Crypto Academy / Season 3 / Week 4 - Homework Post for @stream4u
Hi good evening Steemian, and welcome back to another homework task on the CryptoAcademy for this week. This time is on a homework task on the lecture that was delivered by prof. @stream4u on some of the very important topic in the cryptocurrency industry, which is on CeFi, DeFi and Yield. Prof. @stream4u as a seasoned professor was able to analyze all about CeFi, DeFi and Yield Farming to a layman's understanding and help the students of the academy to have better knowledge about this very interesting topic in the blockchain industry. Thanks as you read through my homework task for this week welcome.
What are are Importance of (DeFi) system?
It will be a nice to first explain what really is DeFi so as to help us understand better it's Importance. Decentralized finance is a financial applications designed on blockchain technology, that using smart contracts to automate enforceable agreements without intermediate party. Anybody at anywhere with internet connection can have access to it.
DeFi can also be describe as a blockchain based financial system that perform without any central financial third parties like exchanges, brokerages, or banks for there financial instruments, but uses the smart contracts technology built on the blockchains
Now that we have understood what DeFi is, let's talk about some of the importance of DeFi system.
Cost Effective
Freedom
In DeFi users decide on their transaction, they can perform any transaction that both parties agreed on and smart contract will execute it. DeFi system gives you the freedom of sitting at your home, even on holidays or anytime of the day and perform any transaction of your choice, all you need is internet connection and not like the central financial system where there's hindrances to this kind of freedom. In central financial system, you can't perform transaction on a holidays or anytime of your choice because of the time restrictions, which means that you have to wait until the banking hour before you can perform a transaction, no matter how urgent.
Transaction speed
DeFi system uses smart contract to automate transaction, therefore increasing the speed of transaction. All transactions are perform in the node, so you don't need the approval of any authority before you can perform transactions. Not like the central financial system where you have to visit many offices to seek for approval from the authorities before performing your transactions. This approval sometimes take days, weeks or even months in some occasion, so removing it help in speeding up transaction time.
No Third Party and KYC Verification
In a DeFi system, you don't need a middle man to perform transaction, therefore anybody can perform transaction directly. In central financial system, the third party will verify your KYC be you can perform transaction and sometimes put your personal information at risk but in DeFi your KYC is not verified. Sometimes this third parties put limits to transaction such as the amount of transactions allowed and how many transaction you can perform per day but in DeFi user are at liberty to perform small transaction and how many times of your choice.
Therefore in DeFi your decided what to do with your funds at anytime of your choice and it saves time because there's no third party. It's safe for someone to say that DeFi is indeed disrupting the traditional central financial system and have come to stay, because it is secure, efficient and save cost.
Flaws in Centralized Finance
The centralized financial system are with some flaw such as listed below.
Very Expensive
Performing transaction on a CeFi system is very expensive and it's not democratic, every participants are not given equal information. The third parties fees help to increase the transaction fees and also unfair monopolization of information advantages are given to prominent trader's. These third parties in the central financial system makes it to been more expensive than the DeFi financial system.
Users Not in Control
In CeFi users are not allowed decide on their transaction, users can't perform any transaction the want because there is a traditional central financial instrument for transaction which user will follow. These simply means that the central financial system have control over you on have to use your money, and you can only perform transaction during work hours, not like DeFi system where you have the freedom to sit at home, even on holidays or anytime of the day and perform any transaction of your choice with just internet connection. Also in CeFi, you can't perform transaction on a holiday because of the time restrictions, which means that you have to wait until the banking hour before you can perform a transaction, no matter how urgent.
Low Transaction speed
In a CeFi system, before you can perform a transaction the authorities have to approve it, these help to slow down the transaction speed. In some of the transactions in a central financial system you have to visit many offices to seek for approval from the authorities before performing your transactions. This approval sometimes take up to days, weeks or even months in some occasion, so it slows down transaction time.
Third parties and KYC
In a CeFi system, you can't perform any transactions without a middle man, Verifying your identity and doing KYC. In central financial system, the third party will verify your KYC and sometimes put your personal information at risk not like in DeFi where your KYC is not verified. Sometimes the third parties can limit transaction such as allowed amount of transaction and how many transaction you can perform per day and you have no liberty to perform transactions.
Explain Two DeFi Products.
Now let me explain two DeFi products, I will be explaining about Decentralized exchanges and Decentralized Lending. I will be analyzing two projects from the Tron blockchain.
Decentralized Exchanges(DEx)
The decentralized exchanges is one of the fundamental products of DeFi where traders can buy, sell, swap, exchange, provide liquidity, borrow, lend, token of any kind any time and without the need for verification, third parties or any traditional central financial instrument in transactions. DEx allow buyers and sellers to perform direct transactions any time and any where of their choice. DEx uses automate market maker (AMM) which control the price of buying and selling based on the algorithms. Some of the DEx are as follows:- JustSwap and PancakeSwap, JustLend, but I will be talking about JustSwap and JustLend which am using and are familiar with.
