DeFi remains one of the most important crypto advances in the last couple of years. But one project, Yearn.Finance, could be a glimpse into the future.
Cryptocurrency isn’t all about Bitcoin anymore. The next big driver of the market is undoubtedly Decentralized Finance (DeFi). These products helped to fuel the crypto boom in September and have become a central part of the cryptocurrency market.
However DeFi can do more than fuel speculative bets and one project in particular shows a glimpse into what could be the future of not just crypto, but finance generally.
Why DeFi Is So Important
One of the big challenges faced by crypto is utility. For the moment it remains unsuitable for much except storing value and speculating via middlemen or exchanges. This lack of utility means that there is no way to make static assets work for you without liquidating them. This, in turn, leads to the volatility that has defined the cryptocurrency market. DeFi provides a solution to this.
Rather than acting as currencies in their own right, DeFi apps are built on top of another blockchain. Currently, these apps generally use the Ethereum blockchain as their base. DeFi apps are constructed using code in smart contracts. This enables the creation of decentralized facsimiles of real-world financial instruments.
There is roughly $13.8 billion locked in DeFi contracts at the moment. These have come in a number of different forms.
Most crypto enthusiasts will already be familiar with decentralized crypto exchange Uniswap. This exchange recently outstripped the volume of coinbase. The CEO of Binance believes that DeFi exchanges like Uniswap could eventually crowd out centralized exchanges entirely.
Despite the success of projects like Uniswap, the most popular development has undoubtedly been lending applications. These allow a lender to lock cryptocurrency into a platform in exchange for interest. This in turn allows borrowers to access capital in cryptocurrency, which is often used for trading.
Yield Farming Caused Significant Problems
This advance was significant because it opened up a simple way for crypto traders to monetize their assets without liquidating them. In the long term, this will help to stabilize the crypto sector. In the short term, it has led to a practice of yield farming, which is essentially the practice of lenders chasing the highest interest rate.
While this helped fuel a DeFi and crypto boom, it also led to a significantly overheated market. In order to compete in a crowded marketplace, lending platforms began to offer outsized interest rates. This contributed to the crash in September and the popular practice could continue to create instability into the future.
This is where Yearn.Finance comes in.
Yearn.Finance Provides a Gateway to DeFi
In the simplest terms, Yearn.Finance is a decentralized community-driven portal that provides simple access to DeFi products from a variety of providers.
It is generally used as a yield optimization tool. This in itself is interesting as it provides a decentralized way for investors to get advice about different DeFi lending projects — potentially avoiding bad investments. But there is much more to Yearn.Finance than meets the eye.
The most important part of any serious crypto project is its governance structure. These take many forms but for Yearn.Finance it is its 30,000 YFI tokens. Unlike many other cryptocurrencies, these have all been distributed and more can only be minted if it is supported by the majority of the community.
Yearn.Finance Could Provide a Roadmap for Truly Decentralized Governance
These tokens are used to vote on issues facing the network, such as whether to move forward with an update or to define what rewards users can gain on the network. In order to vote on an issue, YFI holders need to stake their tokens for three days. As a result, they receive a fee. This means that people with strong YFI holdings have a big say in the future of the network.
In this context, the decision of Yearn.Finance creator Andre Cronje to give away his entire YFI holding was a statement of intent. The token has created the opportunity for a truly decentralized “company” in the crypto space.
Last month, contributors to the Yearn.Finance project released a Manifesto that laid out a plan for how a decentralized governance system could work.
The document emphasizes that Yearn.Finance is not designed to meet the needs of investors or speculators, but instead the needs of the collective members and contributors to the project. It also explains that while YFI governed the network, owning YFI did not represent ownership of the network.
Replacing Centralized Entities With Decentralized Governance
This is significant because it could provide a pathway to replacing the centralized entities that currently control major crypto projects. Instead of using these entities controlled by shareholders, you could have a community-owned and governed structure that would arguably better serve the long term needs of the project.
If Yearn.FInance successfully implements this system, it could have major implications for the crypto sector. Rather than relying on major players like banks or centralized companies, they would be able to create proper decentralized companies that are unanswerable to faceless investors.
This could also lay the groundwork for decentralized systems of regulators that could help to limit any excesses of the cryptocurrency sector. This would help sidestep the problems the sector currently faces with inconsistent regulations across borders. And it could demonstrate to governments that a decentralized regulatory framework is viable.
While it is still too early to tell whether the Yearn.Finance experiment will be a success, it could have major ramifications for the crypto community regardless. Truly decentralized projects could help spark a wave of new creativity in the sector and provide the tools necessary to stabilize what has until now been a deeply immature market.
Featured image via Pixabay.
The views and opinions expressed by the author are for informational purposes only and do not constitute financial, investment, or other advice.