i begin by thanking CryptoAcademy and Crypto professors for gradually making us well verse with the the various aspects of cryptocurrency , finance, trading etc. Today I am writing homework task for @sream4u , which about CeFi, DeFi amd yield farming. Let's begin:

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What Is the Importance Of the DeFi System?

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Decentralised finance (DeFi) system refers to a system which is not centralised. To put it simply, in decentralised financial system there is no central authority to control your financial assets. Each user of the system is entitled to regulate
their funds according to their own will. There is no central authority to formulate rules and regulations unlike centralised system.

Importance of DeFi aystem.

Importance of anything is only realised when we have something to compare it with. So DeFi system's importance will be emphasized by drawing its analogy to CeFi. So let's begin:

• In DeFi you have absolute control over your funds. You are not bound to abide by rules and regulations laid down by any third party.

• DeFi system run via DeFi exchanges, is powered by blockchain technology. All the benefits inherent to the blockchain are therefore conferred upon DeFi too.

• DeFi is more transparent than Cefi because DeFi being powered by blockchain, which is a public ledger and transactions are publicly accessible. Anyone can look for transaction details on blockchain. Moreover, the non editable nature of transactions further add to its transparency.

• Transaction fee on DeFi system is lesser than Cefi. As cefi involves intermediaries and heavy infrastructure, system is set in a manner to compensate those expenses too.

• Global P2P transactions are performed at single click. On the contrary, CeFi system has complex checks and balances especially on global transactions.

• Transactions performed are spontaneous and huge amounts can be transferred globally. In traditional Banks, transactions take hours to days to execute and banks have their own limits on transaction amounts.

• Transactions can be performed anytime and anywhere. All that is needed is a working internet connection. Because of DeFi, concept of banking hours and bank holidays is not making any impact.

• Quality of service delivery in DeFi is adorable. There are no server down issues. As blockchain is run on scores of nodes, it is not possible that all nodes may be down at a particular point of time. So in DeFi, there is 100% uptime.

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Flaws in Centralized Finance.

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When we talk of centralized finance, you can easily understand it by keeping traditional BANKS in mind, however in CeFi, we have majority of financial markets in crypto that are centralized as for their operation is concerned. The working of CeFi in crypto simulates more or less to the DeFi. So keep traditional banking system in view and move ahead. Let's look at flaws of CeFi.

• Centralized financial systems are governed by central authority that has absolute control over finances of users. Here one is bound to operate under rules and regulations laid down by the authority.

• Centralized fiance are less transparent and secure that DeFi because data manipulation is possible at central level. Morever CeFi is more prone to hacks, spam, theft as compared to DeFi because the system operating CeFi is not as strong as blockchain.

• CeFi has definite limits on amount of funds that can be transacted which is much lesser than DeFi. This feature is greatly impacting large scale business etc, however for individual users, set limits usually suffice.

• Transaction fee charged on centralized system is much higher than DeFi system. Moreover the complex checks and balances on gloabl transactions makes these transactions laborious.

• Traditional financial system like Banks have limited working hours that makes this system less effective when compared with DeFi. However, such limitations are not seen on centralized crypto exchanges that keep on working 24x 7.

• Centralized financial system are slow to operate. Transactions take time as mentioned above. In crypto exchamges operating centrally, this ia not the case. Instead they have hugher liquidity and are are quicker than Dex.

• Poor quality of service delivery in CeFi is common. It is not uncommom to face difficulty in performing transactions due to server down problems.

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

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The products that I'll be explaining are "Defi Exchanges" amd to be more specific "UNISWAP" and second will be "Sablecoins".

UNISWAP

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UNISWAP founded by Heyden Adams is an open source decentralised exchange based on Etherium blockchain which facilitates automated transactions via smart contracts. it is GPL certified DEX. Being decentralised transactions are performed in P2P manner and there is no order book on UNISWAP.

The basic working of UNISWAP involves, market makers and takers interacting in P2P manner and getting mutually benefitted. Market makers provide liquidty to the platform by lending/staking of coins for which they are incentivised. The incentives are proportionate to the the percentage stake in the liquidity pool. For example, if your stake in liquidity pool is 10% , out of the interest earned 10% will be provided to you. Trading fee also contribute to the liquidity pool of UNISWAP.

The trade executed on UNISWAp demands deposition of a pair of tokens the multiplicative price of which has to be constant and one of which has to be ERC-20 token. Please remeber supply amd demand won't determine token price on UNiSWAP, imstead it is determined by mathametical algorithm. Native token or governance token of UNISWAP IS UNI. The special feature of UNI is to confer voting rights upon the users in some important decisions of the platform like trading fee and amy other desirable change.

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Stablecoins

Volatility is the inherent feature of cryptocurrencie. To bring stability in the price of cryptos, concept of stablecoins has erupted. Stablecoins are pegged to another asset like cryptocurrency , fiat, or commodity like gold. There are scores of DeFi stablecoins like Ampleforth, Augmint, DAI, DefiDollar, Digix, EOSDT, ESD, PAX etc. For this task, I'll be discussing about PAX.

