Steemit Crypto Academy – Season 3 - Week 4 - Post for @stream4u

Question 1 - What Is the Importance Of the DeFi System?

Decentralized finance have been on a massive rise and increase over the past months. We have seen the emergence of DeFi projects and protocols in the decentralized finance space. Whether it is DEX protocols like Uniswap, Pancakeswap etc or other DeFi products like staking, lending, borrowing platforms, Decentralized finance has been rise and has achieved a lot of growth in recent times in the blockchain and cryptocurrency space. At the moment, DeFi is one of the major aspects of blockchain and cryptocurrency. Some of the main importance of the DeFi system are;

Users have full control of their cryptocurrency assets and funds

This is one of the main importance of a decentralized finance or DeFi system. In a centralized system like the current banks or other centralized financial institutions, users don’t have full control of their funds, the central authorities and entities have the control of user funds. In a DeFi system, users have full control of their assets and funds and can decide to do what they like with their funds in their wallet. Users have the private keys to their wallets which gives them full control of their funds.

Total freedom of transactions

In DeFi system, users have total freedom of transactions and can perform transactions anytime they like without any worry or drawback. For example, centralized financial systems can have restrictions on time and when users can perform transactions. A user cannot perform transactions anytime or anywhere. In DeFi system, any user can perform transactions anywhere at any time without any worry or restrictions.

No central entity or third party

This is another importance of DeFi system. In DeFi system, there is no central entity or third party that makes all the decisions, rather, the users make all the decisions and the system is fully decentralized. In the central financial system, the decisions are made by the authorities who have control. In a DeFi system, the users have full control of the decisions and affairs of the system.

Transparency

DeFi operates on blockchain technology and transparency is one of the main aspects of blockchain technology… Transactions are recorded and stored on the blockchain, and these transactions is transparent for everyone and can be accessible by anyone. This transparency increases trust in the system.

No restrictions on financial services

This is another importance of DeFi system. Users have fill control of their decisions and actions. This is a very important aspect of decentralized finance. In centralized finance systems such as banks or other financial institutions, users don’t have the full control of their decisions and actions. For instance, a centralized financial institution can restrict or deny certain users from using financial services like, investments, lending, borrowing due some factors. In DeFi system, there are no restrictions on financial services and anyone can take advantage of the amazing financial services in DeFi such as investments, lending, borrowing, staking to earn more income.

Peer-to-peer

Peer-to-peer transactions is one of the key aspects of DeFi. There are no central authorities or entities who control the transactions. Simply put, DeFi eliminates central authorities and entities and also third parties, allowing users to perform peer-to-peer transactions securely and fast.

Question 2 - Flaws in Centralized Finance.

Centralized finance is what is most common presently and is what we have been used to for a long time before the emergence of blockchain and cryptocurrency. The main attribute that is associated with centralized finance is central authority or entity which is one of the main elements that DeFi eliminates. Hence the benefits of blockchain and cryptocurrency. As always, centralized finance has a lot of flaws which is one of the main reasons for blockchain and cryptocurrency. Hence the emergence of DeFi which aims to solve a lot of the problems and flaws of centralized finance. Some of the flaws of centralized finance are;

Transaction limitations

This is one of the major flaws in centralized finance. There can be limitations when it comes to the number of transactions that can be made in centralized finance. Take banks or other centralized financial institutions for instance, there is always limitations when it comes to the number of transactions a user can make in a particular time.

Users do not have full control of their funds and assets

This is another major flaw in centralized finance. Users do not have full control of their funds and assets because the central entity can decide to do what they like with the user funds. This means that users funds and assets are less secured with the centralized financial entities and anything that happens to the centralized entities would also affect users funds.

Slower transactions due to third parties involved

This is another very big flaw in centralized finance. The third parties involved causes slower transactions. For instance, when sending funds to another person in another country, it can take a lot of time since the transaction would have to go through various third parties for approval. This processes add to the transaction time which can lead to slower transactions. Some transactions can take days or weeks to deliver.

Higher cost

The cost of sending funds to other users using certain services in centralized finance can be very high especially when sending large funds to another part of the world. This is one of the benefits of blockchain and DeFi because transactions take place on the blockchain and can be sent to anywhere in the world at a much lesser cost and transaction fees. In centralized finance, the fees to send funds can become very high depending on the transaction and the distance.

Lack of transparency

In centralized finance, there is lack of transparency because the central authorities keeps all the details private. This also increases fraudulent activities and manipulation in the system. Because of the lack of transparency, transaction records can be altered or manipulated by those in power, which is a major flaw in the centralized financial system.

