Yield Farming - Yearn Finance - Crypto Academy S5W3 - Homework Post for @imagen
Mostimes, I love to refer to this sector using the word world. I like to describe it as cryptocurrency world because I see it as a whole new ecosystem with its unique and peculiar features and functionalities. Blockchain has been incredible in terms of driving innovations and making financial operations easy for human beings.
The era of decentralized finance have come to give us a wide array of options to generate income while also sorting out some of the inherent problems that bedevil traditional financial systems. Prof. @imagen has blessed us with this great lesson about yield farming which is one for the prominent mechanism for making money through blockchain activities. I will be making my assignment answers in the sections that follow.
Describe the Differences between Staking and Yield Farming
Blockchain has given us numerous means of making money. The idea of smart contracts seem to be a most excellent one because through these, deFi projects have been launched and are causing so much transformation.
Yield farming and staking are among the mechanisms used by these deFis to help their users gain dividends and income.
Yield farming is concerned with the human action of lending and burrowing. A user of a deFi submits his funds to the platform and makes it available for other users to come in a burrow it and then rewards in terms of fees and dividends are being paid to the user. It involves allowing one's assets and tokens to be used by a deFi platform to provide loans. This means the user's funds are locked away and are used in awarding loans which attract certain incentives to the users.
In banking systems, money burrowed is mostly returned with interest. Depending on the type of account a user has, interest gotten from loans can be paid to him if his funds was part of the lended amount. This is what the concept of yield farming is about.
Users gain interest for giving their funds to the project to use as a loan. These locked up funds are used to sustain liquidity in the network by using them to fund liquidity pools. The revenue from the liquidity pools are then shared among the liquidity providers. These fees can be in the native token while extra rewards can be given in form of other yield tokens.
Staking as the name suggests is about making a stake. It involves users making use of their coin or tokens units to support or obtain ownership and participation rights in a blockchain project from which they are paid some commission or returns. It means showing solidarity with a project and thus, commiting your funds to be used to run and develop the project. This committed funds gives the user authority to take part in. Validating transactions and operations in the project through the process of mining.
Here a user, delegates or locks up his funds so that they can be used in the governance and security of the network and the user is given and percentage of the revenue from the activities of the network. A user who stakes earns rewards depending on how much of their total holdings are being staked, and the length that they are being staked for. That is, rewards are proportional to the quantity of stakes owned.
Staking is a very familiar topic associated with blockchain projects that employ the proof of stake consensus mechanism in assigning mining quotas. Users taking part in staking share in the rewards gotten from mining new blocks in the blockchain as there staked tokens are what is used to decide on validation and verification of transactions. The stakes determine the validating nodes while mining.
Just like we have stakeholders in certain industries and sectors who are outstanding firms or individuals that command significant share of the industry through their investments and assets. Staking in deFi is the process of obtaining significance in a project by allowing your assets to be used in the operation of the deFi project frow which one is paid some fees and rewards.
The distinction between Yield Farming ans Staking is further detailed in this table below.
Image was designed with Picsart.
| Yield Farming | Staking |
|---|---|
| This is usually associated with normal transactions taking place on the network. | Staking is focused on the activities of validating and verifying transactions. |
| Tokens are used to fund liquidity pools and provide liquidity | Tokens are used to secure the network and facilitate governance of the project. |
| Locked funds attract rewards from gas fees and transaction charges. | Rewards are generated from block mining. |
| There are chances of getting higher rewards here as it is dependent on the volume of transactions | Rewards are lesser as only a specified number of transactions can be verified inna particular mining session. |
| Here, full profits or dividends can be paid to liquidity providers | Stakers are to share only the stipulated quota of the rewards. |
| The mechanism of yield farming is concerned with the automated market maker which is about filling and executing orders immediately. | Staking stems from the proof of stake consensus mechanism for mining by blockchains. |
| Yield Farming can be done for as long as is convenient for the user. | Staking is for specified periods of time. |
| There are no complex regulations to be followed in yield mining. | Staking comes with stringent policies and regulations as this is concerned with security and administration of the project. |
Login to Yearn Finance. Fully explore the platform and indicate its functions. Describe the process for trading on the platform (wallet connection, funds transfer, available options). Show screenshots.
I went ahead to log on to the [Yearn Finance site](https://yearn.finance/#/ironbank] and landed on the homepage So I could explore the features. On the home page there is a welcome note.
Also, the dashboard of the user is shown indicating the earnings from the vaults and the estimated yearly yield.
The major features of the platform were listed at the top left hand corner. I will give some information about them.
WALLET
This is where the balance of the tokens owned by a user in USD is displayed. It shows the users assets as it is in the connected wallet.
VAULTS
As the name implies, this is a place for putting in your funds and leaving it there for it to generate interest. The funds locked up can be withdrawn anytime by the user as he has full access and control of it. The vault maximizes yield by shifting capital, automatically compounding the deposited amount and rebalancing it. There are different sections of the vault represented by the different assets. These assets have their specified interest percentage (APY)
LABS
In the lab are listed three products yvBOOST, pSLPyvBOOST, yveCRV. These options for users to still lock up their funds. Here, funds are to be kept aside for fixed periods of time before withdrawal. They offer different interest rates as well.
IRON BANK
This is another investment section on the platform. Here, users can burrow tokens using their already owned tokens and coins as collateral. This is especially possible with new tokens. A user does not need to sell off his old tokens to get the new one. He can just borrow them and invest with them. Users can also place their tokens here did others to burrow and then they are paid interest.
SETTINGS
This is the area where a user can make changes and adjusted to some aspects of the platform in terms of appearance and language. One can make the platform be in a dark or light mode. The theme can be changed or even customized as the case may be.
OTHERS
There are some other things that could be found on the page. This includes things the system of governance of the project when the GOV button is pressed.
There is also the area where the paper work and documents concerning the project are listed. This is found once the DOC button so clicked.
The security protocol of the platform is detailed in the SECURITY tag. It shows information like the smart contracts strategy and more.
There is yet the DISCLAIMER page.
All images in this question are from the same source
- Connecting Wallet
To connect a wallet to the platform, I located the option at the top right hand corner of the page. Clicking on it, I was given a list of wallet options.
I clicked show more since the wallet I wanted to use (Trust Wallet) was not among the first list.
I then picked the Trust wallet option by clicking on the icon and going on to open the wallet.
I was directed to complete the operation either through the wallet app in my phone or using a browser. I picked the app option. From the wallet I was directed it the webpage of Yearn Finance.
I went to the wallet area and picked the Trust Wallet and it was connected successfully.
- Depositing into the Vault
I executed a deposit into one of the earning features, the vault. So I clicked on it. Then went ahead to pick the pool I wanted to contribute to.
I selected the SNX ( Synthetix) option. The reason I chose this was because of the high reward percentage of 87.49%. The total assets here sums up to $ 7,636,533. So, clicking this option, I was taken to the landing page where I saw more details.
I swiped lower to get the deposit details. There are spaces where once can type in the amount to be tied up in the vault. Once this is done, one can screw done and click approve.
From here a page opens which has a summary of the transaction. There is a rather large network fee of $39.03 attached as it requires some Ether as gas fee.
The operation did not progress since I had insufficient Ethereum balance. The operation was cancelled.
Images in the question are from https://yearn.finance/#/home and Trust Wallet app.
What is collateralization in Yield Farming? What is function?
It is often the case that people who took a loan from a person, a bank or other financial institutions are unable to repay it. This is always a difficult situation to handle. To remedy this, the borrower is often asked to give up some other valuables which would be used in such instances to offset the taken loan. This is the concept of collateralization.
It is quite common in traditional financial systems and it is what it is in yield farming. Users who wish take a loan that is borrow some tokens are asked to deposit certain amount of asset as collateral supposing they do not pay back the loan, the deposited assets would be used to settle it. The collateral is of different ratios depending on the lending platforms.
Sometimes it is as high as 500% of the borrowed amount. But this is not fixed. However, in most occasions, the collateral is usually higher than the initial amount obtained as loan.
Reason for Collateralization
Collateralization as stated above is a cushion, a safeguard and a precautionary measure employed by lending agents and yield farming platforms to minimize losses due to lack of repaying loans by users.
Once a user fails to repay a loan, the collateral is traded to match the value of the loan and a balance is created. If the collateral has diminished in value, the lender may have to settle for some losses.
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.
From https://defipulse.com/, I was able to find that $105.33 billion is the current value of the total value locked (TVL) in deFi projects.
Specifically for Yearn Finance, $4.21 billion is the TVL and this has dropped by 5.95% over the past one day.
For Yearn Finance, the total market capitalization value is at $988,889,309.02 which is down by 5.94%
The Total Value Locked (TVL) is $5,861,575,389
Market Cap / TVL ratio of the YFI token is 0.1688.
The token has a current price of $27,047.07.
The YFI token, is it overvalued or undervalued? State the reasons.
From a theoretical point of view, the higher the TVL ratio, the lower the value of an asset should be; however, this is not always the case in reality. One of the easiest ways to apply the TVL ratio is to determine if a DeFi asset, for example Aave, PancakeSwap, Uniswap, and others, is undervalued or overvalued, and this can be done by looking at the ratio. If this value is less than 1, it is undervalued in most cases. Prof. @imagen.
