Author: Nick Chong
YFI is the native cryptocurrency of the Yearn.finance protocol. It is a governance token that allows users to vote on which direction they want the protocol to head.
Decentralized finance – better known as DeFi – has seen parabolic growth as the yields provided by protocols have exploded higher. A crucial part of this growth can be pinned to the introduction of governance tokens, which allow holders to determine the direction they want protocols to develop. Governance tokens are a crucial step in decentralizing DeFi protocols.
Riding the wave of governance tokens, Yearn.finance rolled out YFI in July 2020. It quickly captivated the cryptocurrency space as it proceeded to rally from $3 to $30,000 in a month.
What is Yearn.finance?
Before we get into YFI, it's worth giving some context about Yearn.finance – also referred to as yEarn.
After suffering an exploit shortly after launch, Cronje overhauled the protocol to provide users with a new suite of products.
Up until July, Yearn.finance was fairly niche. After the exploit early in 2020 and the cryptocurrency market crash of March, many users were hesitant to use the then-new protocol.
While the Medium post mentioned that YFI has "no intrinsic value," the market proceeded to gobble the coins up. After starting trading at $3 in a Balancer pool, the cryptocurrency skyrocketed as investors saw value in governing Yearn.finance, which began to gain dozens of millions in deposits.
While YFI was crucial to Yearn.finance in that it generated deposits and attention, the coin also had another purpose: to decentralize development and control of the protocol amongst users.
The farming mechanism allowed any user – whether they had $100 or $1,000,000 – to earn YFI at the same time and at the same cost. This meant that any user could acquire YFI to influence Yearn.finance.
Decisions that have been made thus far include the hiring of a team of marketers and developers and the addition of certain strategies to Vaults.
Why YFI is important
While many focus on the price action YFI experienced, it is most important because it marked a shift in how protocols can incentivize adoption. It has been argued that YFI's launch was the "most fair launch since Bitcoin," as anyone could participate in the generation of the coin while paying the same price.
YFI is not without its challenges. Because Andre Cronje was the mastermind behind Yearn.finance and YFI for so long, investors are watching his moves with keen intent. This means that if he takes time off, many may see it as a blow to YFI. As such, some argue that the project is still centralized around this key player (at least to some extent).
This was accentuated earlier this year when it was reported that Cronje said he wanted to leave the DeFi space. YFI prices proceeded to crumble amid fears of the project shutting down.
This "Cronje Premium" trend (as some traders have dubbed it) is slowly losing relevance as Yearn.finance introduces new team members. It might no longer be a concern if decentralized governance continues to develop without Cronje's influence.
YFI's launch marked an industry-wide shift in how cryptocurrency projects distribute coins. By providing an incentive for early users, projects can get quick adoption and community growth. This ties in with the concept of "skin in the game," which suggests that those that have a monetary or emotional stake in an investment will do what they can to allow it to succeed.
Yearn.finance is an interesting protocol that is building unique decentralized finance products. The future seems bright as they hire a team of developers and marketers, but only time will tell if the project will manage to thrive longer in the Ethereum DeFi space.