<aside> 💡 This article is from September 2020. As Yearn has evolved a lot since then, most details should be outdated, though the main idea behind the protocol remains.
</aside>
Yearn.finance initially started as a family business: a single man wanting his family to profit from the advantages of DeFi (Decentralized Finance) lending and borrowing platforms, such as Aave or Compound. These new protocols allow users to earn yields on the assets they lend, or borrow from assets they deposit as collateral.
To leverage these platforms effectively and make them accessible to the non tech-savvy, Andre Cronje developed a platform where people could deposit their stablecoins and earn the best yield available on the market.
In the background, the smart contracts would compare the available yields and associated risks of the different platforms for different stablecoins, and invest the funds in the best one. At this point, Yearn was basically a private yield arbitrage fund.
In early February, he decided to open it to the public. This doesn't only mean opening access to the platform, but also making the smart contracts and vaults strategies public and auditable by everyone.
Fast forward to mid-July 2020, Andre announced the launch of YFI, the governance token for Yearn (I'll tell you about it in a few paragraphs). Immediately, a lot of fresh funds came into the vaults (where assets are deposited and invested) : AUM went from 10M$ to 300M$ in about a week. Then, strategies became more elaborated and in early August vaults for cryptocurrencies were created. Instead of just lending stablecoins, these vaults use the assets as collateral on DeFi platforms, borrow stablecoins against them, put these stablecoins to work, and use the profits to buy more of the initially deposited cryptocurrency.
It allows people to profit both from an increase in price of the underlying asset, and from the stablecoins' yields available on lending platforms.
After these delegated vaults were out, two types of fees were introduced : a 0.5% withdrawal fee, and a 5% fee on realized profits (actually it's on "additional yield"). Out of these 5%, 10% are distributed to the vault's strategy designer/coder : we now have a public yield arbitraging cryptocurrency fund, for which anyone can design & code a strategy, and get paid if implemented.
As @joeykrug puts it :
Huge moment in finance just happened with the @iearnfinance ETH vault launch. What this means is someone essentially deployed a single asset fund strategy on #ethereum. Complete with management fee and performance fees. Currently yielding ~90% APY in ETH w/ ~$6M ETH in it already
Developers can write additional strategies for other assets or even multiple for the same asset. Basically the world's first autonomous on chain hedge fund
The remaining 90% plus the 0.5% withdrawal fee go to the governance. Now, how does governance of such a platform work?