Yield Farming - Yearn Finance - Crypto Academy S5W3 - Homework Post for @imagen
In this post, I will publish the results of the homework given by professor @imagen.
1. Describe the differences between Staking and Yield Farming.
Staking
Staking refers to the act of entrusting our cryptocurrency to a blockchain network. In the blockchain network, if additional cryptocurrency is issued using the cryptocurrency staked by the participant, the participant who staked the additional is paid as a reward for a certain amount of cryptocurrency as a contribution to the additional issuance. Simply put, this is the same as the concept of keeping a deposit in a bank and receiving interest at a set rate of interest after a certain period of time.
If the bank receives interest in return for deposits, coin staking is a concept in which additional coins corresponding to a certain percentage are awarded in exchange for depositing coins. However, staking is not possible in all cryptocurrencies, and it is only possible on blockchain networks that adopt proof-of-stake (PoS) algorithms.
Depending on the type of coin, the interest rate on the bet varies. It can be seen that the staking market continues to develop as the participation of cryptocurrency investors who prefer stable investments increases.
Yield Farming
Simply put, Yield Farming is a way of using cryptocurrencies to earn more cryptocurrencies. Sometimes in liquid mining, earning farmers use their crypto assets to earn rewards. Generally, people think that the key to holding crypto currency as an investment is to keep it in a steel vault, yield farming has changed that mindset.
DeFi platforms such as Compound, Yearn Finance, Curve Finance, Aave, and Badger DAO work by allowing users to deposit cryptocurrencies, lend to borrowers at interest through smart contracts, and then return the interest earned on that interest to the borrower.
When we deposit to the DeFi protocol liquidity pool as a lender, we will usually receive more tokens we deposit and reward tokens (usually the underlying asset of the platform we use). So, we can get COMP by lending to Compound or SUSHI by depositing to SushiSwap pool.
| Staking | Yield Farming |
|---|---|
| The bet has a fixed compensation, which is expressed as APY. Usually 5%, but can be higher, depending on the token and method used. | Yield farming requires a well thought out investment strategy and is not as simple as staking, but can bring much higher yields or up to 100%. |
| Staking rewards are network incentives for validators that help the blockchain reach consensus and generate new blocks. | The rewards for yield farming are determined by the liquidity pool and may fluctuate as the token price changes. |
| Strict rules apply to staking, which is directly tied to blockchain consensus. If scammers try to outsmart the system, they risk losing funds. | Yield farming is based on the DeFi protocol and smart contracts, which can be vulnerable to hacking if programmed poorly. |
| Various blockchain networks require users to stake their money for a certain period of time. Some also require a minimum amount. | With Yield Farming, users don't need to invest their money for a certain period of time. |
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 is a comprehensive product with various aspects. The platform's most popular product is yEarn. A pool of liquidity aggregators that offer automated strategies to increase revenue by combining different loan pools ( Compound, Aave, etc.) is yield farming optimized. But let's step back, because yearn.finance (YFI) has a lot to offer.
Dashboard
On the dashboard menu, one can see the total net worth, vaults earning, vaults est.yearly yield etc. There is also some information displayed, this is the main menu that we navigate.
Vaults
In this menu, one can find information about holding, earning, Est.yearly yield, and highest APY. In addition, there are also opportunities at the very bottom.
Labs
In this menu, one can find some of the same features as in the Vaults menu, and the dashboard. Because on the Labs menu, we can see a dashboard that is having holding, highest APY, and opportunities.
Iron Bank
There is almost no significant difference in the Iron Bank menu with the previous menus. In addition to the dashboard information that is having supplied, in the Iron Bank menu we can also find the borrowed, borrow limit used and total borrow limit features. Below that, we can also see the highest APY features and opportunities.
Settings
As we know that this is a menu to customize the appearance of the site as we want, we can change the language, theme, and slippage tolerance.
Wallet
I purposely predestined the conversation on the wallet menu to make it easier to explain the procedure for connecting the wallet with Yearn Finance. In thismenu, we can see the info of the balance we have after we connect to our wallet, here we are asked to connect the wallet.
Connecting Wallet
Because here I use a mobile device, so I have to change back from desktop mode to mobile. There are many wallets that we can choose to connect to, but in this case I chose metamask.
- Steps 1
The first step we have to do is click on "connect wallet", then we will be directed to the choice of wallet that we will connect to.
- Steps 2 and 3
Several wallet options will appear such as MetaMask, Trezor, Ledger, if you use a desktop then you can directly choose one of the three. Because here I use mobile, so I choose WalletConnect.
After we select WalletConnect, a pop up menu will appear as shown below, just click connect.
- Steps 4
After we click connect, then the next choice of wallet will appear that we will use, just click on metamask.
- Steps 5
Next we will be asked to confirm, this is the last stage so click on "connect".
After that, you will see that the wallet has been successfully connected to Yearn Finance, now we can use all the features in Yearn Finance and do farming, etc.
Funds Transfer
If we want to put tokens into Yearn Finance or make withdrawals, then we have to go to the Vaults menu, then scroll down as in the screenshot below.
Then click deposit if you want to add tokens, or click withdrawal if you want to remove tokens from Yearn Finance. In this case, I will explain how to send tokens to Yearn Finance, then we have to click on deposit.
Next, fill in the amount you want to transfer and click approve and the token will immediately enter your Yearn Finance account.
Borrow Funds
When we want to make a loan at Yearn Finance, we have to go to the Iron Bank menu, then select the asset you want to borrow.
