Yield Farming - Yearn Finance - Crypto Academy S5W3 - Homework Post for @imagen by @blessingkasabe
Introduction
1.) Describe the differences between Staking and Yield Farming.
Staking:-
source
Staking as the name suggests refers to the process of contributing funds to a block which would later be rewarding you so your stake. Staking works using the Proof of Stake consensus mechanism. This indicates that the higher your stake the higher rewards you would receive. Users stake their assets on the platform which is used for verification and validation of transactions on the platform and later rewards the user for the stake. The number of rewards would depend on the number of tokens you used in staking.
Staking helps to provide security to the blockchain network that uses the Proof of Stake consensus protocol which thereby helps to reduce the risk of being hacked.
Yield Farming:-
source
Yield farming which many people confuse with staking refers to the way of locking your assets in a liquidity pool and then returning for the rewards or profits. In this method, investors lock their assets on the platform whereby the platform later borrows those funds as loans with interest rates. This interest returns to the investor as a profit for locking his/her assets on the platform. The investor becomes the liquidity provider and the assets go into the liquidity pool directly and are then commissioned on the platform for borrowers. The liquidity provider is then rewarded for the assets locked in the liquidity pool.
Differences between Yield farming and staking
Staking
Staking requires investors to lock their assets for some period
The percentage of profits is usually around 5 to 10% with the maximum as 15%.
The assets blocked on the platform support the blockchain network.
Before acquiring the reward percentage, the locked assets must take a long time.
Yield Farming
With yield farming, there is no exact periods of time in locking assets
In yield farming, there is no percentage of rewards almost all tokens are being awarded to the liquidity provider.
The assets locked by the liquidity providers enables them to generate rewards
In yield farming, investors can earn huge profits by investing a small amount of capital at the start.
2.) Enter Yearn Finance. Fully explore the platform and indicate its functions. Describe the process for trading on the platform (wallet connection, funds transfer, available options). Display screenshots.
- First of all, let's search and enter the Yearn Finance website and then begin with the exploration.
As shown below in the screenshot indicates the main page of Yearn Finance platform which provides information about your Dashboard.
- Another feature from the main page of Yearn Finance is the Wallet section. This section shows or indicates your wallet's balance. As we can see, I have not linked my wallet yet and so I have $0 as my balance.
- Another important feature is the Vaults section whereby we can see the number of assets we have, the earnings, and also the estimated annual yield as well. Again, from the same section, we can find the highest or the major APY yield, and in my case I have SNX being the highest and then followed by Curve yCRV and then Curve EURN as shown below in the screenshot.
Again, we can find all investment opportunities on the platform after making a deposit into the platform.
- The next section we have Lab which indicates or provides information about your invested asset's balance and also the highest APY as well as precautions regarding locking and holding of your assets on the platform. It also provides opportunities that one can invest in after making a deposit.
- Another feature is the Iron Bank feature which also provides information about your asset's balance and the highest APY. It similarly provides information regarding the opportunities for investment on the platform.
- We also have the settings feature where users can edit the theme color to their preference and also change the slippage tolerance of the website page.
- Additional or optional features which include the Gov, Docs, Security, and Disclaimer, and they can be found in the settings menu at the bottom of the page.
- The Gov Feature:-
- The Docs Feature:-
- Security Feature:-
- Disclaimer Feature:-
How to connect your Wallet to Yearn Finance Platform
- First of all, I click on Wallet from the Menu Section.
- Now, click on Connect Wallet on the upper right corner of the wallet interface.
- From the wallets provided below, I then selected the MetaMask wallet from the list provided.
- I then clicked on Open MetaMask to install MetaMask on my browser.
- I then clicked on Install MetaMask on Firefox to continue with the installation.
- Click on Add on Firefox to add to the browser
- Now, after setting my MetaMask Wallet I would then refresh Yearn Finance page and then select MetaMask Wallet again and then click Next to continue.
- Now, click on Connect to confirm the transaction.
- Now as we can see the wallet is successfully connected.
How to Deposit funds into your Yearn Finance wallet.
- To deposit funds, first of all, click on the Vaults section and then select the asset you want to deposit from the opportunities tab.
- Click on Deposit and then click on Approve
- Click on confirm to accept the transaction. Unfortunately, I couldn't make a deposit because I do not have sufficient funds in my MetaMask Wallet to deposit.
How to Supply in Iron Bank
- First of all we click on the Iron Bank tab
- You then select the asset (CRV) you want to supply and click on Supply at the far right side of the asset.
- You then click on Approve to confirm the transaction
- You would have clicked on Confirm to accept the transaction but due to insufficient funds, we can not continue.
How to Borrow assets in Iron Bank
- Similarly, we first enter the Iron Bank tab and then select the asset we want to borrow from the opportunities column.
- You then select the asset (sUSD) you want to Borrow and click on Supply at the far right side of the asset.
- Enter the amount sUSD to borrow and then click on Borrow.
- I could not borrow the asset because I do not have sufficient funds in my wallet as indicated above.
Q3: What is collateralization in Yield Farming? What is the function?
Collateralization refers to putting a valuable asset as an agreement when borrowing an asset and those valuable assets would be taken as a replacement if the borrowed asset is not paid back. Collateralization takes place in the centralized financial system and it is generated from the word collateral. It is also referred to as guarantees in taking loans.
In Yield Farming, the guarantee is somehow at risk unlike the traditional bank's sector where there is no liquidation involved but in yield farming, the guarantee is usually at risk because they can be liquidated.
