an explanation of how yTokens work. If you are looking to buy YFI, please read our guide on how to buy YFI.

What is YFI Token?

YFI token is the governance and economic layer on top of the yearn protocol, which is a suite of smart contracts that track the best yields on underlying assets.

YFI token was released to the world in the fairest possible launch:

  • There was no pre-mine
  • No ICO – not a single token was sold by the team before launch
  • No VCs – the bane of a lot of crypto projects
  • No “advisors” to shill the token on Twitter and make money by dumping their bags on you
  • No developer allocation. Yes, really.

The most interesting thing? It is all built by a single developer, Andre Cronje!

If you want to buy YFI, you want to do this for two purposes:

  • Govern the protocol by setting parameters on everything from inflation rate to protocol fees.
  • Earn fees from “assets under management” based on how well the protocol does in providing returns.

Unlike other vaporware tokens like BAL from Balancer which are a promise of future governance and have a marketcap of $1 billion fully diluted with literally 0 economic utility (and currently 0 governance utility as well), YFI has both governance and economic utility since launch. As the assets under management for yTokens goes up, the value of YFI also goes up and holders can expect a real non-speculative return.

YFI has been steadily going up in price over the last week since launch. A passionate community has formed around it and is building tools from governance to returns trackers.

What are yTokens?

Let us also understand what yTokens are. yTokens are simply wrappers around existing tokens, currently stablecoins. Therefore ydAI is a wrapper around DAI, yUSDT is a wrapper around USDT, yUSDC is a wrapper around USDC, and yBUSDC is a wrapper around TUSDC.

But what does this wrapper do? Simply put, it takes the underlying asset, like DAI, and finds the best possible yield for that asset. So for example if Aave yields 8% on DAI and Compound yields 6%, then yDAI would move your DAI into Aave. yTokens are ‘yield optimized tokens’ based on the underlying.

Therefore, you don’t need to worry about trying to track aDAI vs. cDAI and where you can get the best returns. The yearn protocol automatically does this for you. Since it is currently managing a few hundred million dollars, it can move around large sums of money without gas being an issue either.

Things get more interesting with the yield farming and liquidity mining incentives, so that yTokens can actually be much more powerful than simply yield seeking instruments, but can combine yield maximizing based on yield farming. A lot more of this will become a reality in V2, slated to be released in a few days.

In a nutshell, yTokens are super-charged DeFi wrapper tokens that seek out the best yield for you. Therefore if you are new to DeFi or don’t want to spend every waking minute of your existence refreshing twenty web pages to track everything, just let yearn do its thing while you sit back and enjoy your yield.

What is yCRV

A quick detour into yCRV is warranted. This was the first pool where you could “mine” for YFI at launch. Essentially, it is a stablecoin pool (therefore well suited for Curve) on Curve where you can trade between different yTokens derived from USD stablecoins, i.e. yDAI, yUSDC, yUSDT, yTUSD.

You can think of the yCRV pool tokens as a basket of yield maximizing stablecoins, but in addition they also accrue liquidity provider fees on Curve! Pretty neat.

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