Yearn.Finance (YFI): A Fair-Launch DeFi Token Experiment

What Is Yearn Finance?

The dominant conception of a startup today is that of a finite, centralized group of individuals releasing patented products to a wider public. Yearn.finance is challenging that notion by decentralizing the very idea of what a company is, and as a result has become a driving force in the burgeoning sector of decentralized finance (DeFi). The Yearn.finance endeavor is driven by a decentralized community that is collectively developing an ever-growing suite of financial products on Ethereum and collectively reaping the rewards.

Yearn creates automated DeFi investment strategies designed to earn the maximum amount of rewards while minimizing risk. With Yearn, complex and dynamic investing strategies can be accessed by simply depositing assets within the user’s Yearn protocol of choice to accrue earnings, and holding yTokens to claim a share of the pool’s underlying assets. For a primer on Yearn.finance and its suite of collectively-sourced products, read our introductory article. Here, we’ll take a deep dive into the decentralized governance protocols of YFI, and explore how Yearn is structured to seek to maintain distributed equitability throughout its community.

The story of Yearn’s decentralized governance begins with the protocol’s founder, Andre Cronje. Cronje built the first Yearn applications as a way to automate and maximize his personal crypto returns. As the protocol grew, the talented developer released the YFI as a "fair launch" token, thus relinquishing control over the Yearn project and sharing the rewards of its products with its wider community of users.

A "fair launch" is considered to be the most decentralized token distribution mechanism available; Cronje and other early Yearn developers received no tokens as a result of their early efforts in establishing the platform. Instead, the YFI token and ownership of the Yearn protocol was distributed transparently and equitably — no one individual received special treatment. Yearn’s launch became a live experiment in the effectiveness of decentralized organizations and DeFi token incentives. 

Yearn Finance’s Collective of Contributors

Since the YFI token release, the Yearn community has become much bigger than Andre Cronje. YFI token holders organically and spontaneously write software, discuss investment strategies, create community resources, and promote Yearn. The YFI token acts as a coordination mechanism for Yearn’s decentralized community, which is incentivized to help develop and manage the protocol with little to no oversight or instruction. YFI token holders simply do what they can to improve Yearn, because their contributions increase the likelihood that the value of their YFI holdings will grow.

In its governance documents, Yearn describes itself as a “collective of contributors” that prioritizes building, equal access, and merit. It’s not the specific procedures or processes that make Yearn governance special, but rather the platform’s organic and enthusiastic community, which is largely the result of the YFI token’s release. 

YFI’s "Fair Token" Launch

Many crypto projects publicly release their project tokens only after a significant portion of the tokens have already been allocated to the founding team or early investors, which means a small group of people not only benefit the most financially, but are also given significant control of the protocol. The idea of a "fair" launch means that tokens are distributed in an equitable and transparent way. One of the reasons Yearn has cultivated such a strong community is because the founding team received zero YFI tokens in advance — an unprecedented demonstration of the founder’s belief in true decentralization.

Each YFI token represents a controlling stake in Yearn’s smart contract protocol development, and the tokens were initially distributed to anyone willing to deposit tokens to a designated liquidity pool. After only a week of yield farming, YFI holders decided to stop distribution at 30,000 tokens. This meant no more YFI tokens would be created, and the only way to obtain more YFI tokens was to buy them in the open market. By voting to stop new token distributions early on, Yearn’s community solidified ownership of the protocol in fewer hands, which created a highly concentrated and dedicated community of early adopters. This community worked aggressively to expand Yearn’s DeFi offerings and market the project’s relative advantages, and as a result the total market cap of the YFI token reached over $1 billion only a month and a half after its launch. 

The Yearn Improvement Proposal Process

The Yearn Improvement Proposal (YIP) process for managing Yearn is broadly similar to those on other DeFi protocols. The governance token — in this case YFI — must be staked in order for the holder to qualify to vote on network governance decisions. One YFI token is worth one vote, and votes can change any code on the protocol, including the ability to mint more YFI tokens. Token holders can also stake YFI to earn rewards from the transaction fees that Yearn products generate.

In order to introduce a new proposal via the YIP process, a user will generally first discuss the proposal in standard Yearn communication channels as a way to gauge the sentiment of the community. Proposers are responsible for building consensus and convincing others to support their idea. If there is enough support, a formal YIP can be submitted, which must include the specifics of how Yearn’s smart contract code would change if the proposal is approved. While anyone can participate, introduce proposals, and discuss pending proposals on the forum, only YFI token holders can officially vote on a proposal. YFI votes occur on Ethereum, which ensures that the process is transparent for all to see and permanently recorded on the blockchain.

Through its token distribution and voting mechanisms, Yearn.finance has illustrated the possibility of crypto tokens as a decentralized coordination and governance tool. Given the proper tokenomics incentive structure, DeFi token holders from all over the world can be naturally and voluntarily motivated to generate new content, code, and products, and work toward their common goal of increasing the value of their shared token and the ecosystem in which it is used.