Yield Farming - Yearn Finance - Crypto Academy S5W3 - Homework Post for @imagen
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INTRODUCTION
Thank God is another week 3 of the season 5 of the steemit crypto Academy. This week, professor @imagen has taught us about the Yield Farming. What an awesome session with him. This is my response to the home task given.
QUESTION 1
Describe the differences between Staking and Yield Farming.
The recent exploit because of the decentralized economy, traders are exploring ways and methods of getting income from Defi. The revenue generated is through yield farming and staking.
There are several strategies that traders use to make profits in the crypto world. Many techniques and strategies are used in trading to increase the profit rate. The basic goal of every investment and trading plan is to achieve high rewards.
YIELD FARMING
Yield farming is a new and innovative technique to earn passive income on DeFi platform. Here, users feed tokens into the platform's cash fund and earn interest as passive income. The liquidity pool is used to lend capital, execute transactions, issue loans, and more. to users and gather interest from them. Profits earned are distributed to liquidity providers as a percentage of the tokens offered. The higher the percentage of tokens offered, the higher the return.
On DeFi platforms, Automated Market Maker (AMM) mechanism is in area to facilitate yoeld farming through clever contracts. The splendor of AMM lies in its manner of calculating yield. AMM primarily based totally yield relies upon upon deliver and call for and consequently yield maintains on converting on occasion and consequently LPs can select the liquidity pool that gives better APY or APR.
Yield Farming is also a well-known technique used by traders in the crypto world to get big rewards. In profit farming, investors invest their assets in the platform's cash fund to increase liquidity. In return, they earn rewards for locking up their assets in a cash pool.
The buyers or investors lend their property to the debtors to apply thru the Dapp. The debtors use the ones cash for buying and selling and also you get the praise in go back. The hobby charge might also additionally range consistent with the demand. But whilst the buyers make investments their property to liquidity pool they begin taking part in the praise in go back in shape of rate and hobby. The Annual percent Yield is used withinside the Interest yield mechanism.
Productivity includes lending or placing cryptocurrencies in exchange for interest and other rewards. Farmers measure their profits as a percentage of their annual yield (APY). Productive agriculture is potentially profitable but very risky.
There are several platforms that offer the option of yield farming where investors freeze their assets and get rewarded. Some of them are: Uniswap, Compound Finance, BSC: Binance Smart chain, etc.
STAKING
Staking is a process in which investors have to lock their assets in the pool in order to participate in trading withdrawals. They lock their assets to help them mine blocks. If they validate the block, they will receive a reward equal to the amount they put in. The reward for staking depends on the assets that the investors have staked. This award is also based on APY.
Staking has its roots in the mechanisms of consnensua. For starters, Bitcoin works on the PoW mechanism which is expensive and not very energy efficient. To combat the problems caused by the PoW mechanism, new consensus mechanisms such as Proof of Stake were born. In PoS, users have to wager a certain number of tokens to validate transactions and earn rewards. However, the concept of staking was later implemented to expand its scope of operations through centralized and decentralized exchanges, and node configuration and transaction function validation were eliminated for large layers of DeFi users.That part is being taken care of by exchange and users only need tk stake funds and earn rewards.
The staking process is used in the PoS consensus algorithm. In the PoS consensus algorithm, huge computing power is required to validate blocks. Miners have to spend a lot of energy to solve complex problems, and the nodes that solve the first problem receive a reward. But the process is expensive, and miners have to consume high computing power and use expensive computer systems. But PoS solved this problem.
Difference Between Yield Farming and Staking
| Yield Farming | Staking |
|---|---|
| Investors lock their assets into a cash fund and earn interest on their locked fundsIInvestors put their assets in the stream to be able to participate in the mining process | The more you bet on your assets, the more likely you are to become a validator. |
| Sometimes there is a risk of permanent loss in productive farming | There is no risk of permanent loss of assets when placing bets. |
| There is no need to lock your assets for a fixed period of time in Yield Farming | The investors mostly need to lock their assets for a fixed time period in Staking. |
QUESTION 2
Login to Yearn Finance. Explore the platform completely and indicate its functions. Describe the process for trading on the platform (wallet connection, funds transfer, available options) Show screenshots.
YEARN FINANCE
Yearn Finance is an Ethereum based project that offers many features. Some of them are;
DASHBOARD (Home)
This is the home page which contains some icons such as home, wallet, vaults,, Lab, Iron Bank, Setting. Here, the assets the trader has purchased are listed in US dollars.
WALLET
The assets which are not in use by the users in any trading activity are store in wallet. It gives simple access to all the products of Yield Finance by simple click. Funds are kept to particular product most easily.
VAULTS
Here you can find all the pools where the user can lock there assets and can earn income.
Users deposit their funds into vaults and platforms, then automatically use user funds in strategies with the highest APY and maximizing profits.
LAB
Latest updates and information about the platform. If a new feature is launched or any new facility offer by the platform is mention here. unconventional assets or strategies are added on experimental basis before they are added to Vault or Iron Bank.
IRON BANK
Here a user has to keep his assets as collateral and borrow funds. Once user repay his funds, collaterals are released.
This feature is there to enable the users to borrow the assets from the pool or to lend the assets to the pool.
SETTINGS
Here you can change the setting according to your own. You can change the slippage tolerance, language or theme. User can choose 1% , 2% , 3% as per tolerance potential of users.
WALLET CONNECT ON YEARN FINANCE. ###$
Yearn Finance supports number of wallets like Metamask, Lattice, Portice, opera, keystone etc.
Go to the Yearn finance I chose the meta mask wallet to connect.