Question 3 - DeFi Products

The DeFi products are key elements of decentralized finance. There are a number of DeFi products available and I will be explaining two of them. The two DeFi products I will be explaining are; decentralized exchange DEX and Decentralized wallets

Decentralized Exchange (DEX)

Decentralized exchange is one of the main products of decentralized finance DeFi and is also one of the most used DeFi products. Decentralized exchanges (DEX) have been on a massive rise and increase over the past months. We have seen the emergence of DEX protocols such as Uniswap, Pancakeswap etc. A decentralized exchange (DEX) is not controlled by a central entity or authority, instead, DEX gives users full control when it comes to trading cryptocurrency assets. A typical DEX such as Uniswap runs on the blockchain like the ethereum blockchain, and is fully decentralized. This means that there are no third parties and the transactions are purely peer-to-peer.

Uniswap

Uniswap is basically a decentralized exchange protocol or DEX protocol that operates on the ethereum blockchain. The main uses of uniswap is to users to perform secure peer-to-peer swapping of ethereum-based tokens. When it comes to decentralized exchange DEX, the uniswap protocol ticks a lot of boxes in the DeFi space, which is why uniswap remains one of the most popular and one of the most used DEX in the crypto and DeFi space. On Uniswap, there are no central entity or authority or third party, all transactions are simply peer-to-peer which makes it fully decentralized and one of the best and one of the most secure ways for users to trade their cryptocurrency assets.

The Uniswap is open source, making it readily available for anyone to contribute to it. Uniswap uses smart contracts, and functions through the concept of automated market makers and liquidity pools which are basically pairs of ETH and ERC-20 tokens swapped by users on uniswap. Popular liquidity pools on uniswap are ETH and WBTC, ETH and DAI, and more. Also, there are liquidity providers who add the assets to the Uniswap liquidity pools. Liquidity providers on uniswap earn a proportion of the transaction fees for adding assets to the liquidity pools. UNI is the token of uniswap and is the governance token of uniswap. Anyone who holds the UNI token can partake in the governance, and also, UNI holders can fund liquidity mining pools as well.

Benefits of Uniswap DEX in DeFi

• Decentralized - Uniswap is a fully decentralized DEX protocol that allows anyone to securely swap between ethereum based tokens. All transactions on uniswap DEX are fully decentralized which means that the users have full control while using the uniswap DEX protocol.

• Peer-to-peer transactions - This is another amazing benefit of uniswap and decentralized exchanges, all the transactions on uniswap are peer-to-peer.

• Smart Contracts - Uniswap makes use of smart contracts to execute transactions, operating on the ethereum blockchain network.

• Open Source Protocol - This is also one of the benefits of the uniswap protocol because it is open source meaning that anyone can have access and interact with the protocol and also contribute to it.

How to use the Uniswap DEX

Uniswap DEX protocol is there for anyone to use. It is one of the most used tools in DeFi to swap tokens in a peer-to-peer, easy and straight forward process. To use the uniswap DEX,

Visit the Uniswap protocol https://app.uniswap.org/#/swap
Locate the connect button and Click on it

There are various options to connect supported wallet to uniswap. Depending on the device, choose the compactible option.

On a mobile device, from the list select WalletConnect and click on the connect to mobile wallet

After that, a prompt will pop up to choose from your installed wallet. If you have a supported wallet such as trustwallet, connect to Uniswap

After the connection is done, your wallet address will be displayed on the Uniswap interface.

On the tokens dropdowns, Select the token pairs of your choice or the pair you want to swap

On the amount input, type in the amount and click on swap

Next is to click on confirm swap and follow the process to complete the swap transaction.

Decentralized Wallet (DeFi Wallet)

Decentralized wallet or DeFi wallet is also one of the main products of decentralized finance DeFi and is without a doubt the most used DeFi products. Decentralized wallets are simply just cryptocurrency wallets that fully comply with the concept and idea of decentralized finance which means that the wallets are fully decentralized and give the users full control of their funds and assets by providing the private keys or seed phrase. In cryptocurrency, a decentralized wallet is basically a gateway that allows users have access to and interact with any cryptocurrency assets that is on the blockchain. There are so many types of wallets but not all wallet comply with DeFi. Decentralized wallets are used to store and hold cryptocurrency assets and a clear example of a decentralized wallet or DeFi wallet is the metamask wallet which is very popular and common in the cryptocurrency DeFi space.

