Steemit Crypto Academy Homework Post for @stream4u

Hello all and welcome to steemit crypto academy season 3 week 4.

Introduction.

I am very excited to be a part of this lecture by prof @stream4u once again.

This week we have been lectured on CeFi - DeFi - Yield where we learnt about Centralized finance, decentralized finance and Yield.

I would now present my answers to the questions asked.

What Is The Importance Of The DeFi System ?

The Decentralized Finance system ( Defi ) has brought a lot of advantages into the financial and the cryptocurrency world. But before I speak about that, I would first like to talk about what DeFi is.

The Decentralized Finance system, DeFi is the type of financial system used by blockchain technologies to perform all kinds of transactions.

DeFi boasts of several applications known as DaPPS that works on smart contracts and used by blockchains to execute finanacial needs.

DeFi was introduced to solve the problems with the traditional banking system or the centralized form of finance where transactions could happen without restrictions and intermediaries.

With this brief description of Defi system, the following are its importance.

• One major importance of Defi system is complete control.

We can all agree that at certain points in time, we would like to have complete control and freedom to take actions and decisions relating to our life.

Our financial life is no different because it is a very important aspect of our lives.

With the decentralized system of finance, we decide when to make transactions and when to make them. Transactions with this form of finance can be made whenever and wherever because the funds are yours and you have access to them at whenever time provided you have internet connectivity since most of the defi applications are online.

Comparing defi to the banking system, banks have their working days and hours which might not favor us because we could need money for a number of reasons at anytime.

• Transactions are made without intermediaries or third parties.

Another very importance of the decentralized financial system is that transactions are made without third parties.

Making transactions in DeFi is purely between the buyer and the seller or the two people involved in the transaction.

This form of transaction ensures transparency by removing the sense of doubt between the traders. Time is also saved and transactions are faster.

• There is no central authority in decentralized financial system.

Thirdly, an importance of DeFi I would like to talk about is the fact that there is absence of a central authority in the DeFi system. In this system, individual do not wait for approval from the system or one "master" node but are capable of carrying operations individually.

Unlike in central finance system or the banking system where bank authorities have to approve your transactions, there is nothing like that when transacting with DeFi because all transactions are approved by you and you do not need approval from a central or higher authority.

• No need for KYC or identification verification.

Cryptocurrency traders who trade with centralized exchanges like Binane know that you need to verify your identity in a process known as the KYC verification.

In this verification, valid documents like passports and identity cards are needed for validation before you can trade properly on theses platforms which sometimes defeats the purpose of cryptocurrencies which is to be anonymous.

In trading with DeFi, you do not need KYC verification which gets rid of the identity barriers. Using DaPPs like PancakeSwap need no verification of documents and identity but just a connection to your wallet.

Hence, DeFi alows you to trade easily without giving up your identity or details.

• Transactions are fast, easy and cost effective.

Just like I pointed out in the paragraph above that transactions with DeFi are done without verifying identities, these results in fast and easy transactions.

The fact that you don't need to verify your identity and simply link a wallet like your mobile trust wallet to pancakeswap easily allows you to perform transactions fast and easy wherever you are.

The decentralized finance system is also important it provides transactions at low fees.

PancakeSwap is known to provide transactions and other financial actions at low fees.

What Are The Flaws In The Centralized Finance System.

Centralized finance system was introduced first and was used for a long time before the introduction of DeFi. It is still been widely used by a lot of people for transactions.

Centralized finance system , CeFi can be referred to as the direct opposite of DeFi because it is centralized, has a central authority and doesn't give complete freedom to it's users.

Some of its flaws are below;

• Presence of a central authority.

In Centralized finance systems, central authorities exist. This means that before any transaction is done, it has to be approved by this authority.

This is a failure of the centralized financial system because it delays transactions and sometimes results in corruption.

CeFi is also a failure because the presence of these central authorities mean that a user doesn't have control over his or her funds.

• Users do not have complete freedom.

Centralized financial systems are a failure because they remove the total freedom of a user on his or asset.

User have limits to how and when they they can use their assets. An example of this is users needing approval from central authorities before making transactins.

