Yearn.finance, a DeFi automated yield farming protocol, has recently launched yvault’s latest strategy, yETH. The yVault strategies are a set of pre-defined actions that allow users to deposit funds and have them automatically sent to liquidity funds where high yield interest and additional token rewards are earned.
The yETH Vault was launched on September 2, along with the yWETH Vault and a few other updates. The yWETH Vault is equivalent to the yETH Vault, but uses a Wrapped ETH token ERC-20 linked and backed by ETH.
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According to a recent Delphi Digital newsletter, yETH’s vault strategy has four main steps. First the Ether (ETH) is deposited, then it is used as collateral to acquire IADs through MakerDAO at a 200% collateralization rate. Interest is earned and the DAI is sent to Curve Finance, a stablecoin liquidity protocol.
The DAI is then secured and interest is received (from the trading rates on the Curve DEX) and additional CRV tokens are received. The CRV is then sold by Ether, which is reassigned back to the yETH vault.
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As of the close of this issue, the yVault strategy has a 90% interest rate and a 0.5% withdrawal rate that is distributed to YFI token holders.
Yearn.Finance and the future of YFI
The yVault strategies currently available in Yearn.Finance are achieving massive returns for their holders and, in the case of yETH, are providing an upside perspective for MakerDAO’s MKR holders, Ether, and of course for YFI. This is because token holders receive YFI holding rewards of 0.5% of retirement rates.
Given the high performance of the vault, yETH currently has 345,120 Ether (USD 139 million) committed to the vault just one day after launch, and analysts expect this figure to increase.
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While this new vaulting system is risky for investors, the reward system for the development of new strategies aims to encourage developers to create rock-solid code and the protocols are expected to undergo multiple audits. In the report, Delphi Digital also pointed out some reasons for Yearn Finance’s success, stating that
„It’s hard to give just one reason why our team is so excited about YFI. Clearly there is a market for the products. It’s easy to use, especially with the efficiency it achieves for rates. The returns are attractive and it generates income for the holders without dilution.
Is YFI getting too speculative?
In the yETH and WETH vault tweet announcement, Yearn.Finance warned that there is high risk associated with vaults, as they are „debt based vaults and carry extremely high risk.
The risk referred to here is a settlement risk, meaning that if the Ether falls at a certain price, the user’s Ether positions will be liquidated. This is done to ensure the linkage of the DAI to the dollar, since the DAI is guaranteed by the ETH at a rate of 200%.
Currently, the limit of the collateralization rate is at 150%, which means that there is a very high risk of losing all the funds deposited in these vaults.
In addition, there are general risks and issues associated with the current DeFi ecosystem, including the high gas rates required to interact with smart contracts and the fact that the Cryptosoft vault interacts with multiple smart contracts, which adds several layers of risk to the process.
As the high-risk investment in DeFi continues to outperform itself, the exaggeration surrounding the industry and the price increases seen in space point to a possible bubble forming.
When asked about the hype surrounding DeFi and how it compares to the 2017 ICO hype, Lanre Ige, a 21Shares research associate, told Cointelegraph that there may still be room for growth. He said: