SteemCryptoAcademy Season 3 Week 3 - Homework Post for Professor @stream4u | CeFi - DeFi - Yield Farming
Hello crypto students, welcome once again to my blog post. Regarding the lecture of our advanced professor @stream4u, whose lecture focused on 'Centralized, Decentralized Finance, and Yield Farming. Indeed, it was really a wonderful class, and for this sake, I will be attempting the given questions, but before I start, I want to thank the professor especially for bringing this topic up. Let's quickly get down to the context.
Overview Of Centralized & Decentralized Finance Ecosystem
Today, our world is modernizing, there was a time when traditional financial services were done under a structured and specialized way of services whereby payments, lending, and borrowing were done in a centralized exchange, i.e via banks & financial institutes that are usually regulated by governments.
But then, several setbacks are attached to centralized finance which was centering on higher transaction fees due to third-party or intermediaries’ involvement, full access to funds, and other related issues centralized finance. Today, we have seen a counterparty that since its inception has become the opposite of centralized finance, and that's 'Decentralized Finance'.
Before the inception of DeFi, cryptocurrency was traded in a centralized exchange where all funds are been traded or handled by a centralized exchange, what it means is that your funds are been managed by the bodies that are in charge of the centralized, in other words, you don't have the access to your wallet because you don't have a private key that gives you access to the wallet.
In opposite to CeFi, Decentralized Finance gives you full control over your funds, it does not have any exchange. In this type of system, all processes utilize automated applications built on top of blockchain technologies. It ensures a fair and transparent financial system where anyone can take advantage. The DeFi ecosystem offers a wide variety of services like borrowing, assets storage, yield farming which I will also discuss in this article, and lots more. Let's take a brief dive into DeFi below.
What Is the Importance Of the DeFi System?
As I have said earlier, decentralized finance is built on top of blockchain technology to help store crypto, cryptocurrency lending, yield farming, and lots more.
Decentralized finance aims at building a transparent and permissionless financial service where users have full access to their wallets as the key pair to their wallets is with them. As written above, the system uses decentralized apps (DApps) or smart contracts that are built on top of blockchain technology to carry out its services. Let's take a look at some benefits of Decentralized finance below.
Quick and permanent access to funds: With DeFi, you can access your funds quickly at any time, and at anywhere. Imagine a situation where you want to lend money, and let's put it under centralized finance, in other to successfully get a loan, you would have to go to the bank, and you know sometimes a lot of time will be wasted. In most cases, the bank will be crowded which can cause a waste of time. But with DeFi, you can get a loan with a click, and at your own convenience. The market is accessible at any time even at midnights.
Permissionless Operations: This is another importance of decentralized finance, it is not like the traditional finance system where you need to get permission from an intermediary to carry out a particular transaction, DeFi users do not need permission to interact with the financial market. Users access the service via a provided smart contract with no use of KYC where you present personal details before using the service. It is open to all parties without any discrimination. Furthermore, users that are interested in developing DApps are free because of their high rate of accessibility and collaboration within the community.
Speedy Innovations:Another huge benefit of DeFi is its fast pace of development. The Decentralized Finance Ecosystem is continually assembling current capacities and trying different things with new abilities. The form-driven nature of the DeFi space has changed into a rich environment inserted with notable monetary administrations.
Doesn't Require Trust: Another Importance of utilizing DeFi services is you don't have to believe that the assistance will proceed as advanced. Clients can verify that DeFi transactions proceed as proposed by examining their code and utilizing outside tools like Etherscan to recognize if an exchange was accurately executed. With DeFi users, has the rights to their assets, and transacts safely without validation from central authorities. All transactions are been carried out on a public blockchain
Strong Marketplaces:It has also catapulted the development of strong exchanges where crypto-related transactions are been carried out. One major exchange in DeFi is the Uniswap exchange which facilitates peer-to-peer trading of digital assets. It has impacted much in the crypto space.
Flaws in Centralized Finance
In every organization there must be some flaws, when talking about centralized finance, we have to understand that it must have some disadvantages. We'll take a glimpse at some of these flaws.
Users Have Limited Control Over Their Assets: This is the major problem found in the world of centralized finance. in this kind of finance, users are limited to controlling their assets, in most cases a user must attain some level of authorization. sometimes, this could lead to delay in transactions. This is where DeFi comes in, it gives you unlimited access to your assets.
The Presence of KYC: KYC is an abbreviation for knowing your customer, in centralized finance, it has been a problem as most centralized bodies cannot carry out transactions without knowing their customers, and sometimes the most annoying part is when the requested documents are not in completion, it simply means you cannot transact with such financial institution. This is why decentralized finance is preferred because it saves you the stress of filling those documents. You can at your own convenience sign up on a decentralized exchange and start trading at ease.
Involvement Of Intermediaries: Intermediary in this context means a body that acts as a link between an organization. It means here that CeFi can not operate without these bodies, and as a matter of fact, it causes a lack of freedom to the users of that financial institution. Furthermore, it can also cause a high rate of fraudulent activities, How is this possible?
Let's take a look at a scenario of money laundering. we all know very well that the world's most financial crime is money laundering, and in recent research, it has been measured that $2 - $3 trillion of money is been laundered in the financial market every year, and you also know that such amount of money cannot be laundered if not with the help of financial intermediaries like banks and lawyers. In this context, an intermediary can be seen as a broker.
There are other disadvantages of centralized finance which are not listed here. Now let us take a look at DeFi products below.
DeFi Products. (Explain any 2 Products in detail).
In this section, I will be talking about the products of decentralized finance. Indeed, it has brought a lot of financial opportunities which are mostly built on to blockchain technology. Let's talk about the two major products of DeFi below.
DeFi Lending
Lending is one of the products of Decentralized finance that tends to offers complete and transparent easier access to money transfer without involving any intermediaries. The protocols that are built on this ecosystem allow users to earn interest in stable coins and cryptocurrencies.
How does it work? A user that wants to borrow can just go and create an account on the DeFi platform, create a wallet and open smart contracts, DeFi lending offers a straight-way borrowing process. It also offers margin trading, allowing long-term investors to lend crypto assets and earn higher interest rates.
As said earlier, DeFi lending and borrowing works as our traditional banking works, where a user deposits their money and earn interest. The same is with decentralized finance. But in the case of our traditional banking sector, there is always an intermediary that stands as a link between the loan terms.
In DeFi the intermediaries are smart contracts that are built on top of blockchains which aids transparent and immutable transactions. Now, borrowers intending to borrow fiat can access lenders via these smart contracts with their crypto assets as collaterals, and on a condition of accepting the interest rate.
If both the lender and borrower agree with the interest rate, then the fiat loans will be transferred to the borrower's account, and he/she agree to pay a certain interest on the due date, and then the lender will transfer back the collateral that acted as security. You can refer to the above image for a better understanding.
There are too many smart contracts built on top of a blockchain to carry out DeFi lending & borrowing. They are the likes of JustLend, Aave, Torque, Venus, and lots more. Let's take a look at JustLend briefly.
JustLend: JustLend is the official lending platform for TRON that allows users to borrow, lend, deposit, and earn interests. It is built on top of the Tron blockchain.
How does it work? it accepts TRX, USDT, SUN, USDJ, JST, ETH, BTC, WBTT, and WIN as collateral for loans, and also allows smart contracts for these assets. Now, how it works is when an asset is been supplied into the lending pool of JustLend, it allows the user to earn Jtokens for the period at which the supplied asset was in the JustLend pool. When acquired a Jtoken, it allows you to borrow on the platform where the token is serving as your collateral.
JustLend is seen as one of the best because it has the ability to automatically match the supply and borrow requirements, and then generate the returns on supply. Transactions are cost-effective and can be supplied or withdrawn at any time. Let's take a guide below on how to supply assets on JustLend and become a Liquidity provider(LP)
Here, I will take you on a tutorial on how to supply assets on the JustLend liquidity pool. The first step is to visit the JustLend site By clicking on justlend.link When clicked, you will be taken to the site's home page. See the image below.