Another example is trading with centralized exchanges like binance. There are usually periods where binance have system maintenance and so during those periods, they do not allow deposit of crypto currency assets like steem which happened months ago.

So imagine you had an emergency and you needed funds immediately to sort yourself out and decided to deposit steem and trade, you wouldn't be able to because of "system maintainance".

• Verification of Identity is required.

Centralized financial systems require that every user verifies their identity before they can gain access to some or all of it's services.

Before verification, you need to submit important documents which can sometimes be stolen.

For example, binance exchange requires KYC verification before services like P2P trading can be used.

Another example is the banking system where you have to provide a lot of documents even to set up just a savings account. Without verifying your identities with banking systems you cannot gain access to the banking services.

• Intermediaries or third parties.

There is presence of intermediaries or third parties when dealing with centralized financial systems, CeFi.

With this, traders do not have complete control over how their transactions should be because it needs to go through the third party.

The presence of third parties delays transactions and sometimes the traders can be cheated by the intermediary. One of the traders can also be cheated when the third party and the other trader have secret negotiations.

Therefore the presence of intermediaries makes transactions slow and not transparent which is a flaw of the centralized financial system.

Explain Any Two DeFi Products Products.

For the purpose of this task, I would be looking at decentalized exchanges and lending.

Decentralized Exchanges ( DEX ).

One major product of DeFi is Decentralized Exchanges. Decentralized exchanges allows users to perform transactions with 100% freedom and control.

There are more than thirty five decentralized exchanges found on a lot of different blockchains. Uniswap is the decentralized exchange that runs on the Ethereum blockchain with the highest trading volume. PancakeSwap is another example of decentralized exchanges.

Decentralized exchanges also allows P2P ( peer- to- peer ) transactions which involves only the buyer and seller.

To ensure that transactions are carried out fast without intermediaries and central authorities, DeFi introduced the decentralized exchanges.

In decentralized exchanges, there are a lot of services where traders or users can buy or sell, borrow or lend, stake assets, swap crypto currencies for others and as well provide liquidity to earn more rewards.

Decentralized exchanges takes care of price fluctuation or manipulation by quoting prices with a technology known as Automated Market Maker ( AMM ) using funds in liquidity pools.

PancakeSwap exchange; Pancakeswap exchange is a decentralized exchange that allows traders or investors to trade cryptocurrencies as well as tokens without third parties or intermediaries.

It is built on smart contracts but with the smart contracts deployed on BSC.

Pancakeswap is a part of DeFi services and uses BEP-20 tokens from BSC but also supports the trade of other crypto coins from other network platforms converting or wrapping them as BEP-20 tokens.

Pancakeswap allows trades but does not provide investors with order books. The exchange makes trades by locking tokens in liquidity pools allowing traders to swap the tokens they want from the pool and rewarding those who keep their tokens in the pool for long periods.

Traders can also stake tokens like cake in Syrup Pools to gain extra cake tokens by leaving them in the pool for sometime.
PancakeSwap is cost effective because it offers low fees.

The Pancakeswap exchange supports wallets like Trust wallet, Binance Smart Chain wallet, Metamask, among others.

Lending.

Another product of decentralized financial system is lending.

In lending, traders or users supply or lock their assets in a lending pool. When users lock assets in the lending pool, they earn income calculated as APY or APR.

Users or investors can then borrow crypto assets from the pool and pay with interest. It is interest that is calculated in APR and APY and paid to the users that have locked their assets I the lending pool.

Example of a decentralized financial system ( DeFi ) that allows lending is JustLend.

JustLend: JustLend is a lending platform that runs on the Tron blockchain.

The platform allows traders to supply assets into the lending pool so that other users can borrow from those pools and pay with interest.

JustLend allows traders who contribute to the lending pool earn rewards and receive jtokens. This means when you supply trons in a lending pool, you earn jtokens.

A trader can also supply tokens like SUN and earn jSUN tokens.

JustLend just like PancakeSwap that I have stated above also provides low fees and hence cost effective.

Risk Involved In DeFi.

Although DeFi offers a lot of benefits which I have already stated, there are also a lot of risks involved when using DeFi.

