Yield Farming - Yearn Finance - Crypto Academy S5W3 - Homework Post for @imagen
Hello, steemians. This is season 5 week 3 and I'll be doing the intermediate task assigned by crypto professor @imagen
( 2.) Enter Yearn Finance. Fully explore the platform and indicate its functions. Describe the process for trading on the platform (wallet connection, funds transfer, available options). Display screenshots.
( 3.) What is colaterization in Yield Farming? What is the function?
( 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 ratio (ratio) Market Capitalization / TVL of the YFI token? Display screenshots.
( 4.1.) Is the YFI token overvalued or undervalued? State the reasons.
( 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 today? Explain the reasons.
( 6.) In your personal opinion, what are the risks of Yield Farming? Reason your answer.
( 7.) Conclusions
1. Describe the differences between Staking and Yield Farming.
Yield farming is an activity that involves temporarily lending assets to DeFI applications/networks built around a permissionless environment to earn rewards in the form of cryptocurrencies.
Yield farming is also known as liquidity mining. Here investors lend their crypto assets to Decentralized exchanges (DEX) by making use of LP farms to assist them by providing liquidity to enable them to facilitate trades. By doing this investors are entitled to rewards generated from fees in the platform.
Yield farms are characterized by high dynamic APY rates which are also competitive. This is because as the price of the asset supplied fluctuates, so also will the rewards that accrue to the provider. Before supplying assets to any liquidity pool, certain fees will be paid and the rewards that will be earned is determined by the APY rate of the pool entered into and the amount of assets lent. The higher the asset lent and the higher the APY will result in higher rewards.
Staking is derived from the consensus algorithm proof of stake which was the alternative to the previously existing algorithm, the proof of work which was energy-fueled and involved complex processes. In the proof of stake model, participants are allowed to lock up some funds in the network and by doing so they are subject to rewards after a specific time period. Users with the highest amount of locked funds are allowed to participate as validators on the network.
Staking came before yield farming and serves as a way to enable users to secure their assets while getting incentivized for it with respect to the APY offered by different networks. it's however important to note that the yield generated in staking is far less than that of yield farming.
| FACTOR | YIELD FARMING | STAKING |
|---|---|---|
| PROFITABILITY | Yield farming primarily focuses on yielding the highest returns possible and is more profitable | Staking on the other hand not just focuses on rewards, it majorly focuses on the security of a blockchain network |
| SECURITY | The security of yield farm protocols rests on the activity of the developers. A simple mistake in the application source code might pave way for hackers to make their way to the network | Staking on the other hand offers a high degree of security to users on the network |
| RISK | Yield farming offers exciting ROI but its also very risky. Most yield farms of late eventually result in a rug pull where developers make way with investor funds and close the curtains on the project | staking also comes with few risks such as price volatility and little network fees |
| APY RATES | Yield farming offers significantly higher APY rates however, in the case of ethereum and its gas fees, the returns generated from yield farms and their high APY rates may be reduced to nothing by payment of gas fees | Staking offers low APY rates when compared to yield farming. In staking, fees also constitute a disadvantage but they are not as much as that of yield farming. |
While yield farming primarily focuses on getting the highest returns, staking focuses on the security of the network alongside earnings.
2. Enter Yearn Finance. Fully explore the platform and indicate its functions. Describe the process for trading on the platform (wallet connection, funds transfer, available options).
Upon accessing yearn finance this is the first interface, the homepage. Before transacting with yearn finance ill be required to connect my wallet to enable me have access to its services. To do that click on the connect wallet option located at the top right corner
Next, you'll be required to select a wallet to use. I have metamask therefore ill be selecting that option. Finally will confirm the selection by clicking ok on the metamask confirmation pop-up.
After linking my wallet to yearn finance, I can now utilize the services. The platform performs some interesting functions an......
The home tab contains the dashboard which displays the networth of a user on the platform. The total net worth section is cumulative of all amounts that accrues to a user on the platform, they include the amount in wallet, vault earnings, lab and iron bank deposits and vault yields. My dashboard currently displays 0.00, this is because I haven't transacted with the platform before.
The wallet displays the amount deposited to the platform by the user
This is one prominent feature of the platform. Vaults provide a way for users to earn and manage their holdings through selected strategies. Here users can deposit funds into selected strategies with the highest APY which the platform will utilize to guarantee high returns on profit and even more interesting the deposited tokens do not have to be tracked by the user as the vault does that on behalf of depositors for a small commission.
Users are required to pay certain fees such as performance and management fees. Performance fees are charged against vault earnings and constitute a total of 2% of earnings while management fees also constitute 2% but are charged on total deposits for the year.
Iron bank is an amazing feature that enables users to lend and borrow funds at subjective rates. Users are able to get extra funds by staking some of their token as collateral to access the borrow feature. Interests are paid on borrowed funds which eventually constitute the rewards that accrue to lenders on the platform.
The lab comprises of newly existing and conventional strategies on the platform. Its more like an experimental feature to enable people have early access to new strategies before they are included in the iron bank or vaults and because of this it also bears quite a few risks such as impermanent loss and users are implored to do their own research before participating as participation is at users risk.
The settings tab consists of appearance and customization options such as themes and language preferences but one other important option in the settings tab is the slippage tolerance which can be adjusted from 1% up to 3%.
How to supply
To supply assets on yearn finance. Firstly search for your desired asset and see if the APY is profitable for you. i.e Then click on the supply near the asset.
Next, you'll be required to enter the amount you intend to supply, for this I've picked USDT with a lend APY of 7.05%. After doing this click on approve, you'll be required to confirm this transaction using your wallet (in my case metamask). From the transaction details, we notice that a total gas fee of $21.18 would be spent.
