Crypto Academy / Season 3 / Week 4 - Homework Post for [@stream4u] Decentralized finace and Yield farming

Homework: CeFi - DeFi - Yield
Professor @stream4u.
Written by @chinma

Picture from source

DeFi which is an Abbreviation for Decentralised Finance,it is general term for many projects and applications in the public blockchain space which was created to fight against the traditional finance world. It uses Smart Contract to operate and it works on blockchain technologies. Using Smart connect, you don’t need a middle man to execute an order and it can be accessed from anywhere by just using the internet connection and by anyone.

1. What Is the Importance Of the DeFi System?

So today, we will looking at some important reasons why you and I should be using the DeFi for our transactions.
• The fact that your money can be accessed from anywhere, anytime just using the internet, is a very great advantage. You can make a transaction from the comfort of your home, without coming outside.

• There is no limit to the number of transactions that can be done in a day. Just like our comtemporary banks, that normal places a limit to the amount that anyone can withdraw in a day. Using DeFi you can withdraw any Amount, it can make transactions a hundred times and no one will complain. It gives you freedom and liberty to use your money

• In the traditional financial institutions, your money can be reduced due to some unnecessary charges done by the banks and its co and also the banks can use your money to lend to someone through loans without giving you a dime, but using DeFi, if your money is Deposited and someone borrows from you, in the system, while paying back, the interest on the loan belongs to you and not to DeFi.

• To transfer funds to people in different countries is much easier using DeFi compared to the traditional financial institution that mostly requires cumbersome processes and takes huge charges.

• One great importance of using DeFi, is the abstance of Intermediate, no other third party in your transactions. The banks are not there and your money is still safe, no standing in a queue for hours to either pay in or withdraw your funds .

2 Flaws in Centralized Finance.

let’s quickly look at some flaws to the centralized finance
• One of the greatest flaws of centralized finance is access to the financial institutions. Decentralized finance has made things so easy in such a way that only with you smart device and internet from anywhere you can access it. Most Serious transactions using Centralized finance you must go to their physical location and this will cost you your time, money and other unnecessary stress.

• The presents of intermediate party in the centralized finance is another great issue. For you to get your money (your hard earn money), you need to go and meet someone and tell them, without them granting you the permission, you can’t get the money. See how frustrating it is. This is a very big flaw to the centralized financial institution.

• In recent times, low cost and fast transaction will win the heart of the user. This is one great flaw of the centralized finance system. Most transactions are not as swift as expected by their users, and the users are being charge for most transactions and it is becoming alarming to the user and they can change to Decentralized finance system that is fast and does not charge for any transaction.

• To access a loan is very hard in centralized financial institutions, they always ask for collateral before a loan can be given to you, and the amount of time you will spend before accessing a loan is alarming, some loans takes up to a month before it can be given to you.

3. DeFi Products. (Explain any 2 Products in detail).

DeFi Products are services rendered by the decentralized finance to enable their usage become easier, faster, reliable and also to remove the intermediaries that centralized financial institutions are leveraging on. Some of the services include
• Decentralized exchanges
• Asset management/ (Wallets)
• Investment
• Lending
• Yield farming
• Insurance
etc.

Decentralized exchanges: (DEX) provides users with the opportunity to exchange their assets without the interference of a custody of the underlying collateral. Decentralized exchange focuses on making a smooth trading transactions across a very wide variety of trading pairs. Of recent Decentralized exchange have seen large increase in usability with some liquidity incentives. Some products in DEXs include 0x protocol, 1inch Exchange, Bancor, Kyber network, oasis etc

Example of a Decentralized exchange is Uniswap:

Picture from Uniswap

Uniswap
Uniswap is a DEX under the Ethereum protocol that makes easy swapping/transactions of your ether to or from other Ethereum tokens such as the Dai, ..,.....,... etc.
Uniswap makes swapping easy through connecting to your hot wallet and making transactions with ease.
Major issue with Uniswap is its trading fees due to its use of the Ethereum network.

Lending: DeFi allows many people take and give loan without the interference of any third party. Most of the lending products make use of cryptocurrencies like Ethereum (ETH) which protect outstanding loans with over collateralization. Example of the products include Aave, bZx, BlockFi, Compound, Nexo, Coinliist etc

4. Risk involved in DeFi.

We have seen so many good part of the DeFi, lets look at some risks associated with it

• Government Regulations over Defi. With Defi outweighing banks and other centralized finance systems which can easily be tracked by the Governent, Defi may soon be heavily regulated by Governments making investing in them not so profitable.