JustSwap
JustSwap is among the most used DEx in the decentralized financial system that is built on the Tron blockchain. With JustSwap you can swap TRC-20 token that is listed and it also provide you with the options of buy, sell, swap, and exchange any of the TRC-20 token listed for another, moreover no verification, third parties or interference from any authority.
With JustSwap, liquidity provider's earn rewards for providing liquidity to the pool and you perform transactions without transaction fees if you have frozen TRX and has enough energy and bandwidth to perform transactions. If you don't have enough energy and bandwidth, you will be burning very huge amount of TRX if you want to communicate with the Tron blockchain, which I was doing before I understood how it works.
To visit JustSwap DEx, open your Tronlink wallet.
Now click on discover
Click on JustSwap to open the home page.
Select the token you want to swap and the one you are swapping it to and click on swap.
If you want to add liquidity, just click on pool then select the token you want to add, enter the amount and click on add liquidity.
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Lending
Lending is also a fundamental product of deFi, and operates like this, you supply token to lending pool and you will be earning interest. Users comes and borrow these token from the lending pool and pay back with interest. These lending pool rewards you with Annual Percentage Yield (APY) interest rate for lending your token. It's a wonderful way to earn passive income and also have enabled traders who wanted to perform transactions but are lack of funds, all you need to do is borrow funds from a lending pool, perform your transactions and pay back later
JustLend happens to be my best and the only lending and borrowing DeFi product and I have used and I have been using it for sometime now. So let me talk about JustLend.
JustLend
JustLend is a lending and borrowing DeFi product built on Tron blockchain, it gives users the opportunity to supply token to lending pool and receive rewards for supplying these token and these rewards are paid in APY interest. It also provide users the opportunity to borrow when they lack fund to perform a transaction and the pay back later with interest.
In JustLend you receive jtokens when you supply your token to the lending pool and when you remove your token from the lending pool the jtoken will be removed. These jtoken are allowed to be used as collateral if you want to borrow token from the lending pool. The last token I supplied to the JustLend was 10,217 WIN I received 1,016,691.41344782jWIN for supplying my WIN. One of the most important reason why I like to use JustLend is the fact that it's almost transaction fee free, which a features on the Tron blockchain but you have to fronze TRX and have enough energy and bandwidth to enjoy this great features or else will burn TRX if you want to interact with the Tron blockchain.
To visit JustLwap DEx, open your Tronlink wallet.
Now click on discover
Click on JustLend to enter the home page
At the home page, click on supply if you want to supply liquidity or click on borrow if you want to borrow token.
Risk in DeFi
In every good thing there is also a risk in it, so am going to list of of the risk in DeFi.
Be Scammed
DeFi is a decentralized platform which makes it easier to scam people, meaning that a person or group behind the DeFi protocol you are investing in may be unknown to you and can easily disappear with the money you have invested in their project. You can easily be scammed in a DeFi project because the project owners are not legally registered.
Irreversible
DeFi project are built on a blockchain technology using smart contract, which makes it transaction irreversible, these means that incase of error your fund is lost and can't be reverse. Imagine am sending token to @eberechi10 and mistakenly typo it as @ebere, my token is gone and can't be reversed. With DeFi no room for mistake, you will need to be very careful at all times.
Financial Lost
Transaction in DeFi requires experience because of it sophisticated nature, these meaning that an Inexperienced investors are at risk of losing the money invested in DeFi platforms and DeFi is decentralized, so therefore no third party to give customer support. This is why DeFi is not a safe platform for inexperienced investors to use as a learning ground.
Instability
DeFi is a project that uses smart contract and it's code is an open source software, which makes it easier for another platform to copy the code and implement a similar project. These will create competition among the two platforms, consequently causing instabilities as investors shift their fund from one platform to another platform.
What is Yield Farming?
Yield farming is a process where you lock up your token for some time so as to earn rewards, it provides a platform for you to deposit token into a lending protocol to earn interest from trading fees. Yield farming can also as be defined as a liquidity mining protocol, where users generate rewards with the token they hold. These users who locked their token are known as liquidity providers and they earn from the exchange fees in the liquidity pool, which is based on the APR or APY.
Yield farming can be defined as a lending platform where users can borrow token which the liquidity provider's supplied and the liquidity provider's will be earning rewards base on APR or APY from the liquidity pool
How Yield Farming Works?
The best way to describe how yield farming working is, users provide liquidity into any pool they desire to provide for and the will be earning token for providing liquidity, these liquidity provider's earning are from the interest pay by users who exchange or lending tokens. The liquidity in the pool are also used for transaction on the DEx, which use automated market maker(AMM) to determine its pricing. After adding Liquidity into the liquidity pool, You will acquire a token called LP and you can also stake your harvested token to earn more.