The above image depicts the homepage of JustLend, as you can see on the image, my Tron link wallet is not connected, and I cannot make use of the site without a connected wallet. In other to connect my wallet, I navigated to the red arrow direction where I clicked on 'Connect Wallet'. When I clicked, I go the below Screen.
In the above. I have to specify the wallet that I am connecting to which is Tronlink-Pro as seen in the image above, I clicked on connect, and was taken to the next step below.
After clicking on connect wallet, the above image appeared with my Tronlink Wallet as an extension on my browser. So on the image, I inputted my password and then clicked on the continue button to see the next option.
Now, you can see that, I have successfully connected my wallet to the JustLend site. So I am heading to supply my asset on the liquidity pool, I screw down to get the below option on that same page.
When I have screwed down, I saw the Listed markets of JustLend, all the assets are attached with supply and borrow, so since I am supplying, I had to click on supply as I did on the image above. When clicked, I was taken to the next option below.
Now, I am on the page to fill in my supply asset amount. Remember, when I was in the market overview, I selected TRX as my supplying asset, so now, I am to fill in the amount Trx, it must be above 100 TRX in other to have more energy, In that case, I filled In 103 TRX, and then clicked on supply.
After clicking on supply, it cannot supply to the liquidity pool without first taking permission from my wallet, which is why it requested a signature on the image above. So I clicked on accept which means I have accepted the Transaction. After accepting the transaction, I got the below image.
The above image signifies that the transaction is in process, and will soon be approved, After some time, it brought out a message that it has been approved. See the image below.
Here, the image shows that the transaction has been confirmed on the Tron blockchain. To explore more, I visited the chain to see where it was confirmed from. Below is some piece of information from Tronscan.
The above image depicts the transaction details as confirmed on Tronscan, On the image, you will see the status that it was confirmed from over 200 blocks with 19 SRs, and with the block number as 32232680. You can also see the transaction hash. Let's take a look at my dashboard after supplying the liquidity.
Decentralized Exchanges
Decentralized exchange (DEX) is one of the products of DeFi that allows users to crypto-related transactions like swapping, exchanging, buying & selling, borrow/lend on a platform without involving any intermediary. In this kind of exchange, you have full right/access to your funds.
It has a mechanism of dictating the price of assets automatically with the help of Automatic Market Maker (AMM) which makes use of the assets that are been supplied to carry out transactions. There are many DEXs which are - JustSwap, Uniswap, QuickSwap, ShibaSwap, DODO, and lots more. Let's have a brief view of one of these exchanges.
Uniswap: Uniswap is a decentralized exchange built on top of the ethereum network. It is one of the core products of Decentralized finance that was built t enable users to swap ERC-20 tokens. Unlike other DEXs that use a matching mechanism to determine the price of an asset, Uniswap uses a simple math equation and sometimes pools of tokens & ETH to its price-matching in terms of executing a trade.
Now, where it is distinct from other DEXs is its ability to connect buyers and sellers to determine the price of an asset using the Constant Product Market Maker which is equated as: X * Y = K. Here the X & Y stands for the quantity of ERC-20 tokens and ETH that is present in the liquidity pool, and the K stands for the constant value. It uses this equation to balance the number of supplies and demands of ETH & ERC-20 in other to determine the price of a particular asset.
Another difference from uniswap is the ability to list any ERC-20 token without permission. How does it work? Every token on the Etheruem network has its own smart contracts, and its own liquidity pool, if an asset doesn't have either a liquidity pool or smart contracts, it can be created easily.
Now, if a token has a smart contract and liquidity pool, it can be traded or be contributed to the liquidity pool while the traders earn liquidity fees of 0.3%. In other to contribute to this liquidity pool, you will need an equivalent value of both ETH and ERC-20 tokens.
Risk involved in DeFi
There are lots of risks involved in the Decentralized finance ecosystem. Here, I will be highlighting a few of these risks.
Smart Contract Problems: As we all know that smart contracts are the core products of Decentralized finance as they tend to execute an agreement between traders on the DeFi ecosystem without involving any intermediary. They are built on top of blockchain technology with lines of code written by individuals which means they are not 100% free from errors. In this case, if there is the smallest imperfection in the code of a smart contract, it can lead to loss of assets.