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Paxos Standard token (PAX) is an US dollar pegged programmable stablecoin run on Etherium standard (ERC 20) , and tethering ratio is 1;1 ( PAX; USD). It is therefore a good storage and exchange asset. It is worth mentioning that PAX is approved by New York Finance department . This approval has boosted legal status of PAX. Tethering of PAX to USD means that for every PAX token issued , one USD in reserved in Paxos Trust company's account. Therefore, it is understood that PAX is 100% backed because tokens are only created at the time of purchase and backed simultaneously.

Being a DeFi token, issuance and redemption time of token is quick . Another interesting feature towards enhanced security is ability to freeze transactions on directions of court etc in case of dispute and than unfreeze after subsidence of dispute. It is a step towards emhanced security .

As mentioned above, PAX matches ERC 20 standards amd Etherium Blockchain being pioneer, PAX shares some benefits like, being globally available and to specify, it is listed on more than 180 exchanges , that is a huge number to acknowledge its popularity and trust.

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Risk involved in DeFi.

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No system , be it centralized or decentralised, is perfect. Pros and cons are there in every system. Let's talk about risks involved in DeFi :

• Anonymous nature of transactions makes DeFi vulnerable to use for illegal purposes like drug abuse, arms and ammunition purchaae, child trafficking etc. One such example is "silk road scam" - an online website selling drugs illegally by making use of BTC. Transactions carried on Blockchain are anonymous and it is impossible to trace back these transactions to the initiator of transaction.

• If we take example of BTC, transactions carried on BTC blockchain are based on PoW algorithm, where miners compete for solvng complex cryptographic puzzles based on computational power of the hardware device used . The hardware device like computers, ASICs, GPUs used consume huge amount of energy and therefore such a DEFi is energy inefficient . It is worth mentioning that other consensus algorithms have successfully tackled this problem. Another issue that is being raised along with energy inefficiency is of environmental hazards posed due to carbon emission from these hardware devices. Loud noise generated directly by the system in use or indirectly by the set up used for cooling the system like coolers, fans etc, is annoying too.

• Non repudiabe natire of transaction is another risk in case of wrong transaction made. Being P2P there is no one to mediate as no middleman is involved. However, in case of CeFi, as user identification details are available to the authorities, negotiation is possible.

• Volatility in price of crypto acts as a barrier to entry into cryptosphere for some. However, volatility is considered as advantageous by many because it is volatility , on the basis of which crypto trade is possible.

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What is Yield Farming?

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Yield farming is a practice of offering your funds to others via lunding or staking for a pre set period of time on DeFi platforms . Inturn you get incentivised for the same. Let me give an example from traditional financial system. All of us are aware of Fixed Deposits (FDs) being made in banks for certain specified period of time at certain pre set interest rates. Our funds that we deposit in banks are locked or staked and we cannot take advantage of the incentives if we take out funds before maturation. Yield farming works in similar manner. We stake (lock) our funds for certain period of time at some pre-specified interest rate which is being paid to us. So we become liquidity providers for the platform for which we are incentivised.

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How does Yield Farming Work?

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Yield farming works like Fixed deposits or loans offered. Here lender stakes his/her funds on a platform for which he /she is paid interest. The funds deposited into the platform are offered by the platform to borrow and charge them interest rates on borrowed funds. The interest earned is than distributed to the lender and small part may br utilized for platform offering the service. On DeFi platforms the incentives offered are much better than CeFi. It can go upto 100% APY on DeFi and as low as 0.1% in traditional banks. The incentives offered may be taken from interest earned, transaction fee or governennce token of the platform.

To put it simply, we can understand it as :

• User who supplies funds to the platform becomes liquidity provider
  and the funds accumulated on the platform are known as liquidity pool and the platforms serves as automated market maker (AMM).

• Liquidity provider deposit their funds into the platform. Platform offers these funds to borrowers and charge them interest on the fund offered.

• The interest taken from borrowers is distributed among lenders. The lender can make use of that extra amount into other smart contracts and earn more interest. In this way, cascade of events is triggered due to compounding frequency and therefore it a complex system of finance.

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

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Some of the best Yield farming platforms are UNISWAP, Maker DAO, COMPOUND, AaVe, Balancer , synthetix, Yearn , Curve, Harvest, Ren and SushiSwap. All of these platforms are well established and popular and offer variable ramg of features. However, for this task, I'll be talking about COMPOUND and Maker DAO. I think they are best for the features they offer.

Maker DAO

Maker DAO is Etherium blockchain empowered lending platform found by Rune Christenson in 2014. However, its native stable coin gained entry three years later, that is 2017. DAI being a stable coin is maintained at 1:1 ratio with USD.