• Another risk associated with DeFi is Digital Scammers and sending of phishing links to compromise your account security and gain access to your wallet. Due to the large Amount Invested into this platform by users. Digital scammers are also out looking for who to be their prey. And because of the unlimited withdraw power you have in crypto currency, if you fall victim to these Scammers, all your funds can leave your account in a split of a second.

• Lastly, Liquidity in the liquidity pools can decrease and value of tokens decreasing too depending on the miners at that time, Rug Pull can be major factor for that to occur. Imparmanent loss and other cases such as loss of wallet keys can also be a risk factor to using Defi.

5. What is Yield Farming?

Many users came into DeFi because of Yield farming. As the name implies, yield farming helps the users to have returns after investing a certain amount of Crytocurrency (usually stable) with a Defi smart contract such that your cryto will be locked in safety while you make return after lending. Yeild farming is locking your funds to a Defi liquidity pool to receive profit generated from the activities in the liquidity pool.

6 How does Yield Farming Work?

Yield farming works with this 2 factors in place, the liquidity provider and the liquidity pool, (a smart contract filled with cash) these are the two have determines what happens at the DeFi market. The yield farming uses the automated market maker(AMM) model. As we all know, the liquidity provider provides the funds into a smart contract while the
liquidity pool is like the market that is filled with cash.

The AMM totally depends on the Liquidity Providers, for funds to be deposited in the liquidity pool. Don’t forget that some services offered by the DeFi includes borrow, swap tokens and lend. While another users comes to perform any of these listed services, he/she will be charged with trading fees. That trading fee will be shared between DeFi and the liquidity providers and this will be based on the share of the pool’s liquidity.

7 What Are the best Yield Farming Platforms and why they are best. (Explain any 2 in detail)

This is the list of the best yield farming platforms as for 2021
• Earn interest on Aave ~ 0.01% to 15% APR
• Yield farming on Pancakeswap: ~ 8% to 250% APR
• Liquidity providing on Curve finance : ~ 2.5% to 25% APR

Yearn Finance: ~ 0.3% to 35% APY:

Picture from Yearn finance

The unique thing about this platform is that it has more than 30 yearn integrated curvepools where investoers can put 1 to 5 different cryptocurrencies. ( ETH, USDC or USDT, WBTC, DAI, ) earning ytoken. and CRV.
The yearn platform is pretty easy to use, letting anyone make deposits through his wallet just on one page.

Liquidity provided on Uniswap ~ 20% to 50% APR:

Picture from Uniswap

As started earlier, the Uniswap also provides a liquidity pool for investors to gain profit from the transactions that go on in the system. Liquidity providers receives their percentage of trading fees for every swap, and their interest is large depending on the market and pool fluctuations. Uniswap is the second largest decentralized exchange after pancake swap with a total value locked exceeding $5.5 billion.

8. The Calculation method in Yield Farming Returns.

Calculating the yield farming returns
The yield farm returns are being calculated using annualized model. This can help you to lock up your crytos for up to one year. They are measured using Annual percentage yield (APY) and Annual percentage Rate (APR).APY considers compound interest while APR doesn’t.

Calculating the APY:

Say the Defi platform gives a 56% APY, then the calculation goes as follows:

Interest the end of 1 year = 100 * [(1+0.56/365)^365-1]
= 100 * [(1+0.001534)^365-1]
= 100 * [0.7497)
=74.97%

Interest = 74.97%

Calculating APR%:

Say a platform gives 45% APR, the interest after one year remains 45% so if one invests say 100 dollars, after one year he has 100 dollars plus 45% of 100 dollars thats 45 dollars, so total he has 145 dollars.

9. Advantages & Disadvantages Of Yield Farming.

Advantage
• Profit on your deposit, this is key
• It is cheaper and ease to make any transaction
• It is also another alternative for storing funds in your accountt

Disadvantage
• You can fall prey to scammers or hackers and cases of Rug pull
• After borrowing funds, they can be a devaluation in the coin used as a collateral making you need to deposit more funds
• Defi is still in an experimental phase so caution is still applied when using it.

10 Conclusion on DeFi & Yield Farming.

In conclusion DeFi - Decentralized finance which is gradually kicking out the traditional financial institution which has been existing for years now. This is because Defi makes life easier, faster and gives you have full control over your funds any intermediaries.

Yield farming on the other hand is the funds/asset gotten from initial deposit you have done initially on a liquidity pool platform. Here you can either gain the Annual Percentage Rate or the Annual Percentage yield with the idea of liquidity providers and the liquidity pools.

Thanks to professor @stream4u.

CC. @stream4u.