Low Liquidity: Low liquidity is another factor to be considered in the DeFi ecosystem, the liquidity is not always high as compared to CeFi which can also cause high network fees in transactions. Based on research - the total liquidity locked in DeFi as 2020 is 12.5 billion dollars, and this is really small compared to our traditional finance system.
High Rate Of Loss: High rate loss in the DeFi ecosystem is a major risk, and it usually happens when the price of an asset that was locked in liquidity changes other than when the asset is in the wallet. Sometimes the market risk is significant in the DeFi ecosystem because of the high volatility of cryptocurrency.
Over-collateralization: Over-collateralization in this context means when the value of the placed asset is higher than the loan, and this usually occurs in the DeFi lending products mostly because of the DeFi market price instability. Let's take an instance of loaning a particular asset, and because of the instability, of the price the staked asset can grow in value more than the Loaning asset.
What is Yield Farming?
Yield farming is one of the hottest trends in decentralized finance, it is a way of locking your crypto assets for some period of time, and then earn some interest based on the % return. Just like when you when lend your traditional money to borrowers and expect interest in a given time, that is how Yield farming works, but the core difference is the decentralized nature where the banks represent cryptocurrency holders.
It makes use of idle crypto assets in a wallet or exchange that would have been wasting to provide liquidity in DeFi Exchanges like JustSwap, QuickSwap, UniSwap in exchange for some percentage returns (APR/APY). It brings riches, but not for crypto users who are always afraid of losing money.
How does Yield Farming Work?
As we have seen above, what yield farming is about. One can still ask how does it work? Yield farming utilizes a liquidity provider & a liquidity pool, that's a smart contract that is filled with cash in other to power the DeFi markets. where the liquidity provider is seen as the investor, and the liquidity pool is the smart contract that is built on top of a blockchain.
Now, it functions based on an Automated Market Maker (AMM), this model is fully based on the liquidity providers that deposited into the liquidity pools which are the bedrock of DeFi markets where crypto users swap, lend, and borrow crypto assets.
What the AMM does is disregard the order book which contains buy and sell orders, instead of making use of this model, it will automatically create a liquidity pool via smart contracts which are used to open trade based on the predetermined algorithm. As users pay trading fees on the market so the fees are distributed between the liquidity providers based on their APR/APY.
What Are the best Yield Farming Platforms and why they are best. (Explain any 2 in detail)
There are lots of DeFi platforms where one can farm cryptocurrency. In this section, I will be discussing 2 of them of which I think is the best for me. They are Venus, which has a total value of $2,411,211,552.09 locked and is built on top of the BSC Mainnet. The second in consideration is PancakeSwap. Let's take a look at these yield farming platforms below.
Venus
Venus is a decentralized exchange for both lenders and borrowers that is built on top of the Binance smartchain algorithm. All protocols on this DEX are based on the Bep - 20 standard. It has a token that is termed vToken which is used as collateral for borrowing on the venus protocol without a trading fee and slippage.
Yield Farming works when an asset has been deposited in the liquidity pool, and these assets that are been deposited will be used in borrowing to users that are wanting to borrow from the liquidity pool. This is how it is for venus, in other to borrow from venus, a user must deposit a Bep-20 token that will serve as collateral for loans, liquidity supplies, and an APY.
On successfully depositing an asset on the venus platform, the user will be issued with the vToken which can be used to access the awaiting collateral that was supplied. These vTokens are such as vBNB. This will help the users that have deposited to safeguard other tokens.
Now from the above screenshot, simply shows how the collateral is been withdrawn back to the liquidity provider through the help of the vToken that was minted on deposit.
Now, from the above image you can see how the transaction is been carried out, for the borrower to borrow from the lender, there must be a deposit first, which I've talked about, as the lender deposits the assets it will be locked in as collaterals, and the value of the collateral is always higher than the value of the given asset and the annual percentage return.
Over - collateralization in the screenshot means that the asset in supply is totally secured, if anything should happen in the cause of the transaction users will also get their asset as well as their annual percentage yield.