As a liquidity providing on PancakeSwap which is a decentralized exchange built on the Binance Smart Chain (BSC), these mean that you can only supply BEP-20 token into any pool on PancakeSwap and you will be earn BEP-20 tokens as a reward which is calculated on the APR or APY. So you can only provide liquidity based on tokens on the blockchain that DEx is built on. Now let illustrate how you can provide liquidity with one of the big DEx on the Binance Smart Chain known as PancakeSwap.
Adding Liquidity on PancakeSwap platform
Visit the PancakeSwap home page and on the main menu
On the main menu, click on liquidity
Now click on Add Liquidity to enter the liquidity pool page.
At the liquidity pool, I selected the pair of BNB-C98 and enter the amount 0.0005 BNB and 5276.45 C98, now click on Approve, then click on Supply and click on Confirm Supply. You have successfully supply your token into the liquidity pool. You can decide to stake LP tokens you earned for adding liquidity into pool, these help to increase you earnings. Let visit the farm page to stake the earnings.
Now click on Farm to enter the farming page.
Select C98-BNB pair and click on it, Click on harvest and harvest your LP that you acquired when you supplied liquidity.
After harvesting you can enable staking to earn more.
The best Yield Farming Platforms and Why They are Best?
There are many good yield farming platforms currently but I will be focusing on my best two yield farming platforms. I chose PancakeSwap is a DEx built on the Binance Smart Chain and SushiSwap which also a DEx built on the Ethereum Blockchain.
PancakeSwap
PancakeSwap is a decentralized exchange that is built the Binance Smart Chain,
and offer's some of the best products in yield farming. It was launched in 2020 and has been among the fastest growing decentralized exchanges since it was launched. PancakeSwap has its own native currency that is called CAKE token and is currently trading at $13.85 and with a Market capitalization of $2,755,891,614.50, raking 32 as at when writing.
It's has an arrays of exciting products, ranging from buy, sell, swap, exchange, liquidity pool, prediction, yield farming, lottery, etc. PancakeSwap makes buying and selling BEP-20 token easier and also you can easily swap or exchange BEP-20 token without stress, its prediction and lottery products is also an avenue for earning. PancakeSwap also has one of the best yield farming and liquidity pool products in the cryptocurrency industry, liquidity pool such as C98-BNB, CAKE-BNB, BUSD-BNB, AXS-BNB, TRX-BNB, etc. Each of these liquidity pool products has different interest rates which is based on APR or APY. It also uses the Automated Market Maker(AMM) to determine pricing on its liquidity pool funds.
Why I chose PancakeSwap among the best decentralized exchanges is that it's built on the Binance Smart Chain, which has also one of the best low transaction fees in the industry. It's arrays of yield farming products are many in numbers, which means that you can ever run out of choice, you can chose from adding Liquidity, farms and can still stake the LP tokens to earn more. PancakeSwap is more cost effective when you compare it to some other DEx. The only negative side of PancakeSwap is that you could lose your fund if it is hacked by hackers
SushiSwap
SushiSwap is a decentralized exchange built on the Ethereum blockchain, it's a hard fork of Uniswap but with some changes, Its interface is been designed based on sushi menu, which makes SushiSwap to be gamified more than Uniswap. SushiSwap offers you products like buy, sell, swap,exchange, lend and borrow of ERC-20 tokens, you can provide liquidity and also enjoy yield farming products, these yield farming products allows users to supply liquidity into the pool and will be earning passive income from exchanges fee from the pool. SushiSwap had one of the best liquidity pool and has help to enhance liquidity and put SushiSwap on a good foot.
The SushiSwap was lunched August 2020, and under a few hours of been launched, users shift nearly $1 billion staked liquidity from Uniswap to SushiSwap. SushiSwap also uses automated market makers (AMM) to determine the pricing for it's liquidity pool, SushiSwap takes 0.3% fee for swapping, and 0.25% are shared to the Liquidity Pool provider's, 0.05% is shared to the SUSHI token holders.
One of the great features of SushiSwap is that in it's yield farming platform, you can stake ETH into smart contract for the Ethereum 2.0 and you will be earn ETH2.0 token which you can later redeemed for ETH, which automatically makes you a wrapped ETH holder. You can also stake the wrapped tokens and you will been earning a compound yield.
SushiSwap also has it own native currency known as SUSHI and it is currently trading at $ 8.37 and a market capitalization of $1,058,502,344.49 and raking 68 as when writing.
