Yield farming - Yearn finance - Cryptoacademy Season 5 Week 3- homework post for @imagen by @beewrites
✓Describe The Differences Between Stalking And Yearn Farming
STAKING
staking is a type of consensus mechanism in which the proof of stake method is employed. In staking, the validators stake their cryptocurrency which will be locked up in a pool for a fixed period of time and cannot be pulled out, bought or sold until the fixed time is met.
In Staking reward goes the highest staker, this means the higher you stake, the greater chances to get rewarded. Staking method was employed as an alternative to the proof of work mining method, this is bacause the POW consumed a lot of energy and also had serious scalability issues which made them unable to handle much transaction per seconds. Also, staking process is easier, faster and received cheaper transaction fee unlike the mining method.
Examples of Cryptocurrencies that uses the POS are, Cardana, Solana etc
YEARN FARMING
Yearn farming is an investment strategy on cryptocurrency that you invest cryoto asset and get interest from it after a period of time. These people who invest in yearn farming called liquidity providers or farmers. The liquidity providers invest their cryptocurrencies to ensure liquidity of the pool and get rewarded for doing that.
In Yearn farming, there is a means of supplying/lending and borrowing asset, this will come with a collateral bigger and more valuable than the asset borrowed.
Currently, yearn farming is practiced with cryptocurrencies under the Ethereum Blockchain and reward are given to the farmers using the ERC-20 token.
| STAKING | YEARN FARMING |
|---|---|
| Uses the proof of stake consensus mechanism(POS) | Uses the Automated market Markers method(AMM) |
| Staking is done to improve the safety of the block chain by creating new blocks | The aim of yearn farming is to create liquidity in the pool |
| Reward is taking it low when compared to yearn farming | Reward is very much higher than stalking |
| Staking has less risk and more secure than yearn farming | More Risk and Less secure |
| Can be much simpler and user-friendly | More complex to Beginner, not beginners friendly |
| In staking, users are called validators | In yearn farming, users and called liquid providers or farmers |
| Low investment profits | Investing on yearn farming is very profitable. |
| Staked assets will be locked up for a fixed period of time | The farmer can pull his asset what any time he want to |
✓Login to yearn finance. Explore the platform completely and indicate it's functions. Describe the process for trading on the platform (wallet connection, fund transfer, available options)show screenshots
Login to yearn finance through the link Begin Exploring to see the numerous features.
•Homepage
The first feature is the home page, it shows how much total net worth, vaults earning and vaults est yearly yield
•Wallet
Wallet is a store or purse where you keep and save your Crypto assets. Your wallet is your treasury. It should be secured preciously, because if gone into the wrong hands, the assets can be stolen
•Vaults
Vaults keeps your holdings, earnings and eat yearly yield. It is in the vault feature assets can be locked or invested so as to yield more interest. It also helps manage your holdings, it also gives a clue of the ranking of APY from the highest other to the least
•Lab
The land feature gives information on the holdings, the highest annual percentage yield and also current opportunities to explore on the platform
•Iron Bank
It shows the supplied assets, borrowed assets, borrowed limit used and total borrowing. You can borrow using your assets as collateral without having to sell them. In iron bank the user can supply/lend assets and also borrow assets. You can also explore new tokens
•Setting
The setting of yield finance shouldn't be left out either . The setting is where you can change some default setting to suit your taste. It has options lines slipage tolerance language setting and theme
Trying to explore the setting, by changing the slippage tolerance, language and theme
Wallet Connection
To connect to your wallet, you click the connect on the top right of the page
Click on it and select the wallet. I choose to explore with Coinbase wallet.
I'm fully connected. You can see my wallet ID
I will move into some of the features so you'll see how it goes. This is the vault feature
I clicked on deposit
My transaction couldn't go through because I didn't have sufficient cryptocurrency
Let's explore the ironbank feature. It has the supply and borrow feature. Lets explore the supply side
.
Let's explore the borrow side
✓What Is Collateralization In Yearn Farming?what Is The Function?
