Crypto Academy Week 7: Introduction to Defi and Yield Farming – by @gbenga
Hi everyone, it’s has been an amazing week so far, welcome to yet another lesson of the week. In this homework post, I will be solving this week’s task that involves Decentralized Finance (DeFi) and Yield Farming and also giving my opinion and knowledge about a project/protocol that operates on the DeFi ecosystem. I have to say, I’m a big fan of this week 7 topic by the Steemit crypto professor @gbenga a very important topic as DeFi is now one of the major ecosystems in crypto at the moment. Based on the main task for this post, the project/protocol that operates on DeFi that I will be discussing is uniswap.
The past months have seen the rapid rise of DeFi projects in the blockchain and crypto space and protocols that operates on DeFi, whether it is decentralized exchange DEX protocols or lending and borrowing platforms or staking platforms, DeFi has gained so much growth and popularity since it became a thing in the cryptocurrency space. As far as blockchain and cryptocurrency is concerned, DeFi has taken over the scene.
Uniswap and What is it all About
Uniswap is one of the projects/protocols in the blockchain and crypto space that needs no introduction. As far as DeFi is concerned, Uniswap is one of the top players in the space. Months ago, it took over the limelight because of the airdrop it did for users who had interacted with the protocol at certain points. While some missed out, a lot of users reaped bountifully as the price of the UNI token skyrocketed. At the moment, Uniswap is one of the heavyweights in the DeFi space and currently the most used DeFi DEX protocols/
Uniswap is basically a DEX protocol or a decentralized exchange protocol that runs on the ethereum blockchain for exchanging eth and eth based tokens. Uniswap ticks a lot of boxes when it comes to DeFi, that is why it is very popular and one of the most used DeFi protocols with a lot of users. One of the boxes that uniswap ticks is that it is decentralized, which means that there is no central authority or entity that controls the service, all the transactions on uniswap are fully decentralized. The second box that uniswap ticks is that it is open source… This is great because it aligns with DeFi, meaning that anyone can have access and interact with the protocol and is transparent. Like I mentioned earlier, the Uniswap protocol is fully decentralized, it uses smart contracts and operates on the concept of liquidity pools and automated market makers.
Main Benefits of Uniswap in DeFi
Fully Decentralized
The main element of DeFi is full decentralization, hence the name Decentralized Finance. There is no DeFi without decentralization which is the main focus of DeFi in the first place. By Decentralization it means there is no central authority or entity controlling anything, rather it gives users full control over their funds and how they interact with the blockchain network.Decentralized Exchange (DEX)
This is simply what Uniswap is all about. It is a decentralized exchange protocol that runs on the ethereum blockchain for swapping between Eth and Eth-based tokens.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.Uses Smart Contract
Another key benefit of uniswap protocol is that It uses smart contracts and also inherits the benefits of the ethereum blockchain network.Secure
The Uniswap protocol has proven to be secure not only because the protocol is open source, but because it inherits the benefits of the ethereum blockchain and its smart contract.
UNI Token
The UNI token is the token of the uniswap protocol. The UNI token has gained so much popularity over the past months because of how successful its airdrop was and success of the UNI token which is currently ranked 8th on coinmarketcap. The UNI token is mainly for governance. What this means is that users who hold the UNI token can take part in the governance, and also have influence on decisions for the development of Uniswap. Aside from that, UNI token holders can fund liquidity mining pools, and other proposals in the uniswap ecosystem.
Liquidity Pools and Liquidity Providers on Uniswap
On the Uniswap protocol, there is something known as Liquidity pools… it is simply pairs of ETH and ERC-20 tokens which are swapped by users on the uniswap DEX. For instance, some popular liquidity pools on uniswap DEX protocol are ETH and DAI, ETH and WBTC etc
Another key element of the Uniswap protocol are the liquidity providers. Liquidity providers are simply users who add assets to the Uniswap DEX protocol liquidity pools and while they do so, they earn a proportion of the transaction fees. Any user can add their ETH tokens into the shared liquidity pools and begin earn trading fees as rewards for their contributions.
How the Uniswap Protocol Work
Above, I made mentioned that any user can add asset to the liquidity pool or become a liquidity provider and begin to earn portion of the transaction fees. On the Uniswap protocol, any users can start with any amount of the tokens at a ratio of 50/50 this means that the ratio will be a 50% on the two tokens. So each time users swap tokens on the uniswap DEX protocol, the trader pays 0.3% fee that goes into the LP and split proportionally in based on of tokens each LP has deposited to the pool.
How Price is Determined on Uniswap
This is another differentiating factor between uniswap protocol and centralized exchanges. We all know (at least users who trade cryptocurrencies on centralized exchanges) that the CEX uses what is known as order book - buyers and sellers determine the price based on the buy and sell actions on the order book. However, on Uniswap, it is different… The price of assets on uniswap is gotten by dividing the size of the two sides of the LP of the assets.
The image above clearly shows how price is determined on uniswap. Based on the above image, let’s take for instance, if “user A” swaps an ERC-20 token with ETH, then the supply of that particular token would reduce and the supply of ETH would go up which would now cause an increase in the price of that particular ERC-20 token.
If another user let’s say “user B” comes and swaps that particular ERC-20 token and to get ETH in return, the supply of ETH would reduce and the supply of that ERC-20 would go up… this would cause the price of that particular ERC-20 token to reduce.
Thanks for being a part of my class and for participating in this week's assignment. I hope you learned from the class as the aim of the school is to teach and allow people to learn alongside.
Review
Great writeup, impressive sourcing of photographs, but no proper sourcing of contents as I am sure all this had a material or two that were used while creating the content.
Rating 7