To borrow assets on yearn finance you'd be required to deposit a sum that would serve as collateral.
The steps remain the same. Search for your desired asset and see if the APY is profitable for you. i.e Then click on the borrow near the asset, input the desired amount to borrow, and approve the transaction with your wallet.
3. What is colaterization in Yield Farming? What is the function?
The concept of collaterization in yield farming is similar to that of financial institutions. Whenever we want to apply for loans in banks, it's required that we put up an asset to stand as collateral to prevent absconding with funds. So also in the crypto space, if a user intends to borrow funds from yearn finance for example, they'll be required to deposit some funds which will serve as insurance against theft.
Collateralization is simply the practice of using assets to secure a loan.
Depending on the platform, a set of collateralization ratio will be stated and this may vary depending on the platform. Collaterization ratio is simply the ratio of funds that have to be deposited to the ratio of funds that is available for loan. Let's say I intend to borrow $500 worth of crypto funds and a collateralization ratio of 150% exists. This will mean I have to deposit a sum of $750 to stand as collateral.
The function of collateralization is to protect lenders' assets as well as act as security for borrowed funds. In a situation whereby the deposited collateral falls below its value due to market price, borrowers will be expected to deposit additional funds enough to cover up the fall in value or risk forceful liquidating of collaterals.
This measure helps to keep the network safe from theft.
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 ratio (ratio) Market Capitalization / TVL of the YFI token? Display screenshots.
To discover the total value locked of the DeFi ecosystem, we can make use of DeFipulse. At the time of drafting this post, the total value locked (TVL) for the DeFi ecosystem stands at with a market dominance of -
screenshot gotten from DeFipulse
The total value locked of the Yearn Finance Protocol at the time of writing this post stands at $6,016,984,287 with a price of $28,469.94 per YFI token, the market capitalization currently stands at $1,043,073,680
screenshot gotten from DeFipulse
The ratio of the market capitalization/TVL of the YFI token is = 1,043,073,680/ 6,016,984,287 = 0.1733
screenshot gotten from coinmarketcap
4.1 Is the YFI token overvalued or undervalued? State the reasons.
As stated by @imagen in the lecture. If the value for the MarketCap/TVL ratio is less than 1, then the token is undervalued. The figure gotten for the ratio was 0.1733 (confirmed by sources mentioned above) which is a lot less than the threshold of 1, therefore we can conclude that the YFI token is currently undervalued.
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 today? Explain the reasons.
To get accurate information on the historical price data, ill be making use of the historical data function in coinmarket cap. According to coinmarket cap the price of BTC closed at $39,974.90 on august 1 2021.
A $500 BTC at that date would give a total of
500 / 39,974.90 = 0.0125 BTC
With the use of the cryptocurrency converter by coinmarketcap]
0.0125 BTC equals $705.84
Therefore, the return on investment would be
(($705.84 - $500)/500) X 100 = (216.25/500) X 100 = 41.168% which is about $205.84
From the historical data of YFI above, we observe that YFI closed at a price of $31,779.15 on August 1, 2021. With an investment of $500 I'd have been able to procure a total of
500 / 31,779.15 = 0.015733YFI
With the use of the cryptocurrency converter by coinmarketcap
0.015733 YFI today equals
Therefore, the return on investment would be
(($450.18 - $500)/500) X 100 = (216.25/500) X 100 = -9.964% which is about $-49.82.
Total return on investment would be the sum of the respective ROI's of the investments
BTC RO1 (205.84) + YFI ROI (-49.82) = $156.02
In percentage this equals [(41.168%)+(-9.964%)] = 31.204%
6. In your personal opinion, what are the risks of Yield Farming? Reason your answer.
As much as yield farming offers a lot of ways to get profitable return on investments, the risk portion of yield farming cannot be ignored. Some of the risks of yield farming include:
Security risks - Security happens to be one of the major concerns when dealing with yield farming. As DeFi applications are built up using codes known as smart contracts, a simple alteration or mistake in the codes could cause major harm on the part of the users on the network. Hackers for example, could use this little loophole to gain access to the network and cart away user assets on the network.
Also, due to the decentralized nature of these DeFi projects, it's very prone to see a project creator execute a rug pull after reaching a sizeable amount of total value locked (TVL), halting the project and running away with investors' funds. Once this happens, the funds are lost permanently as most creators keep their identity hidden and the decentralized system on which it is built upon makes it impossible to track or locate the funds.
Large investors have undue control over the network. Due to the large nature of funds added as liquidity by large investors, they get to manipulate the network as they like. In most cases, these large investors invest early enough and wait for the public to take interest in these liquidity pools and after some time remove all their liquidity and amassed profits. This is bad for small-scale investors as this act would cause a drop in price affecting their returns.
Unbelievably high gas fees - DeFi applications are mostly built around the ethereum network which faces unstable gas fees. A slight increase in the gas fee could question the profitability of returns generated on farms. In most cases, the returns generated are barely enough to cover up the contract + gas fees.
Conclusions
Yield farming is a very good way to get profitable returns on investments however before going ahead to provide liquidity, it's important to consider the gas fees, token to be supplied, and contract fees. One of the easiest way to get consistent profits on yield farming is to invest a large amount of capital.
The crypto professor @imagen has done an excellent job of explaining yield farming and staking as well as introduced us to yearn finance. Thanks to the steemit team for the crypto academy, it's been a great ride.
ALL IMAGES IN THIS POST ARE GOTTEN FROM YEARN FINANCE unless otherwise stated.
you nailed it, nice one