Collateralization is the act of using assets of more value to get/secure a loan. Collateral are always more valuable or expensive than the loan given . In collateralization, a memorandum of understanding is agreed on by the lender and borrower on what to be borrowed, the returning interest and the duration/time frame to repay the loan.
The function of the collateral is to give the lender an assurance that he is not going to make a loss after the entire process. He will definitely received his assets and interest directly (through direct payment of the due amount before the fixed date) or indirectly (if the borrower doesn't pay back on or before fixed date, he sells the collateral to recover back his asset and has left over as interest)
✓At the time of your 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? And screenshots
At the time of writing this assignment 3rd Dec. I will go through the Defi pulse link to get my information
The TVL of the Defi Ecosystem(USD)= $107.65B
Still on the link, moving downward, you will locate the TVL of some Cryptos, locate the TVL of yearn finance protocol
From the time of my writing,
TVL of Yearn finance Protocol(USD) = $4.31B
To get the market cap/TVL ratio of the token, I will switch into the coinmarketcap link
From the screenshot above,
Market Cap/TVL = 0.1763
These othere information can be gotten about Yearn finance
Rank = #103
Price = $28,956.19
Market Cap = $1,060,888,684
TVL value = $6,016,964,287
✓The YFI Token is it overvalued or undervalued? State the reasons
In the Defi market, an asset is said to be overvalued when the ratio of it's market cap to TVL equals 1 or above 1. On the other hand, an undervalued asset is the asset whose market cap/ TVL ratio is below 1.
Looking at the Market cap/TVL ratio of Yearn finance which is 0.1763 and approximately 0.18 (in 2 decimal point), it falls below 1, therefore the asset is said to be undervalued
✓If in August 1, 2021, you had made an investment of 1000USD in the purchase of assets, 500USD in BTC and the remaining 500 in USD in the YPI token, what would be the return on your investment in actuality? Explain the reason
I will be using the tradingview.com for an easier and faster process.
I searched for BTC/USD and tracked it from 1st August till December 3rd.
It had a result of 43.20%
On to the next YFI/USD tracking from August 1st 2021 till date DECEMBER 3rd
YFI didn't perform well, it has a whole decrease. It was about -11.02%
Profit Percentage
Bitcoin = 43.20%
YFI Token = -11.02%
Amount invested = $500
Return On Investment of Bitcoin
ROI = (Amount invested × %Profit) + Amount invested
= (500 × 0.432) + 500
= 216 + 500
= $716
Return On Investment of YFI
ROI = (Amount invested × %Profit) + Amount invested
= (500 × -0.1102) + 500
= -55.1 + 500
= $444.9
In actuality, the investment on BTC obviously yielded more profit than that of YFI. The YFI runs into negetive which is completely a loss on the trader's path.
✓ In your personal opinion what are the risks of yield farming, give reasons for your answers
• Not Beginner's Friendly
Traders who are amateur in using yearn farming strategy could fall into terribly difficult loses and could make very huge losses if they venture into it. An advanced knowledge is needed to minimise losses that can come through the process.
•Issue of Security
The Issue security in uniform and cannot be overemphasized. Security is a major risks in the Defi platform. It is very prone to being hacked and Cryptocurrencies to stolen, these assets cannot be recovered by the owner.
For example, In 2021, February specifically, the vault in yearn finance was hacked and millions of assets were stolen.
Also, in the issue of security, some fradulent developers can create a liquidity pool to lure liquidity providers into Investing, when investment are made, the pools shutdown and every asset invested are stolen.
•liquidity
On a normal, the collateral price placed exceeds the value of the loan, but when liquidity occurs, the reverse can become the case. In such a case loss is to the lender as the collateral rate falls below the value of the loan given. This is what is called impermanent loss
Risk of Gas fee
The gas fee can be very high and outrageous, although the Ethereum lockchain (Ethereum Version 2 with layer Il) is setting up a system that tackles outrageous gas fee
✓ Conclusion
Yearn farming and staking are often confused to be same thing, but they are different. The lecture has made it obvious to sit the difference between with two.
Yield farming comes with advantage and also the disadvantages cannot be overlooked, overlooking the risks will cause massive loss to the trader or investor.
Thank you Professor @imagen for this teaching.
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