I would like to talk about some of these risks.

• Liquidity Risk: Because decentralized financial systems are not supported by financial authorities, they rely on liquidity pools for transactions. Due to this, fees are usually higher as compared to fees on centralized financial exchanges.

• Impermanent Loss Risk: Impermanent loss occurs when the value of the locked asset in a liquidity or lending pool is lower than what it would have been if it was in a wallet. This is not a permanent loss because you can earn your funds back with interest.
  Impermanent loss usually occurs when the decentralized system raises the prices of assets locked in the pools in higher liquidity and lowers the prices of locked assets in pools of lower value.

• Financial Risk: Everything about dealing with cryptocurrencies is a risk and transacting or investing with DeFi has financial risk as well. This is due to the fact that crypto assets are highly volatile.
  The financial risk is seen when previously locked up assets reduce significantly in value due to its volatility.

• Security with smart contracts. Smarts contracts in DeFi are not very safe because they are pre-written codes that can be hacked. When these smart contracts get hacked, transactions can be manipulated which can result to heavy loss of assets.

What is Yield Farming ?

Yield farming is a situation or system where users lock up their assets in liquidity pools over a period to help the system in its transactions and to earn rewards.

The users that lock up their assets are liquidity providers and earn in percentage returns ( Annual Percentage Rate, APR and Annual Percentage Yield, APY which is a compound interest ).

The locked up assets can also be used foe lending. Yield farming is good because you earn rewards or interest on your funds instead earning nothing on them when they are just lying in your wallet.

How Does Yield Farming Work ?

Yield farming works on a system where the liquidity providers lock their assets in liquidity pools to earn rewards.

These locked up assets are what is used by the decentralized exchanges to carry out transactions using the Automated Market Maker ( AMM ).

An example of yield farming is providing liquidity on a DEX like PancakeSwap. You will need to supply cake tokens and earn more cake rewards calculated on APY or APR.

I would be showing how to add liquidity on PancakeSwap exchange.

Firstly, you need to connect or link pancakeswap to a wallet of choice.

I would be linking PancakeSwap to my binance smart chain wallet.

How To Link BSC To PancakeSwap.

• Search pancakeswap in google or visit this link

• At the top right corner, click on connect.

• Select binance smart chain from the displayed wallets.

• The bsc extension is opened which requires you to unlock your wallet. I unlocked my wallet by entering my password and clicking on unlock.

• Click on connect.

• Wallet is connected.

How To Add Liquidity On PancakeSwap.

• Select liquidity from the homepage of pancakeswap.

• Select the pair you want to add and input the amount you want to add.

• Click on supply.

• Click on confirm.

• Click on supply
  

  

• Click on confirm supply.

• Click on confirm on bsc extension.

• Liquidity is added.

What Are The Best Yield Farming Platforms And Why Are They The Best ?

The best yield platforms for me are Pancakeswap and Sushiswap.

PancakeSwap.

PancakeSwap exchange; Pancakeswap exchange is a decentralized exchange that allows traders or investors to trade cryptocurrencies as well as tokens without third parties or intermediaries.

It is built on smart contracts but with the smart contracts deployed on BSC.

Pancakeswap is a part of DeFi services and uses BEP-20 tokens from BSC but also supports the trade of other crypto coins from other network platforms converting or wrapping them as BEP-20 tokens.

Pancakeswap allows trades but does not provide investors with order books. The exchange makes trades by locking tokens in liquidity pools allowing traders to swap the tokens they want from the pool and rewarding those who keep their tokens in the pool for long periods.

Traders can also stake tokens like cake in Syrup Pools to gain extra cake tokens by leaving them in the pool for sometime.
PancakeSwap is cost effective because it offers low fees.

The Pancakeswap exchange supports wallets like Trust wallet, Binance Smart Chain wallet, Metamask, among others.

Panckaeswap allows you to engage in lottery, prediction, yield farming, team battles, etc.

Why PancakeSwap is one of the best.

Comparing to other DEXs, it offers yield farming, allows users to add liquidity, swap tokens and stake tokens.

Acquired liquidity tokens can be used to stake in the farms and also provides transactions at low fees.