From the above, it is explicitly stated that a value below 1 show undervalued while that above 1 is over valued. At the moment, the Market Cap / TVL ratio of the YFI token is 0.1688. This figure is obviously less than 1. Thus, it can be confidently said that the YFI token is undervalued.
The YFI token even at $27,047.07 does not indicate how valuable it is. If a holistic estimation of the value was conducted, this figure would have definitely increased. The tokens are used for a number of transactions and financial services. The platform alone has numerous products and investment units. This has made to token to enjoy large usage.
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.
- BTC
BTC had a price of $39,974.90 on 1st August, 2021. This was the closing price.
Buying units of BTC with $500 on this date would amount to getting 0.0125BTC.
At present, the price of BTC is $53,013.06. At this price, 0.0125BTC would cost $663.23
Subtracting the initial $500 from $663.23, I have $163.23. This is the returns I have made on the purchase from 1st August, 2021.
In percentage, my returns on investment will be $163.23/$500 × 100 = 0.32646 × 100 = 32.646%
I had 32.646% Return on Investment in BTC.
- YFI
YFI had a price of $31,779.15 on 1st August, 2021. This was the closing price.
Buying units of YFI with $500 on this date would amount to getting 0.015733 YFI.
At present, the price of YFI is $26,931.94. At this price, 0.015733 YFI would cost $422.49
Subtracting $422.49 from the initial $500, I have -$77.51. This is the returns I have made on the purchase from 1st August, 2021 and it is in the negative. I have incured losses.
In percentage, my losses are $77.51/$500 × 100 = 0.15502 × 100 = 15.502%
I had -15.502% Return on Investment in YFI which shows losses.
Total
In total, I have returns of $163.23 from BTC purchase and -$77.51 from YFI purchase.
=163 23-77.51= $85.72.
This represents $85/$1000 × 100= 8.572%
Overall, I have made 8.572% returns on investment in the two purchases using my $1000 capital.
Generally, the investment was profitable. Though the profit gotten was very much reduced by heavy losses incured in the YFI investment which which almost cancelled the gains I made through BTC purchase.
However, the higher value of BTC ensured that the gains I made were above the losses. Bitcoin has proven to be a very reliable coin to invest in.
The price has been in a uptrend lately. Recently, it hit an all time high value of $67,549.74. These dynamics is largely responsible for the large gains made. From inception till date, no other coin has been able to unseat it from the #1 rank.
It also enjoys the largest market capitalization of $996,077,362,179. Contenders, especially Ethereum, is still a long way firm achieving these stats.
In your personal opinion, what are the risks of Yield Farming? Give reasons for your answer.
Normally, investment portfolios usually come with very unique limitations and risks. It seems anything connected with making money is most often quite risky. Yield Farming is thus a risky business.
Some rominent notes on the Yearn Finance page read:
Be sure to review the About sections carefully and make sure you understand token locking, impermanent loss, and other risks before proceeding.
Remember, even with simple tools like Iron Bank, smart contract risks and systemic risks of the underlying crypto assets exist.
Source
There are some reasons that make this true. Some of these are :
- Coding and Protocol Errors
Coding errors usually occur in some blockchains. These errors can result in complete loss in value of the held asset. A popular example of this is the incident with the YAM token.
- Instability and Volatility
The price of tokens are not always stable. They fluctuate from time to time. From the investment question above, we can see how drastically prices changed and how much losses were incured from the investment in YFI. The market of cryptocurrencies is very volatile.
- Incidence of Malicious Attacks
As an online platform, there is a risk of hackers breaching the security of the network and breaking its firewall. This breach can lead to direct theft or change in key data stored in the blockchain which can cause heavy losses in assets. As a smart contract project, there is increasing target by fraudster.
- Manipulation by Key Players
The dynamics of the platform and the token can be influenced by the actions of users who control large shares in the investment pools. Large volume deposits or withdrawal can spell doom to small investors leading them to experience losses.
It is yet to be understood the level of variety and innovation that blockchain, especially smart decentralized finance has triggered in the financial sphere. There are just very minor limitations to one making a living from making money through these deFis.
At present, there are so many financial services that can be accessed on deFi platforms. Lending, borrowing, staking, yield farming, trading, minting, mining and many more are ways with which one can earn serious income from blockchain. Now, it it no longer about just buying a coin and holding it for the price to increase and gain in value. Individuals are going ahead to make profitable investments with their assets.
There are a number of really attractive decentralized platforms. Some of them offer really amazing features and functionalities for earning. As users with the understanding of the high risk status of blockchain investment, it is wise that one conducts due research and makes proper consultations before embarking on any investment.
Prof. @imagen has really exposed me to some great ideas through this lesson. Well done sir.