Metamask

Metamask is a clear example of a decentralized wallet or a DeFi compactible wallet that that is very popular in the DeFi space. It has been around for a long time now and has gained the reputation as being a very reliable and secured wallet for decentralized finance. Metamask wallet has made a name for itself as one of the best wallets in the cryptocurrency and DeFi space that runs on the ethereum blockchain. Ethereum is known as the king of DeFi and metamask is one of the favorite DeFi wallets for performing DeFi transactions. Metamask is basically a gateway for interacting with assets stored on the blockchain network such as the ethereum blockchain. Metamask makes it easy for users to benefit from DeFi by providing the gateway for users to have access to decentralized finance.

How to Install Metamask

The Metamask installation process is quite simple and straight forward, it is just all about following the set up process to get started with installing the Metamask extension for desktop browser. To install the Metamask extension on a desktop browser, you have to first visit the official website for metamask which is https://metamask.io to download the correct and official version.

On the metamask website, locate the download button and click on download now

Select the chrome option and click on install Metamask for chrome

After the installation is done, and the extension is installed on your device, follow the installation process to proceed setting up the wallet.

Select get started

Select create a wallet and agree to the terms

Create a strong password for better security of your metamask wallet. Input your password

After that, the next step is to backup your secret phrase. Your wallet seed phrase will be displayed, click to reveal to view the seed phrase or backup seed phrase.

The seed phrase is the most important, ensure to keep it very secure. Your seed phrase is what you will use to activate your wallet on another device or recover your wallet.

The next step is confirmation of the secret backup phrase.

In the confirmation step, select the phrases as they appeared in their correct order.

Congratulations, the metamask wallet has been successfully created.

Question 4 - Risk involved in DeFi

• Risk due to very high transaction fees which can lead to unprofitable investment - The rise of DeFi and the increased use of DeFi products have seen the massive increase in transaction fees, these has caused the transaction fees on blockchain networks like ethereum to skyrocket, leading to very high transaction fees on the ethereum blockchain. While this high transaction fees mean nothing to some investors who invest with large capitals, the very high transaction fees can lead to unprofitable investment for a lot of smaller investors who invest few hundreds of dollars. For instance, it would be very unprofitable to pay $100 transaction fee to swap a $150 worth of token.

• Risk involving high price volatility of cryptocurrency - We all know that the cryptocurrency market is very volatile. This can be a problem and a big risk in DeFi. Users who stake their asset for a long period of time can end up losing their investment because the value of their investment have depreciated due to the high volatility of the staked cryptocurrency asset.

• Risk due to impermanent loss - This is a type of risk that is involved in DeFi and mostly common to liquidity providers. Decentralized exchanges such as uniswap allows anyone to add liquidity to the liquidity pool by becoming liquidity providers and earn reward in the process. The risk due to Impermanent Loss is when a liquidity which is added in the liquidity pool and the price of the assets that have been added to the liquidity pool changes compared to the time the liquidity was provided. The high change in price could cause the liquidity provider to incur impermanent loss.

• Loss of funds due to failed transactions - This is also very common in DeFi. Funds can be lost when transaction fails especially when using DEX like uniswap and paying high transaction fees.

• Hack involving smart contracts - the rise of DeFi has also cause an increase in hacking attempts. Back actors try to exploit and take advantage of loop holes in smart contracts to steal user funds and assets.

• Scams projects and phishing attacks - This is also a big problem in DeFi. Over the months, we have seen the increase in scam projects in the DeFi space who just want to take advantage of gullible users and steal their funds. Some scam projects do what they call rug pulling. Also, phishing attacks has increased as scammers try to steal user funds by creating the replica and fake version of original platforms take advantage of gullible users.

Question 5 - What is Yield Farming?

Yield farming is one of the most popular aspects in the world of decentralized finance, allowing anyone to put their cryptocurrency asset to work and earn interest in return based on the estimated APY. In cryptocurrency, yield farming is basically the process where anyone can earn passive income by locking up a particular cryptocurrency asset based on the percentage yields or APY. In yield farming, anyone can earn either fixed returns or variable returns based on the specific cryptocurrency asset and the percentage yields.

In yield farming, cryptocurrency investors can earn more passive income or maximize their investment by taking advantage of different DeFi protocols or yield farming platforms. On DeFi protocols such as uniswap, investors can lock up their cryptocurrency assets in the liquidity pools and become liquidity providers. The liquidity providers earn a proportion of the transaction fees for adding assets to the liquidity pools based on the percentage yield. If done properly, yield farming is a great way for any investor to gain more value and profit from their investment.

Question 6 - How does Yield Farming Work?