SushiSwap.

SushiSwap is another decentralized exchange built on the Ethereum blockchain for the buy or sell, swap or exchange of ERC-20 tokens. SushiSwap DEX was introduced in the year 2020 and it's the hard fork of the Uniswap. The technology used to quote prices in Sushiswap is AMM (Automated Market Maker) which enhances liquidity on the DEX.

SushiSwap also offers yield farming whereby users can supply liquidity into the pool of choice and earn passive exchanges fee from the transactions on the DEX. This option of liquidity providing enhances liquidity on SushiSwap and at the same time allow liquidity providers to earn more rewards.

Why SushiSwap is one of the best.

Sushiswap is one of the best in my opinion because it has a lot of liquidity pools.

On SushiSwap, user can take part in governance by voting for projects and hence part of the decision making.

Calculation Method In Yield Farming Returns.

There are 2 ways by which yield farming returns can be calculated;

Annual Percentage Rate ( APR ) and Annual Percentage Yield ( APY ).

• APR.

Annual Percentage Rate is annual return on investment without compound interest.

APR Calculation.

For example, I would be calculating the APR on a staked asset of worth $1000 with an APR of 60%.

60% of $1000 in APR = $600

$1000 ( Investment ) + APR ( $600 ) = $1600

This means that after a year, a staked asset of worth $1000 with APR of 60% = $1600

• APY.

Annual Percentage Yield is the total return on your investment with compounding interest.

APY Calculation

For example, I would be calculating the value of a staked asset worth $1000 with 60% APY.

Here, this formula is used: (1 + r/n)ⁿ -1

where r = interest rate
= 60% = 0.6

n = compounding period = 365 days.

Using the formula,

( 1+0.6/365 )³⁶⁵ -1

( 1 + 0.016438 )³⁶⁵ -1

( 1.0016438 )³⁶⁵ -1

1.821198 - 1 = 0.8212

Therefore the APY value = $ 0.8212 x $1000 = $821.20

Total investment after one year would yield = $821.20 + $1000 = $1821.20

Therefore the total annual returns for the staked assets = $1821.20

Advantages And Disadvantages of Yield Farming.

Advantages of Yield Farming.

• High Profits.

From the calculations above, it proves that when you invest well, you would make a high return and so it is highly profitable to engage in yield farming.

• Earning more rewards.

Yield farming allows users to be able to earn more rewards on staked or locked up assets. This is a passive income generator and so it is better to use your assets for yield farming than just leaving them in your wallet.

• Easy to use and no need for verification.

In yield farming there is no need to go through KYC verification and as such allows people from all over the world to participate without stress.

Connecting to pancakeswap for yield farming or other DEXs is very easy and has seen a significant rise in users.

• Involvement in decision making.

Because there is a governing protocol on platforms like Sushiswap, users can vote for projects they like or delegeate their voting rights to third parties.

This helps users to engage in decision making by voting for or disproving certain projects that concern the platform.

Disadvantages of Yield Farming.

• Smart contracts.

Yield faming works on smart contracts and because smart contracts are pre-written codes, they can be hacked. This can result in data manipulation.

• Price volatility.

This happens when impermanent loss occurs where value of supplied or locked assets are affected by the volatility of the assets .

• High transaction fees.

Yield farming charges high fees for transactions. This an be properly seen with Ethereum platforms because they charge high gas fees for transactions.

• Reduction in returns.

Total return of locked assets usually decreases over time when new pools arise and prices in your pool go high in order to create balance on the platform.

Conclusion.

I would like to say a big thank you to prof @stream4u for providing this very informative lecture.

I have learn that decentralized financial systems ( DeFi ) are decentralized systems that gives users freedom to handle their funds.

I learnt that its importance includes providing fast and reliable transactions, removal of central authorities and third parties, etc.

I also learnt the flaws in CeFi because it deals with central authority and limits user control.

I learnt 2 DeFi products, lending and decentralized exchanges, yield farming, pancakeswap and sushiswap and also learnt how to calculate APY and APR.

I learnt about the risks involved in DeFi which includes smart contract vulnerability, high fees, etc.

Thank you.