This liquidation is a result of the fluctuations in the market due to high volatility in the market. As a matter of that, the guarantees in yield farming must be increasing always so as to reduce the risk of losing your guarantee. Usually every blockchain network and the number or quantity of guarantees required to qualify for a loan.
But in different situations, the borrowers have to increase their guarantees in order to avoid loss or risk in losing their assets or what they have guaranteed. Borrowers increase the guarantees in order to establish a less risk of losing their assets on the platform due to high volatility in the market as a result of market fluctuations.
4.) 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 ratio (ratio) of Market Capitalization / TVL of the YFI token? Display screenshots.
- First of all, I would visit the DefiPulse where we would have information about the VTL.
At the time of writing this article, the TVL value was at $105.11B as we can see from the screenshot below.
- To see or have access to the Yearn Finance TVL, we must scroll down on the same page and find out that the yearn.finance TVL is located at number 8. The current price or value of yearn.finance TVL was at $4.23B as we can see from the screenshot shown below.
- To find the market capitalization and other features of the yearn.finance, I would now visit coinmarket.cap platform. The following indicates the statistical data of yearn.finance from coinmarket.cap platform.
Statistical data of yearn.finance at the time of writing this article
| Statistics | Value |
|---|---|
| Market Capitalization | $1,012, 680, 722 |
| Market Capitalization /TVL Ratio | 0.1729 |
| Total Value Locked (TVL) | $5,861, 575, 389 |
4.1.) Is the YFI token overvalued or undervalued? State the reasons.
TVL refers to the amount of all the assets blocked on a platform and to determine its value that is whether it is overvalued or undervalued or not we have to look at the ratio of TVL of that asset to the market capitalization of that asset as well. From the data provided above, we saw that the Market Capitalization /TVL Ratio was at 0.1729 which is regarded to be undervalued as far as the DeFi market is concerned.
Fees that are generated from the gas fees and also withdrawal fees are used for the growth of the IYF token. The value of the token would gradually increase due to the frequent use of the token on the platform.
The yearn finance project provides a simple and beneficial platform for users to earn more profits on the platform. Now, we find out that the yearn finance project is beneficial and as a matter of that I would say the yearn finance is a bit undervalued because of other benefits it provides to users.
5.) 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 today? Explain the reasons.
$500 investment in BTC
I would be using Tradingview platform so we, first of all, visit the tradingview website and select the BTC/USD chart. After launching the chart, we then highlight the price of BTC from August 1, 2021, to today's date.
From the chart shown above, we can see that the performance of BTCUSD within the stipulated period an increase in the price value of BTC of 33.63% which indicate a profit. The profits earned is calculated below:
Profit = $500 x 33.63% = $168.15
Therefore, Profit = $500 + $168.15 = 668.15
This indicates that when the price of BTC increases with a percentage of 33.63, our capital would increase from the initial $500 to $668.15.
$500 investment in YFI
Similarly, we do the same for the YFIUSDT chart by analyzing the price between the stipulated period.
From the chart shown above, we can see that the performance of YFIUSD within the stipulated period a decrease in the price value of YFI of 34.90% which indicates a loss. The loss is calculated below:
Loss= $500 x 34.90% = $174.50
Therefore, Loss = $500 - $174.50 = $325.50
This indicates that when the price of YFI decreases with a percentage of 33.63, our capital would also decrease from the initial $500 to $325.50.
We saw that BTC had a great performance during the stipulated period of time than YFI. YFI showing a loss of 33.63% within three months is something that is not that bad because of how huge its value is.
But in the case of the BTC, we saw that its price increased within that three months, and it's a good investment for investors during that time.
6.- In your personal opinion, what are the risks of Yield Farming? Reason your answer.
As we all know, there are risks in cryptocurrencies and as far as Yield Farming is concerned, there are risks involved in it. I would elaborate on some of the risks involved in yield farming and my reasons as well.
Risk of High Volatility:- there is a high risk when the market price of an asset falls deeply and the percentage of price falls to a price less than the entry price. The assets locked would be liquidated and when that happens there is a loss of assets by the investor.
High risk of scammers:- We must invest in platforms that are known and popular in the crypto market. We should invest in platforms we know we can achieve our assets after locking them in the liquidity pool. High users on a platform indicate the platform is safe for investment.
Lack of Knowledge:- Lack of yield farming knowledge is also a risk and users must first investigate and make their own research about it before making any investment in it. We should also read and agree to the terms and conditions of the platform before investing in it.
Impermanent loss:- This is a loss of funds supplied into a liquidity pool. This is a very critical risk in which users have to take very cautiously before investing in any yield farming platform.
Conclusion
To conclude, I would like to give a summary of what has been done so far in this article. First of all, we looked at the concept of staking and yield farming where we again elaborate on the differences between them as well. In addition, we then explored the yearn finance platform fully and also indicated its functions as well. We also described the process of connecting your wallet to yearn finance platform.
Furthermore, we looked at how to deposit and also how to borrow assets on yearn finance with practical illustrations. We also looked at what collateralization is and it functions as well.
We again showed the TVL of DeFi ecosystem from the DEFI PULSE platform and the current value of TVL at the time of writing my article. We also explored the coinmarket.cap platform and then showed the ratio market capitalization/TVL of the YFI token by including screenshots. We also looked at whether the TVL is overvalued or undervalued.
Moreover, we calculated the investment return we would get for making an investment of $500 for both BTC and YFI from 1st August to the current date of doing this assignment. Finally, we looked at the risks of yield farming.
I would like to say a very big thank you to professor @imagen for this wonderful lecture. I have really understood the concept of Yielf Farming and Yearn Finance. Thank You.