Yield Farming - Yearn Finance - Crypto Academy S5W3 - Homework Post for @imagen
Describe the differences between Staking and Yield Farming.
Well, trading with the assets is not the only way to earn an income there are more beneficial ways to earn an income & that too is at a lesser risk. I am talking of staking & yield farming & today with the help of this post I will differentiate between the two of these.
Well, the concept was introduced as a replacement for PoW because it isn't energy efficient & the machine cost is also too much. But with the advancements in crypto, this concept expanded a bit & it also became a way to earn income at a lesser risk. This staking is a process in which you stake a token on an exchange for a particular period & in exchange for that you get a reward in the same crypto that you staked. Let's take an example of an a crypto ZEE & that gives you an annual APY of 7.5% that means if you stake 100 ZEE tokens & after an year you will be having 107.5 ZEE tokens. In this process your tokens are locked for a particular period of time.
On the other hand the YIELD FARMING is a more recent initiative to earn an income & it is completely different from the staking. In yield farming you provide liquidity pair in a liquidity pool. You have to provide the liquidity of both the assets like in case of TRX/USDT pool you have to provide both TRX & USDT, if you provide 10 TRX you have to provide same amount in USDT equivalent. Once you provide liquidity, you just have to sit back & enjoy the income, this also varies from pool to pool & the higher liquidity you provide the imhighe income you get.
Login to Yearn Finance. Explore the platform completely and indicate its functions. Describe the process for trading on the platform
Well! First of all what we need is the link & the link for this website is here. Now once you visit the website you are shown the dashboard/website homepage. In my case i will connect yearn to the metamask, so i will paste this link in metamask browser.
Once you paste the website in metamask the honepage of yearn will pop-up. Click on the connect wallet option on the too-right corner
Once you click on that option, a list with all the wallets open’s & i will select metamask.
After selecting metamask a connection request will show-up. Press continue if you want to connect metamask with yearn.
As i was using binace smart chain before so a network swirching request will show up. Incase you are already of ethereum you will not get this pop-up
And as easy as that you have successfully connected the yearn with the metamask wallet.
Well exploring the features of yearn the first feature is the HOME section. This is a place where you can see all your holdings including Total Net Worth, Vault Earnings, Vaults estimation yield yearly. Home gives you all the basic information.
The next feature is the WALLET section. As the name suggests this is a wallet. It shows you the assets that are ready to use. That means if you have an asset that is not ready to use, that won’t show up here. That means wallet shows only ready to use amount.
The next feature is the VAULT section. This feature contains the liquidity pools where you can add the liquidity and start earning on them. The liquidity pools are generally sorted in the higher APY to lower APY format.
The next feature is the LABS section. As the name suggests here are the features that are being tested. One can also lock the assets here and earn.The new strategiesmay be unconvent so before adding it it is tested on the labs platform. If it gets positive results than it is added.
The next feature is the IRON BANK. As the name suggests bank that means users can get a loan. Iron Banks helps the user to borrow assets & the users pay interest on the amount so that both of them get the benefits.
Now the last but not the least feature is SETTINGS. Here you can customise the looks, interface, change the language, change the themes e.t.c
What is collateralization in Yield Farming? What is function?
Well The collateralization is, let it be let’s first understand the process of loan taken from the conventional bank. Whenever you want to get a loan you have to mortgage something. Let’s take an example of a person X who wants a loan of $2,50,000 so he visits the bank And asks for the loan, the bank verifies the documents and concludes they will provide the loan but he has to mortgage his car papers, so the person wants the loan he has to hand over the court papers to the bank and a document needs to be signed by the borrower in case he fails to repay the loan he will loose his ownership on the car.
In case of yield farming collateralization refers to a system where a person has to deposit some funds as a means or security against the borrowed sum that means that you have to deposit a sum of money so that they lend you some money same as you do in a bank but in this case you lick money for money instead of property for money. Collateralisation ratio is a ratio of the funds burrowed from the exchange to the ratio of the locked funds. Suppose, an exchange X’s collateralisation ratio is 50% that means that a borrower has to deposit half the amount of funds borrowed. If a person X borrows $1000 from the exchange with with collateralisation ratio of 50%, he needs to lock $500 in order to get $1000.
At the time of writing your assignment, what is the TVL of the DeFi ecosystem? What is the TVL of the Yearn Finance protocol? What is the Market Cap / TVL ratio of the YFI token? Show screenshots.
Having a look at this picture we can see that TVL at the time of post writing is $101.86 Billion. Having a look at the TVL of yearn finance it is $4.08 Billion.
Scroll & lookout for the yearn finance & click on this to reveal more information
At time time of post writing the price of yearn.finance (YFI) token is $ 29,971.47 , with a Market Cap of $ 1,098,086,292, a TVL of $ 5,5 96,315,316,8 and with 36,637.72 units in circulation.
So the ratio of Market cap /TVL is 0.1841 after the calculations.
Is the YFI Token Overvalued or Undervalued?
Well! As we know that if value of a token’s Market Cap / TVL ratio of the YFI Token is less than 1 then the value of the token is considered as undervalued. If the value exceeds one then the value is considered overvalued. So in my opinion this token is undervalued.
If on August 1, 2021, you had made an investment of 1000 USD in the purchase of assets: 500 USD in Bitcoin and the remaining 500 USD in the YFI token, what would be the return on your investment in the actuality? Explain the reasons.
For this you have to visit the BTC/USDT chart & lookout for what is the BTC price as on 1 August 2021. Looking at the chart the price on 1-AUG-2021 was almost 40,000.
So if I bought BTC for $500 on 1-AUG-2021 the average is 40,000 so I get almost 0.01250 BTC & if I sell it curerently I will get $620.
That means I will be having a $120 profit.
So if I earn $120 for $500 that means I earned a profit of 24%.
For this you have to visit the YFI/USDT chart & lookout for what is the YFI price as on 1 August 2021. Looking at the chart the price on 1-AUG-2021 was almost 32000.
Let's take a look at YFI, if I invested $500 in YFI on 1-AUG-2021 the average price of YFI on that day is almost $32000. So if I bought YFI on 1-AUG-2021 I would have got 0.15625 YFI.
Looking at the current price of YFI, today on the day of writing this post the price is almost $25066. So today I will get almost $3916 & that means I will be at a loss of $1084.
Having a look at the percentage $1084 loss I will be having a 21.6% loss.
In your personal opinion, what are the risks of Yield Farming? Give reasons for your answer.
Well as we already know every good things brings with it the bad things. Yield farming has advantages as well as disadvantages. Let's have a look at the disadvantages of the yield farming
Impermemant loss is a loss of assets if a value in the address changes & in case you make a money transfer to a wrong account there is no coming back the assets are lost forever & can never be recovered.
High Gas fees is also a major concern while performing yield farming. The user has to pay for each & everything he/she does on the platform.
Smart contracts risks are the risks that arise from the smart contract just being a simple code.Remember that the smart contracts are just codes running on the platfor. You can say a simple error can lead to a loss of tens of thousands tokens loss.
Conclusion
With the growing popularity of crypto the DEFI is getting more & more popularity day by day , new ways to earn a good passive income at a know risk The staking & yield farming can be a good source of passive income. You lock your assets in the yield farming & the locked assets are utilized for different purposes like liquidity & loans etc by platforms.
cc: @imagen