The above are the available assets on the venus platform and their annual percentage returns attached to them. On the image, we can see the USDC asset and its available liquidity as $65,826,060.65.
It is bound to the Bep -20 algorithm which means transactions fee will not be high as the Binance smart chain tends to reduce transaction fees compared to the ERC-20 network. It is highly scalable as it is built on top of the Binance smart chain which is very fast and secure.
Assets that are been deposited into the liquidity pool which acts as loans are been secured with the help of Over - collateralization which means despite anything users will receive their APYs, and their assets back.
The ability to redeem underlying collateral with a minted token. It also allows users to withdraw at any time as all assets are been pooled into a smart contract given them permissionless access to their assets.
PancakeSwap
PancakeSwap is a decentralized exchange platform that operates based on the Bep-20 protocols, it allows trading and swapping of cryptocurrency without the involvement of third parties. Since its inception, it has been one of the trending DEX built on the Binance Mainnet.
It offers liquidity providing on various pools like price prediction, yield farming, non-fungible tokens (NFTs), collectibles, and lots more. It has been the major decentralized exchange with some outstanding liquidity pools. Listed on PancakeSwap are Auto CAKE, Manual CAKE, Earn TRX Stake CAKE, CAKE-BNB, Earn TITAN, Earn CHESS, and lots more with their annual percentage return/annual percentage yield(APR/APY).
Just like other decentralized exchange protocols, it uses the AMM model to insulate the price of assets depending on the liquidity pool. It has its own native coin which is called 'Cake' based on CoinMarketCap's statistics that cake is currently selling at $12.967, and one of the most widely used reasons is because of its low gas fee compared to other decentralized exchanges that are built on chains like ERC-20.
How does it work? Let's see. As seen above, the decentralized exchange makes use of liquidity pools with token pairs. Users that stake their token on the liquidity pool earn some reward when a transaction is been carried i.e when a borrower comes to borrow the staked token, a reward will be generated based on the staked token of the LP.
Let's take a scenario where you're to stake CAKE maybe because it's not yielding you any profit, and then you decide to stake it in the PancakeSwap's syrup pool and allow it to stay for a time, after a given time it will yield you more CAKE token, and one important aspect PancakeSwap is its ability to re-stake your token with an auto-stake mechanism which continuously compounds your rewards.
Transactions fee has always been a major problem in DeFi projects. In the case of transacting with ERC-20 DEXs, the fees are always high compared to Bep-20 DEXs. An example of this effect is seen on uniswap, the fees there are usually high compared to PancakeSwap, this is because of the Bep-20 network protocol. In PancakeSwap, most transaction charges are under a 0f $0.15 which is very affordable.
Fast and secure transactions are also another reason for choosing this exchange, you know, in the DeFi world, fast transactions have been a problem of major exchanges which can cause Impermanent loss. PancakeSwap has tackled this issue as most transactions are executed within seconds.
The Calculation method in Yield Farming Returns.
There are two major ways of calculating Yield Farming Returns and there are Annual Percentage Rate (APR) & Annual Percentage Yield (APY), these are the two methods, let's see what they are, and how they are been calculated below.
- Annual Percentage Rate (APR): This is also used in our traditional finance sector where it is expressed as an interest rate when a loan is been given. Annual in this context means it will be paid every year. Let's see the calculation below.
Let's take a scenario where Mr john deposits Liquidity worth $800 in the liquidity pool with an APR of 100%, now we'll say that Mr john has invested $800 expecting some percentage since it was liquidated in the pool that gives a return per annum. The calculation to get his APR will be thus.
100% of $800 which is also seen as 1 x $800 = $800, Now his APR will be:
= Initial Investment + APR = $800 + $800 = $1600 Therefore:
At the End Of The Year, Mr. John will Be having a Total of $1600
- Annual Percentage Yield (APR): Annual percentage is also seen as APR but the difference is that it reinvests your returns to increase the rewards of that investor, in simple terms, it means compounding the interest of the investor. Let's take for instance.
If Mr. John decides to invest in a liquidity pool with $800 to be receiving 50% returns in APY, we'll be using the below formula to calculate the APY of Mr. John.