Click on connect wallet
Select meta mask. Wallet will be connected
Moving money to Yearn's finances is easy once it's connected to the wallet. When you transfer the assets that you have in your connected wallet to the year financial wallet, all your assets in the connected wallet will be transferred to the year financial wallet.
To add the funds, click on the Add funds.
There will be two options. You can either copy the link or can scan the code.
Then on next, choose the ether.
Enter amount that you want to transfer and click on next.
QUESTION 3
What is collateralization in Yield Farming? What is function?
In the crypto world, the concept remains the same. Collateral is the amount that the borrower gives the lender to borrow. The mortgage amount must be greater than the loan amount. On average, a person wants to borrow 10 dong, the amount of mortgage that he or she puts on the lender must be more than 10 dong.
Collateral in yield farming refers to a system in which a borrower must deposit money as a vehicle or collateral against the borrowed money. Mortgage rates are set by a platform that lends you money. Mortgage rate is the ratio between deposits and borrowed money. Assuming a collateral ratio of 200% means that the borrower must deposit twice the amount borrowed. For example, an exchange with 200% collateral will borrow you $500 by putting $1,000 as collateral.
In case the borrower fails to repay the loan to the lender, the lender will take the collateral. Guarantee rate is different on different platforms. But in all cases, the collateral ratio is higher than the loan ratio. This is necessary to avoid liquidation. When the value of the collateral is greater than the value of the loan, it is over-collateralized.
The function of the guarantee is to act as collateral against the borrowed funds. If the value of the collateral falls below the rate set by the exchange due to a decrease in the value of the borrowed funds, the exchange may proceed to force liquidation of the collateral to cover the loss in the event of a loan. in case the user is unable to do so. deposits. no additional money. Therefore, to avoid forced liquidation, users need to make additional deposits. The over-collateralization of funds required by some exchanges is a safety mechanism to prevent liquidation.
QUESTION 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 Market Cap / TVL ratio of the YFI token? Show screenshots.
(4.1.) The YFI token, is it overvalued or undervalued? State the reasons.
To look for TVL (Total Value Locked) of DeFi ecosystem, we will have to visit DeFi Pulse https://defipulse.com.
Total value locked in the DEFI ecosystem is $108.69 Billion.
Source
TVL of the Yearn Finance Protocol
TVL of the Yearn Finance Protocol is $4.36B
Market Cap / TVL ratio of the YFI Token
Market cap=
$1,068,756,012
TVL to the yearn finance protocol= $4.36B
So here Market cap/ TVL to the yearn finance protocol
= $1,068,756,012/ 4360000000
= 0.245127525688073
≈ 0.25
(4.1.) The YFI token, is it overvalued or undervalued? State the reasons.
When the ratio of the Market cap to the TVL is less than the 1, the coin is said to be undervalued. We have calculated the market cap over the TVl and result we obtained is less than 1. The value we got is 0.25 which is less than 1. So we can say that the YFI is the undervalued.
QUESTION 5
(5.) If on August 1, 2021, you had made an investment of 1000 USD in the purchase of assets: 500 USD in Bitcoin and the remaining 500 USD in the YFI token, what would be the return on your investment in the actuality ? Explain the reasons.
The price of the bitcoin on the 1st August was 39,974.90 which is approximately 40000$.
500$ on August 1 = 0.0125 BTC
= 703.73$
Return on Investment = [($703.73 - $500)/500] x 100
=(203.73/500) x 100
=0.40746 x 100
= 40.746%
The return of investment of Bitcoin will be 40.746% [ 203.73 ] profit
Return of Investment of YFI.
The YFi closing price on the august 1, 2021 was 31,779.15$
500$ on august 1 into YFI = 0.01573 YFI
0.015733 YFI in USD today = 426.400$
Return on Investment = (($426.400 - $500)/500) X 100 =
($-73.6/ $500) X 100
=-0.1472 x 100
= -14.72
The return of investment of YFI would have been around -14.72% [$-73.6] loss
Total Return of Investment.
Total Return of Investment = BTC return of invest + YFI return of invest
Total return of investment = $212.70 - 2$8.36
Total return of investment= $184.34
Total return of investment in percentage =42.54% - 5.672
Total return of investment in percentage= 36.868%
QUESTION 6
In your personal opinion, what are the risks of Yield Farming? Give reasons for your answer.
Yield farming is a highly profitable way of earning passive income. But there are certain risk factors associated with yield farming too. The most common risk factors involved In yield farming are :
Non-permanent loss is an additional risk factor associated with changes in the value of the property offered. A significant devaluation of any asset, due to the volatility of the cryptocurrency market, can ultimately earn less than the value of the token offered.
The value of the collateral is fixed more than the value of the loan. In case the borrower is unable to repay the loan, the lender takes the value of the collateral. This helps to avoid liquidation problems. But when the value of the collateral is less than the value of the loan, which is enough to offset the value of the loan, in this situation liquidation takes place. This is why the value of the collateral is usually more fixed than the value of the loan.
In case of getting hack the Defi platform by the hackers, the investors face huge loss.
There are cases when the market suddenly drops. This sudden downtrend results in losses for investors. The value of the return is reduced to the value of the original investment. Investors thus face huge losses.
Small cap investors need to weigh the risk/reward, especially on the Ethereum blockchain, where the cost of gas is constantly increasing along with yield farming. However, alternative platforms have now emerged. Last year, Ethereum gas fees increased to 236 Gwei, which is a huge increase.
CONCLUSION
Yield farming is very profitable, but for those with a good knowledge of how it works. There are some risks to farm productivity. If we focus on these risks and invest after proper research, we can realize huge returns. The Yield Farming is also a well known technique which is being use in crypto world by the traders to get the huge reward.
Thanks to prof @imagen for this wonderful teaching and exposure.
Best Regards
charis20