The main concept facilitating creation of DAI is overcollateralisation of ETH . The current value is set to 150%. So additional ETH has to be deposited . For 150 ETH deposited, a collateral debt position (CDP) for only 100 DAI tokens is opened. It is done to avoid loss ensuing due to price volatility of cryptos. On repaying loan and DAI , collaterals are set free.

To control the circulation of DAI, returned DAI are not recirculated but are burned. As we are all aware of the governance token concept. These tokens are so called because they give voting rights to the users. By voting rights, I mean that the users have right to participate in the decisions of the platform. The native token of Maker is MKR.

COMPOUND

Compound was formed in 2018 as Etherium blockchain based algorithmic money market protocol where we can add to the liquidity pool of the platform and imturn earn interest as memtioned above in the yield farming. As for distribution of the interest on the compound is concerned , one thing to be noted here is that 10% of the interest earned is taken by the compound platform where as rest of the 90% is distributed to the contributors of the liquidity pool.

The burrower of the liquidity also known as market takers mortgage their collaterals. Inturn they can take loan equivalent to the two third of the collatarels mortgaged.. The remaining one third is used as a security to compensate for devaluation of the crypto owing to the inherent price volatility feature of cryptos.
Native token of COMPOUND is ctoken and balances are displayed in the same . Please remember that governance token here is not same as native token but is another token, by the name of COMP. It was the first token that actually facilitated booming of yield farming in DeFi.

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The Calculation method in Yield Farming Returns.

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There are two calculation methods for calculating interests in case of lending/burrowing in DeFi.

(a) APR

(b)APY

Before understand the concept of the APR and API , one should be familiar with the concept of total value locked (TVL) . TVL of an asset or a protocol measures the amount of that assets that are staked on a protocol. On that basis users make decision about the value of an asset, whether undervalued or overvalued. An arbitrary value of lesser than 1 means an undervalued stock. After choosing asset and protocol, interst rates are calculated as mentioned below:

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APR- Annual Percentage Rate (APR) has seprate meaning for borrower and Lender . It is the percentage of interest charged from a borrower and offered to lender. It is calculated on Simple interest formula which is (P × R × T) where P= principal amount, R= rate of interest and T= time in years.

Let's take an example, suppose you borrow me 1000$ for 1 year at an interest of 20%.

APR = 1000 x 20/100 x 1 = 200 $

So I'll have to pay an interest of 200$ to you along with principle amount of 1000$ . In total I'll have to pay 1200$ .

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APY- Annual Percentage Yield (APU) is based on compound interest formula whoch is APY = P × ( 1+ R/N)^NT
where P is principal amount, R is rate of interest, N is no. of days and it will be 365 as it is compounding daily interest and T is time period

Again let's take same example. You borrow me 1000$ for 1year at an interest rate of 20%.

Substitute values into formulla : P × ( 1+ R/N)^NT
1000 x ( 1 + 0.20/ 365} ^1 x 365 = 1221.3$ which is about 10. 5 % more than APY.

As i have taken small amount into consideration, so interest earned seems less. More the amount, more will be the effect of
compounding frequency.

APY offered by different platforms for different Crypto pairs is different , For example, on Pancakeswap ( CAKE reward) APY for BCH - BNB is 1065871.07% Yearly and 2920.19% Daily amd for ISDT-BUSD 575.59% Yearly and 1.58% Daily.

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Advantages & Disadvantages Of Yield Farming.

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Advantages

• Higher profit: Yield Farming offer much better interests than traditional banking systems, therefore it is better alternative for those whose funds are lying idle in saving accounts or are invested in fixed deposits because the rate of interest there is much lesser then yield farming.

• Reinvestment of earned profit into other protocols creates a positive vicious cycles of profit generation.

• Taking loans via yeold farming is much easier and simpler than traditional banks. Through yield farming, you can burrow funds within mintues while in traditonal financial system, loans take months to get approved and that too after submitting all vital and sensitive information. No data sharing is needed in yield farming.

Disadvantages

• As yield farming is a new concept, still in its initial stages of development. It is still vulnerable to security breeches. Failure of smart contracts also pose risk of losing investment.

• Thorough knowledge is required to be properly able to understand the better suited protocol of yiwld farming.

• Impermanent loss due to volatility of the cryptos seems inevitable and not in control of liquidity provider.

• Collateral deposition to take advantage from the yoeld farming and than risk of liquidation is always stressful for burrower.

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Conclusion on DeFi & Yield Farming.

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To circumvent the shortcomings of centralised Finance, the concept of DeFi has came into being and to provide better alternatives to the borrowers and lenders of the funds, than traditional banking systems, better alternative in the form of yield falling has unfolded. Although these concepts have unfolded to cover up the shortcomings of earlier existing concepts, they are not themselves absolute. They have their limitations too.

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Please note that some of the topics covered in this task have already been posted on my blog from time to time and my write up now may mimic or may seem to be copy of that but i assure and take full responsibility that i am original author of that content and this one too. As i have not consulted those posts for thos task, so links are not provided

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Thanks