The above formula is given for calculating the Investment APY of Mr. John. in the formula above we have:
r = represents the rate of periods/interest - 50%
n = number of compounding periods - 365 days
Let's fix the numbers in the APY equation like this:
APY = (1 + 50/365)365 - 1
Then:
APY = (1 + 0.5/365)365 - 1
APY = (1 + 0.0014)365 - 1
APY = (1.0014)365 - 1
APY = (1.0014) 365 - 1
APY = 1.6664 - 1 = 0.6664.
So the APY is = 0.6664 multiply by $800 = $533.1 This means the APY for Mr. John's is ~ Initial investment + APY = $800 + $533.1 = $1,333.1. We can now see that Mr. John is having $1,333.1 at the end of the year.
Advantages and Disadvantages in Yield Farming
There are lots of advantages to Yield farming, and here I will discuss a few of them. From the above content, we have understood that since its inception that it has been the talk trend of the DeFi ecosystem, let's see the advantages below.
High-Interest Rate: This is one important aspect of yield farming, For any crypto enthusiast looking out for where to invest his/her cryptocurrency, yield farming is the best as it has a high Return Of Investment (ROI). let's compare the returns of our traditional banking sector where most of the ROI is given as 5%, but in the case of yield farming, we can see that the return of investment per year differs from 45%. That's a great percentage that investors will want to look out for.
Permissionless: Here comes another advantage, as we all know, the ecosystem of DeFi is limited to users, it is open to any interested participants which makes it a top-notch for like-kind users. You don't need to enroll in filling any document before you can participate in yield farming, you can just access it with any built DApp.
The Above are just but a few of the advantages of yield farming, it is really the smartest way of earning crypto as most of the crypto dealers store their crypto in the wallet without trading them, so if they should join yield farming, it will be yielding profits while they anticipate for their desired price. Let's take a look at the disadvantage of yield farming below.
Disadvantages in Yield Farming
There are also some disadvantages of yield farming that I have observed while researching this topic, and I'll be disclosing some of them below.
Too Complex: Yes! most of the smart contracts that are offering yield farming are too difficult to use which is why most crypto investors don't utilize it, it only requires a user who has gotten some user experience. If a user gets familiar with yield farming, it can be made easy.
Price Volatility: Here comes another considering disadvantage of yield farming, although it is a general term in the crypto space. The price volatility of cryptocurrency can affect a yield farmer (LP) Where the price changes in value as such leading to impermanent loss.
High Transaction Gas Fee: High transaction gas fee is another disadvantage of yield farming which is why most crypto holders don't dive into it. Although smart contracts that are built on top of Binance smartchain have come to reduce this effect, it is still a problem as yield farming is a product of DeFi that can be seen in ERC-20 networks.
Other problems attached to yield farming are the leakage in smart contracts, having understood that yield farming is a product of DeFi which works with smart contracts and is built on top of blockchains.
These smart contracts are built by human intelligence with some programing language which can also face the attack of hackers thereby leading to the loss of funds of investors. Another seen problem is that the ROI usually fluctuates down because of some changes that may occur in a liquidity pool.
Conclusion on DeFi & Yield Farming.
We have taken a very deep look into decentralized finance, and its trending product - Yield Farming. It is another monetary motivating force in the DeFi ecosystem, fit for both boosting liquidity and empowering reasonable dispersion of tokens.
This movement has likewise carried critical advantages to DeFi stakeholders, by diminishing the slippage for token trades across numerous DeFi applications and supporting the development of solid networks, which in any case wouldn't exist. Likewise, Yield farming has permitted various tasks to make headway, which would now be able to get billions in clients' assets at short notification.
As we have also seen, DeFi could make a pave way for investors with just an internet connection. Thanks to the prof for bringing up this wonderful topic, it was really nice learning about DeFi Products.
Hi @bright-obias
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@stream4u
Crypto Professors : Steemit Crypto Academy
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Thank you prof for your wonderful review. Indeed, I benefited from the class, thanks for taking us a dive to CeFi - DeFi - Yield Farming...