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ITSA DeFi Insight — The Vaults at Yearn

Yearn Finance money robots use decentralized finance (DeFi) platforms to execute investment strategies with the goal of maximizing returns while minimizing risk. Providing assets for loans, earning project tokens through yield farming, providing liquidity, or a combination of these and other investment techniques are among the strategies used across a variety of DeFi lending protocols. By contributing tokens to the network, the Yearn protocol allows you to effortlessly participate in complicated investing schemes. Its growing product line aims to make investing in DeFi easier, and it’s gaining favor with investors.

Authors: Christian Viehof, Valentin Kalinov

 

What is Yearn Finance?

Yearn Finance creates “money robots” that seek to optimize profits for a charge in order to automate and simplify the complexities of decentralized finance (DeFi). Andre Cronje, an Ethereum engineer, founded Yearn with the goal of automating and optimizing his own DeFi returns. It has now grown into one of Ethereum’s most active and engaged decentralized communities, with an emphasis on inventing ever-more inventive ways to produce profits.

Yearn executes automated trading strategies across Ethereum-based DeFi platforms using money robots. On a rising number of DeFi protocols, there are a plethora of investment techniques that can be used. A Yearn money robot, for example, can earn trading fees on the Curve protocol, borrow money via Aave’s flash loans, and lend money to other Yearn money robots.

 

Figure 1: Avalanche platform overview (source: https://defillama.com/protocol/yearn-finance)

Yearn.Finance: yVaults

yVaults, a series of token pools that follow an investing strategy that is allocated across DeFi platforms, are the most popular products in the Yearn ecosystem. When you deposit tokens into a yVault, a new yToken is created, which is a sort of liquidity provider (LP) token. When tokens are deposited into a liquidity pool, LP tokens are created automatically and act as a claim on the pool’s underlying assets. Each yToken can be redeemed at any moment for the tokens that were originally invested, as well as any incentives earned while the tokens were working in the yVault.

You can, for example, put LUSD in the LUSD yVault and receive the LP token yLUSD in return. When you swap the yLUSD for the underlying LUSD, you get the underlying LUSD plus any earnings or incentives the LUSD has accrued as a result of using the yVault’s strategy. Yearn’s yVaults are a simplified trading technique in which investors give assets and hold a token to participate in a sophisticated, algorithmic approach.

 

Figure 2: Staking of JOE for xJOE (source: https://yearn.finance/#/vaults)

yVault Strategy Case Studies: GUSD

yVault methods are flexible, and the Yearn community can choose to modify or change one as it starts to produce less favorable results. The following phases earn yield for the yLUSD holder in the yLUSD plan for September 2021 which has already been tweaked for optimization:

  1. To earn fees, LUSD is deposited into a Curve pool that includes the stablecoins LUSD, DAI, USDC, and USDT.
  2. To earn the CRV token, the LP token generated by the stablecoin pool is staked in Curve.
  3. 90% of the CRV tokens earned are exchanged for DAI.
  4. To generate extra fees, DAI is placed back into the original LUSD, DAI, USDC, and USDT stablecoin pool.

The processes above happen under the algorithmic hood from the user’s perspective. In comparison to more complex and more complicated yVault techniques, which may entail borrowing money, employing leverage, and maintaining market exposure, this LUSD strategy is rather straightforward.

The yETH vault, for example, employs both the MakerDAO and Curve protocols in its strategy. ETH holders who use the yETH approach remain exposed to the price appreciation (or depreciation) of ETH while generating yield by following the procedures below:

  1. ETH is deposited to MakerDAO as collateral.
  2. DAI is borrowed from MakerDAO using the deposited ETH as collateral.
  3. The borrowed DAI is deposited to the yDAI vault.
  4. The yDAI vault deposits DAI to Curve in order to earn fees.
  5. The LP token generated from the DAI pool is staked in Curve to earn the CRV token.
  6. The CRV tokens are sold for ETH.
  7. ETH is deposited back to MakerDAO as collateral.

