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DeFi has become key to the crypto market and Yearn.Finance could be the harbinger of things to come.
Cryptocurrency has had a stellar year and it is at least in part thanks to the decentralized finance (DeFi) boom. These projects promise to create decentralized alternatives to existing products, such as banks, lending platforms, and even cryptocurrency exchanges. Many of these projects are ambitious but it is Yearn.Finance that shows a glimpse of DeFi’s true potential.
DeFi Has Powered a Crypto Boom
Until DeFi, Bitcoin and many other cryptocurrencies had little utility beyond acting as a store of value, or enabling speculation on exchanges. This meant that there was no way to monetize static assets without first selling them. This contributed to the volatility that has defined the crypto market up until now.
The Role of DApps
DeFi apps (called DApps) have helped to solve this problem. The proliferation of decentralized lending platforms has been particularly beneficial. These platforms, such as Maker or Compound, enable users to access crypto loans without going through the painful approvals process normally associated with getting a loan from a bank or lending company.
These have proven wildly popular and the amount of outstanding debt currently sits at around $2.91 billion.
There is over $2.9 billion in outstanding debt on DeFi projects (screengrab via DeFi pulse)
In order for a lending platform to function, they need liquidity. In order to get that liquidity, they encourage users to put up their own cryptocurrency as collateral. To attract users to their platform, decentralized lenders offer interest rates significantly above the market average.
This has led to a practice called rate farming, where lenders seek the highest return.
The problem is that these rates are unsustainable and it is difficult for lenders to know whether they are locking their money into a safe platform, this is where Yearn.Finance comes in.
Yearn.Finance Is a Interface to the World of DeFi
The most basic description of Yearn.Finance is that it acts as a decentralized community-driven interface that advises on the best DeFi products from a variety of providers. At the moment, it is generally used as a yield optimization tool.
It does this in part via yPools. When users deposit tokens, they are changed into yTokens (yield optimized tokens). These provide users with fees by using Curve. As a result, Yearn.Finance has created one of the best liquidity routes to a variety of DeFi projects and has offered excellent lending rates.
The project has also teamed up with Hegic to develop options contracts that could help to reduce the risk for liquidity providers and DeFi pools. This should help to develop an effective risk management strategy for decentralized exchanges like Uniswap. The value of Hegic surged 30% on the news.
Yearn.Finance Could Be the Most Decentralized Project Ever
Governance tokens are equal to power in a blockchain project. This is why one of the most interesting aspects of Yearn.Finance is the decision of its founder, Andre Cronje, to give away his YFI holdings to key network liquidity providers. Each YFI token acts as a vote on the network, so a user who holds a significant number of them could have a significant say in the way the network is run.
Typically, project founders want to retain some control of their project, and so hold on to a large number of these tokens. As Cronje opted not to do so, he made a strong statement about what he wants Yearn.Finance to be. This has been picked up by users and the project released a Manifesto that emphasizes the importance of keeping the project decentralized.
Theoretically, a decentralized project will have more chance of succeeding in the long term as it won’t fall victim to the groupthink, or self-serving, problems that many centralized companies face. It has also turned Yearn.Finance from just another DeFi project into a grand experiment in creating what could be the most “pure” blockchain project to date.
If Yearn.Finance is successful it will send a message to the blockchain community that centralized entities are no longer needed to run projects and it could well follow in Bitcoin’s footsteps and spark a second blockchain revolution.