Yearn Finance is a DeFi project with its own cryptocurrency (YFI) whose platform works as a financial protocol, including loans in cryptocurrencies in exchange for interest at different rates. This platform is very straightforward with its options and can be used by anyone with a basic understanding of how investments work with DeFi projects.
This time we are going to review the vaults section of Yearn Finance and show you how it works. This tool can be considered a window to the available stablecoins with their ROI (Return On Investment) rates. Almost all of these digital assets are destined for Curve’s liquidity pools, a platform with which Yearn Finance works the most.
Disclaimer: investing in these protocols and vaults is very risky. Never invest more than what you are able to lose. This shouldn’t be considered investment advice.
What are Yearn Finance Vaults?
The Yearn Finance vaults are -at the core- smart contracts which take a deposit of your underlying asset and issue a corresponding Y asset in return, so what happens to your deposit “under the hood” is that each vault is automatically rebalancing them over underlying assets to the best available yearn generating opportunity for that particular asset.
For example, if you deposit DAI into the DAI vault, you will receive YDAI and this vault will deposit to generate lending interests on your DAI tokens. This might change as interest rates throughout the places where these tokens can get the best available ROI.
How do Yearn Finance Vaults work?
The vaults rebalance to the best available Yield generation strategy for your deposited address, so it depends on what you want to hold more of (DAI, BUSD, USDT, etc).
These vaults were created with the purpose that the Yearn community could team up to find the best possible strategies for Yield farming. In other words, Yearn Finance vaults provide liquidity through any supported asset, lend stablecoins at certain interest rates and handle collateral in the safest way and avoid default.
However, it should be noted that all vaults are created by Andre Cronje, the creator of the Yearn Finance protocol, who hopes that -as mentioned before- users can compete by offering their own strategies and analyze which is the most profitable of all.
Are there risks to Yearn Finance Vaults?
Despite the fact that the available assets cannot be depreciated (because they are stablecoins), the vaults can, so if the strategy used does not manage to keep the debt in control, a portion of the deposited assets will be blocked, although the amount would be subtracted directly from invested capital. If a strategy proves profitable and manages to overcome debt, these tokens will be unlocked again and will be available again.
The platform has different mechanisms that prevent the blocking of the tokens, that is, to keep the debt under control, although it is also true that it is not 100% accurate in all cases.
What you will get from these vaults is the stablecoin that you initially deposited, plus the total amount of pool yield that you could obtain during your investment (from which the established fees will be subtracted).
The fees are 0.5% deducted from the total amount to withdraw, which is acceptable considering that the commissions do not take even 1% of your tokens.
Yearn Finance vaults are an excellent option for users in the crypto community who are interested in DeFi protocols and investments in liquidity pools, especially since the platforms these vaults work with have excellent reputations.