For example, here I choose usdt then I will click borrow on the usdt token. Now fill in the amount of usdt you want to borrow and click borrow.
3. What is collateralization in Yield Farming? What is function?.
Usually, when we receive a loan property, we need to add a certain amount of collateral to cover the loan. It basically functions as insurance for the loan. If the value of the collateral falls below the limit required by the protocol, the collateral can be settled on the open market. What can be done to avoid liquidation? More funds can be added as collateral.
To recap, each platform has its own set of rules for this. This means that each platform has its own rules and guarantee/guarantee ratio. In addition, these platforms generally operate under the concept of “over-collateralization”. This means that users who take out loans have to deposit more than the requested loan amount. Because, this system can cause a large decline in the market to reduce the risk of settlement of large amounts of collateral.
So let's say my loan protocol requires a guarantee ratio of 200%. This means that for every $100 I add, I can get a $50 loan. However, it is generally safer to add more collateral than necessary, which further reduces payment risk.
The main function of collateral is obviously to avoid harm to the platform, as it is impossible for the platform to trust people they don't even know. So basically, this is a guarantee that we provide in order to be able to borrow on the platform. There are many platforms that use a very high level of guarantee (eg 750%) to keep the entire platform relatively safe from payment risk.
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.
Let's head over to Defi Pulse to see the current TVL on the DeFi and Yearn Finance ecosystems. I took this screenshot on December 4th at around 12 noon western Indonesia time. And the total USD locked across the entire DeFi ecosystem is $102.44B.
Meanwhile, TVL in Yearn Finance was recorded at $4.12B which you can see for yourself in the screenshots below.
We will now take a look at the Market Cap/TVL ratio of the YFI tokens listed on CoinMarketCap. As I write this, the YFI price is $24,335.63, market capitalization $891,602,209, TVL $6,905,420,545, the last seen TVL ratio is 0.1291.
4.1. The YFI token, is it overvalued or undervalued? State the reasons.
Personally it is difficult for me to describe this question with reasons, because there is only one reason. If the Market Cap/TVL value is less than 1 then the result is considered undervalued. While the market Cap/TVL of YFI is less than 1, to be precise it is 0.1291 so we can conclude that the YFI token is undervalued because its value is less than 1. We can only say that the price is overvalued if the market value of YFI's Cap/TVL is above 1.
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.
BTC
First we will calculate the investment we made on BTC for $500. Now let's check the price of BTC on August 1, we need this to be able to do the calculations.
The price of BTC on August 1 was $39.9749, using $500 to invest at that time we would get 0.0125 BTC.
0.0125 BTC if we sell now at $48,105.02 we will earn $601.31.
0.0125 BTC * $48,105.02 = $601.31
(($601.31 - $500)/500) * 100
($101.31/500) * 100
= 0,20262 * 100
Profit = $101.31 (20.26%)
YFI
The price per YFI unit on August 1 was $31,778.15. By investing $500 at that time, we will get 0.01573 YFI.
If we sell 0.01573 YFI at the current price, which is $24375.00 then we will get $383.42.
0.01573 YFI * $24375.00 = $383.42
(($383.42 - $500)/500) * 100
(-116,58/500) * 100
= -0,23316 * 100
Loss = $-116,58 (23.32%)
$1000+ $101.31 - $116,58 = $984,73
After totaling up as a whole, the $1000 we invested in BTC and YFI suffered a loss of $15.27 with the following details: Investment in BTC made a profit of $101.31, while investing in YFI suffered a loss of $116.58.
6. In your personal opinion, what are the risks of Yield Farming? Give reasons for your answer.
Typically, investment vehicles that offer a high return on investment (ROI) often carry significant risks, and Yield Farming DeFi is no exception. The decentralized world of distributed and financial ledger technology in general is rapidly gaining momentum across the globe, but the fact remains that the industry is still in its infancy and is still struggling to find its place.
The DeFi protocol is based on smart contracts, and therefore errors and loopholes inevitably arise that attackers exploit from time to time. There is also a risk of liquidation, as crypto assets can lose their value at any time, regulatory issues some crypto assets are still marked as unregistered securities by regulatory authorities.
In addition, decentralizing high yield farming methods can be costly if done wrong. This can jeopardize the entire blockchain, the so-called "domino effect". Also, because transactions are immutable, investors can quickly lose their digital assets.
Finally, the volatility of electronic money is a major problem. The losses can be significant, especially if the value of the asset drops very low.
Decentralized Financing (DeFi) is an inexpensive option for investors, especially if they use practical technologies such as high yield farming. However, before starting, you should consider any risks you may face, such as the risk of losing your assets, etc.
Conclusion
Staking and yield farming are different things which most people think of as the same, but they are quite different. In terms of risk, staking is safer, then also from the special skills we must have to use the yield farming feature which is very different from Staking which does not require special skills.
Yearn Finance is the best platform for those of you who want to benefit from yield farming, but remember that it's not as easy as turning your palm to make a profit. The features provided on the Yearn Finance platform are also capable and complete.
In conclusion, while yield farming is one of the hottest trends in the crypto industry right now, new farmers should proceed with caution and avoid investing more than they can afford to avoid losing assets. For those who are only interested in making decent money from their stablecoins, money markets like Yearn Finance and others are the way to go. The liquidity pool is ideal for big crypto whales who are willing to take risks and receive good rewards and incentives for their crypto assets..