In cryptocurrency, when we talk of yield farming, it is pretty much the process anyone can put their cryptocurrency asset to work and earn interest in return based on the estimated APY. Investors can earn more passive income or maximize their investment by taking advantage of different DeFi protocols or yield farming platforms. If we think of the conventional banking system where banks provide loans to other users and collect interest in return, yield farming is very much similar. By yield farming in cryptocurrency, it means that cryptocurrency holders can put their cryptocurrency asset to work and earn interest in return based on the estimated APY by locking up their funds over a period of time.

A clear example of yield farming in cryptocurrency is providing liquidity on uniswap. Cryptocurrency holders can lock up their cryptocurrency assets in the liquidity pools and become liquidity providers. The liquidity providers earn a proportion of the transaction fees in return for adding assets to the liquidity pools based on the percentage yield. On Uniswap, the Liquidity pools are simply pairs of ETH and ERC-20 tokens that are swapped for each other on the uniswap DEX protocol. ETH and DAI is a very popular liquidity pool on uniswap. Yield farming operates on the concept of automated market maker also known as AMM.

When users add liquidity into the liquidity pool, they would start earning a portion from the transaction fees. Any amount can be used, however, it has to be at a ratio of 50/50. What this means is that the two tokens to be added into the liquidity pool will be 50% each. Once the liquidity is added, anytime a trader performs a swap transaction on uniswap protocol, that trader would have to pay a fee of 0.3% which ends up going into the pool and is shared proportionally to each liquidity provider based on amount of tokens deposited into the pool.

Question 7 - What Are the best Yield Farming Platforms?

In the crypto space at the moment, there are a number of very good yield farming platforms that allows anyone to put their cryptocurrency asset to work and earn interest in return based on the estimated APY. In my opinion, pancakeswap and venus.

PancakeSwap

PancakeSwap was born from the same idea as uniswap but on the binance smart chain and one of the top automated market market in the DeFi space. Similar to uniswap, pancakeswap is a DEX that also allows anyone to do yield farming and earn passive income. Pancakeswap have become very popular when it comes to DeFi and yield farming because it runs on the binance smart chain and has very low transaction fees. Just like uniswap, anyone can provide liquidity on the pancakeswap DEX protocol by adding the cryptocurrency pairs on a 50/50 ratio.

On pancakeSwap anyone can provide liquidity and earn returns and passive income from the different available pools. On PancakeSwap, there are a variety of different farms such as CAKE-BNB, BUSD-BNB, PMON-BUSD, TRX-BNB, CHESS-USDC, TITAN-BUSD and more. Each of the different farms have their own specific APR/APY. On pacakeswap, CAKE is the native token that runs on the binance smart chain network.

Yield farming on pancakeswap operates on the concept of automated market maker also known as AMM. At the moment, farming on pancakeswap is one of the best because of a few factors such as very low transaction fees, super-fast transactions, high APY/APR. CAKE is one of the top cryptocurrencies with high growth potential which means that farming CAKE is a great idea especially now that the prices are low, CAKE has shown that it has the potential to triple in price in the near future, this alone makes yield farming on pancakeswap among the best.

Venus

Venus is another yield farming platform that allows users to let their cryptocurrency asset work for them by depositing their cryptocurrency assets like BNB, USDT, BUSD, USDC etc, and in return earn passive income from interests. Venus was launched not too long ago in October 2020 and has gained massive growth on the binance smart chain since then. The interest earned on venus can also be used to mint the venus stablecoin or borrow more assets by providing it as collateral.

On venus, users can supply their cryptocurrency assets to the protocol to earn passive income in form of interest and an XVS reward, with varying APY based on the cryptocurrency asset. There are different assets that can be supplied in the venus protocol to start earning returns based on the APY. Each of the assets that can be supplied in the venus protocol have their different APY. Venus is one of the best because there is a lot of liquidity in terms of total value locked on the platform. Also, venus operates on the binance smart chain which means fast transactions and low fees.

Question 8 - The Calculation method in Yield Farming Returns

There are two ways for the yield farming calculation method. Yield farming can be calculated as APR which means annual percentage return, and APY which means annual percentage yield.

Calculating APR

Calculating APR is done when it involves earning interest by locking up an asset for a period of time like lending crypto assets and earning interest in return based on the APR without a compound interest.

Let’s take for instance, if I lock up $1500 of a particular cryptocurrency asset stablecoin on a selected yield farming platform that offers 15% APR on that particular cryptocurrency asset,

Calculation;

Investment Capital = $1500
APR = 15%

15/100 = 0.15

0.15 x $1500 = 225

APR after 1year is 1500 + 225 = 1725

At the end of 1yr, The earning is $1725

Calculating APY

Calculating APY is done in yield farming when it involves total annual interest that also includes the compound interest. Unlike APR that doesn’t include compound interest, APY includes the compound interest for that period of time. Simply put, at the end of 1 year, the APY is the earning after all the compounding occurred.