Because the yETH vault borrows DAI from MakerDAO, there’s a chance it’ll be liquidated, or the money robot will sell your ETH to pay back the DAI loan. When the value of ETH collateral falls below the minimum 150 percent barrier of the value of borrowed DAI, liquidation occurs. The yETH money robot seeks to keep the value of ETH collateral at a safe 200 percent of the value of DAI debt in order to avoid liquidation. If the value of the ETH collateral falls below the 200 percent target, the money robot will automatically pay off some of the DAI debt in order to maintain the over-collateralized status. Yearn’s vaults are made more complicated by the fact that they must manage debt, collateral, and liquidation.

It’s critical to note that the risk of the yVault strategy grows as it becomes more sophisticated since it relies on additional protocols and platforms. In addition to the risks associated with leveraging leverage, strategies like the yETH example also run the risk of liquidation and smart contract failure.

 

The classification of YFI according to the ITC

YFI is the primary token of Yearn’s yield aggregator platform providing an on-chain governance functionality to its holders so that they can participate in the decision-making process on how the platform is managed.

 

Figure 3: The YFI Tokenbase entry (Source: https://itin.itsa.global/SJDHH2DJ8)

Economic Purpose (EEP): YFI is listed as a Settlement and Governance Token (EEP22TU03) due to its design as a means of collateral combined with governance functionality.

Industry Type (EIN): The issuer of YFI is active in the field of Decentralized Lending, Saving and Asset Management (EIN06DF02).

Technological Setup (TTS): YFI is an Ethereum ERC-20 Standard Token (TTS41BC). The Class “Ethereum ERC-20 Standard Token” captures every Token that is implemented by means of the ERC-20 Standard on top of the Ethereum blockchain.

Legal Clam (LLC): YFI does not entitle its holder to any legal claim or rights against the issuing organization, therefore it is listed as a No-Claim Token (LLC31).

Issuer Type (LIT): The dimension “Issuer Type” provides information on the nature of the issuer of the token. YFI’s platform is built by a team of programmers and engineers that make up the core contributor community. Its Issuer Type is an Application Layer Protocol (LIT62AL).

Regulatory Framework (EU) (REU): The dimension “Regulatory Status EU” provides information of the potential classification of a token according to the European Commission’s proposal for a Regulation on Markets in Crypto Assets (MiCA, Regulation Proposal COM/2020/593 final). YFI qualifies as an Utility Token (REU52) according to the definition provided in Article 3 (5) of Regulation Proposal COM/2020/593 final.

Figure 4: List of Yearn tokens (source: https://api.itsa.global/view-list?list_id=24)

The International Token Standardization Association (ITSA) e.V.

 

The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.

  • The International Token Identification Number (ITIN) is a 9-digit alphanumeric technical identifier for both fungible and non-fungible DLT-based tokens. Thanks to its underlying Uniform Token Locator (UTL), ITIN presents a unique and fork-resilient identification of tokens. The ITIN also allows for the connecting and matching of other media and data to the token, such as legal contracts or price data, and increases safety and operational transparency when handling these tokens.
  • The International Token Classification (ITC) is a multi-dimensional, expandable framework for the classification of tokens. Current dimensions include technological, economic, legal, and regulatory dimensions with multiple sub-dimensions. By mid-2021, there will be at least two new dimensions added, including a tax dimension. So far, our classification framework has been applied to 99% of the token market according to market capitalization of classified tokens.
  • ITSA’s Tokenbase currently holds data on over 4000 tokens. Tokenbase is a holistic database for the analysis of tokens and combines our identification and classification data with market and blockchain data from external providers. Third-party data of several partners is already integrated, and API access is also in development.

Remarks

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Christian Viehof is an Executive Director at the International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database including a classification framework and unique token identifiers and locators. He completed his Bachelor in Economics at the University of Bonn, the Hong Kong University and the London School of Economics and Political Science with a focus on Behavioral Economics and Finance. Currently pursuing his Master of Finance at the Frankfurt School of Finance and Management, you can contact him via christian.viehof@itsa.global and connect with him on Linkedin, if you would like to further discuss ITSA e.V. or have any open questions.

Valentin Kalinov is an Executive Director at International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database, including a classification framework and unique token identifiers and locators. He has over five years of experience working at BlockchainHub Berlin in content creation and token analysis, as a project manager at the Research Institute for Cryptoeconomics at the Vienna University of Economics and token analyst at Token Kitchen. You can contact Valentin via valentin.kalinov@itsa.global and connect on Linkedin if you would like to further discuss ITSA e.V. or have any other open questions.