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September 1, 2020

How YFI v2 Works

Shubham GoyalProduct Specialist

What Is YFI v2?

YFI started out as the governance token for Yearn.Finance, a DeFi field network model that’s programmed to run on the Ethereum blockchain. Now Yearn has launched a newer version of the YFI token dubbed YFI v2, or YFI version 2, that features a range of upgrades. 

Yearn’s initiative behind the launch of YFI v2 was to allow the users a portal to access the extensive DeFi ecosystem, and to make yield farming an innovative and accessible process where users can suggest their own strategies to the platform. Yearn.Finance aims to provide the users with the opportunity to easily automate the farming of the highest possible yields with their assets while saving up on transaction expenses: a strategy known as yield aggregation, which is presently the most popular and advantageous strategy for maximum returns. (YFI)

What Are the Primary Functions of YFI?

YFI has three major operations:

  • Power to Vote in Governance Decisions: YFI is a governance token. If you possess any number of YFI tokens, Yearn allows you to vote in governance decisions that affect the platform’s future workings, also known as the YIPs (Yearn Improvement Plans).
  • Additional Earnings: If you hold YFI tokens and choose to vote in the YIPs, you are automatically eligible to lay your claim to a percentage of the benefits acquired from the yield aggregation products (e. g. APR, vaults, etc.).
  • A Valuable Cryptocurrency: Even though the Yearn.Finance team describes the token as, “..a completely valueless 0 (zero) supply token… There is no pre-mine, there is no sale, no you cannot buy it,…,”  YFI is, at present, a highly valuable crypto. It also has quite strong liquidity support on both prime decentralized (DEX) and centralized (CEX) exchange platforms, with millions in the average daily trading volume.

How is YFI v2 different from YFI v1?

The workings of the original YFI token, or YFI version 1, was perhaps a lot more straightforward and easier to comprehend. Still, with the way the DeFi system has been enlarging its scopes with every passing day, the most optimal strategy you can go for is to try new things. It’s undeniable that YFI v2 offers exactly that: a boatload of new, potentially beneficial opportunities.

With v1, you could deposit your stablecoin into a single Yearn smart contract and receive YFI tokens in return, the contract would then issue the funds towards yield farming and give you returns, and that was that. Needless to say that these contracts obviously came with predetermined, unalterable conditions.

But with the upgraded version 2, Yearn.Finance has essentially broadened the range of a YFI token’s functions by tweaking the token’s basic structure and functions. In the case of v2, three interconnected components come into play-  yVaults, Controllers, and Strategies

How Do the yVaults, Controllers and Strategies Work?

The yVaults are where you deposit your assets and get interest-earning yTokens in return (e.g. yUSDC in return for depositing USDC).  An additional feature of these vaults is that they allow users to stake DeFi tokens (SNX, LEND, MKR, KNC, and more) in exchange for interest-earning stablecoins, as opposed to most other platforms where the tokens given are only the interest-earning versions of the assets deposited.

Next up, we have the Strategies, which are essentially smart contracts. You can propose a strategy you have come up with to the Yearn community, and if it gets approved, your strategy can become an official strategy. This component allows the users whose strategies are approved to claim a percentage of system fees, and will hopefully help construct a creative and collaborative yield farming ecosystem in the near future. 

And lastly, there are the Controllers. These are once again smart contracts that get the deposited assets out of vaults, allocate them towards yield farming opportunities, and distribute the returns among all farmers- each user’s yields directly proportionate with the amount they deposited in assets.  

YFI v2 Strategies Example

Strategies proposed by users are approved through the governance votes. In the meantime, Yearn provides several optimal strategies you can choose from. While describing version 2 of YFI, the developer Andre Cronje says:

“Strategies can be submitted by anyone. We do have a predefined list of strategies we consider to be the current optimum in the market. A strategy can receive rewards from any additional sources other than its core function. These additional rewards are split between the governance ecosystem, the yield farmers, and the strategy creator. So if your strategy is selected as the highest performing strategy, you receive funds every time the system receives rewards.”

One of the v2 strategies that has received a lot of popularity is related to the Synthetix (SNX) ecosystem. For those of you who don’t know, Synthetix is an Ethereum blockchain based DeFi system and a decentralized exchange platform (DEX).  SNX is the token of the ecosystem that generates synthetic assets called Synths; SNX tokens can be bought from multiple crypto exchange platforms.

The way this strategy works is that you stake your SNX into the yEarn vault, and then the entire farming process is automated, so you just automatically get your rewards after a year (rewards are locked up for the entirety of the first year). Plus, since every user claims their rewards simultaneously, you get to save up on gas fees. However, one condition of this strategy is that you have to keep claiming your rewards every week.  

As for the yields, returns from the YFI version 2 are fairly high, plus since you get to give your input in future governance decisions while also getting returns, if the Yearn ecosystem does become a globally recognized part of the DeFi system in the future, you’d get to have a say in the making of decisions that might just leave an impact on the market as a whole. Keep in mind, though, that when you choose to support YFI, you are taking a risk, however small it may be. For more info on the workings of Yearn.Finance in general and the YFI token in particular, don’t forget to check out their official Twitter page!

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