Let’s take for instance, if I lock up $1500 of a particular cryptocurrency asset stablecoin on a selected yield farming platform that offers 15% APY on that particular cryptocurrency asset,

The formula to calculate this is (1 + r/n) the power of n – 1

r = interest rate

n = the number of time for 1yr or 365 days that the interest is compounded

APY (monthly)

r = 15%
n = 12 (monthly)

Using the formula;
APY = (1 + r / n) to the power of n – 1

[1 + (0.15 / 12)] the power of 12 - 1

[1 + (0.0125)] the power of 12 – 1

[1.0125] the power of 12 – 1

The APY = 1.0125 ^12 – 1

1.16075451772 – 1 = 0.16075451772

APY in % = 0.16075451772 x 100

APY = 16.075451772 %

Rounded to 16.075 %

Investment Capital = $1500
APY = 16.075 %

0.16075 x $1500 = 241.125

APY after 1year is 1500 + 241.125 = 1,741.125

At the end of 1yr, The earning is $1,741.125

APY (Daily)

r = 15%
n = 365 (daily)

Using the formula;
APY = (1 + r / n) to the power of n – 1

[1 + (0.15 / 365)] ^365 - 1

[1 + (0.0004109589)] ^365 – 1

[1.0004109589] ^365 – 1

1.0004109589 ^365 - 1

1.16179844139 – 1 = 0.16179844139

In % = 0.16179844139 x 100

APY = 16.179844139 %

Rounded to 16.18 %

Investment Capital = $1500
APY = 16.18 %

0.1618 x $1500 = 242.7

APY after 1year is 1500 + 242.7 = 1,742.7

At the end of 1yr, the earning is $1,742.7

Question 9 - Advantages & Disadvantages Of Yield Farming

As always, anything that has an advantage would most likely have a disadvantage. Even though yield farming is very popular in the DeFi space and has a lot of benefit in terms of passive income, it also has some disadvantages as well. Here are some advantages and disadvantages of yield farming;

Advantages

• Anyone can grow and increase the value of their investment capital by earning passive income.

• It operates on DeFi which means that the users have full control of their decisions and there are no central authority that have the control.

• Users can earn even better annual returns APR/APY compared to a lot of the conventional financial system.

• Investors can put their cryptocurrency assets to work without doing anything and earn annual yields just by locking their asset up.

• Increased profit is another advantage of yield farming because anyone can make more profit from their annual yields, especially if the price of their locked investment increases in addition to the earned income.

• No restrictions is another advantage of yield farming platforms compared to the conventional financial system. In yield farming, any user can participate and earn annual yields and passive income from their investment.

Disadvantages

• High transaction fees can be a big problem when it comes to yield farming on some platforms. A lot of yield farming platforms operates on the ethereum blockchain which is known in recent times for its high gas fees. This can be a disadvantage especially for small investors who only want to lock up a small value in dollars.

• High price volatility can also be a major disadvantage of yield farming. We all know that the cryptocurrency market is very volatile, this means that, depending on the locked cryptocurrency asset, the value can depreciate after 1 year compared to the value before the yield farming. Sometimes it is much better to hold the asset and sell when the price increases, than locking it up for 1 year.

• Hack involving smart contracts is also a problem because hackers try to exploit and take advantage of loop holes in smart contracts to steal user funds and assets.

• Liquidation risk is also a big disadvantage because it happens when the value of the provided collateral decreases compared to the price of the loan.

10 – Conclusion

DeFi has come to stay and has brought a lot of benefits compared to the centralized conventional financial system. Not only has DeFi been on a massive rise, we have seen the emergence of DeFi projects and protocols in the decentralized finance space. Whether it is DEX protocols like Uniswap, Pancakeswap etc or other DeFi products like staking, lending, borrowing platforms, Decentralized finance has been rise and has achieved a lot of growth in recent times in the blockchain and cryptocurrency space. In the world of DeFi, yield farming is one of the most popular aspects which allows anyone to put their cryptocurrency asset to work and earn interest in return based on the estimated APR/APY. In yield farming, cryptocurrency investors can earn more passive income or maximize their investment by taking advantage of different DeFi protocols or yield farming platforms. If done properly, yield farming is a great way for any investor to gain more value and profit from their investment.

@stream4u