Why I chose SushiSwap as among the best decentralized exchanges is that, it has one of the best enhenced liquidity which will make it almost impossible for SushiSwap to face any liquidation issues. So as a liquidity provider on the SushiSwap platform you don't have much fear comparing to other DEx. As a holder of Sushi, you also have the opportunity to vote and effect an upgrade. The only negativity side of SushiSwap is the high Ethereum blockchain transaction fees which could be a bit draw back.
How to Calculate Yield Farming Returns
There are two ways by which you can calculate yield farming returns which are as follows:- Annual Percentage Rate(APR) and Annual Percentage Yield(APY).
How is APR calculated and what is it all about. APR is the annual interest rate of Your investment without the inclusion of compound interest and it can be calculated as show below.
APR Calculation
You invested in Sushi token of $100 in a pool that has 100% APR,
100% of $100 in APR which should 1,
1 X $100 = $100
which will be initial investment + APR, $100 + $100 = $200
My total investment will now stand at $200.
How is APY calculated and what it all stands for. APY is the annual return of your investment including compound interest. In APY your interest are Compounded daily, which simply means that your interest are reinvested daily.
APY Calculation
APY uses this calculation formula (1+r/n)n-1, where r = interest rate, n = compound period, that is to say that n= 365 days
You invested in Sushi token of $100 with 100% APY.
using the APY formula we have
(1 + 1/356)365 - 1,
(1 + 0.002740)365 - 1,
(1.002740)365 - 1,
(2.717) - 1 = 1.717,
APY = 1.717 X 100 = $171.7
Total investment after one year
Initial investment + APY = 100 + 171.7 = $271.7.
Total returns after one year = $271.7
Advantages and Disadvantages of Yield Farming
| Advantages | Disadvantages |
|---|---|
| Yield farming makes you to earn higher profit than when you invested your funds on a centralized financial system. It also provide you with the options of reinvesting your interest for more profile | Yield farming is a DeFi system that uses smart contract, which is powered by a software code and can be manipulated or hacked, these could lead to loss of fund invested by investors |
| Yield farming can also be used as a way to save up your fund. It's a better alternative when you have a project and you wanted to save up for that project, you can invest the once you have already to avoid mismanaging it as you continue to save for the project | In yield farming there no guarantee on investment returns, the returns are decreased as more investors are joining the pool, these will affect your excepted returns |
| As a DeFi project that is decentralized and uses smart contract, which means that you don't need to verify your identity or do KYC before you can perform transaction, you can perform transaction from anywhere and anytime. With your funds at your wallet and internet connection, you perform transactions directly with any partner of your choice | It's an open source code, which means that someone can copy it to launch a similar project and these will mean great competition which could affect the price of that token, if not able to stand that competition, could face liquidation. Also users will like to move there token to the new project so as to enjoy the new incentive issued by that new project to attract users. |
| It serves as a borrowing source to investors, as an investor you can borrow funds to perform transaction if you run short of funds and repay back later. You can also swap your token, for example you need SUSHI token but you are with ETH, you can easily swap it. | It is a platform that is open for all users and without regulating agencies like the government, these could cause dubious elements to take advantage of this to commit crime. Since you're not with there information it will be very difficult to discover locate. |
Conclusion
DeFi
The introduction of deFi into the financial system have really changed many things about the financial life. DeFi have disrupting the traditional financial system by eliminating the hindrances in the financial system, with DeFi you don't need verification to perform a transaction and no more official approval from the directors or board before you can withdraw your fund for urgent pressing needs. Removing all these hindrances help to improve the speed of transaction delivery, and you have the independence of performing transaction at your sitting room. But the bad side of these could be that since on one is regulating it because of its decentralized nature, some criminal minded individuals could take advantage of all these removed hindrances and commit crime since there identity is private.
Yield farming
Yield farming have made earning passive income very easy through the help of DeFi, this means that you don't need to verify your identity before you can start transaction or provide liquidity, like in the centralized financial system where you have to verify your identity before you can even deposit your funds. You don't require any knowledge to start earning passive income from your home and everyone are giving equal information, not like the centralized financial system where major trader's are giving advantage.
In general conclusion, DeFi and Yield Farming has come to stay and I believe can only get better with time as more people are adapting it every day. I sincerely thank you prof @stream4u and appreciate your efforts on this lecture sir.
Hi @eberechi10
Thank you for joining The Steemit Crypto Academy Courses and participated in the Homework Task.
Your Homework Task verification has been done by @Stream4u, hope you have enjoyed and learned something new.
Thank You.
@stream4u
Crypto Professors : Steemit Crypto Academy
#affable
Thank you prof @stream4u, the lecture made to know more about DeFi and am grateful.
@eberechi10 Good day and how are you?
Pls do you mind me having your WhatsApp contact, I have some for you about steemit
@cinnymartins Good evening my dear, am ok and you. I have sent you a memo massage
Okay I wasn't able to get that but I chatted you on telegram already
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