Crypto Academy / Season 3/ Week 4 - Homework Post for Professor [@stream4u] || CeFi-DeFi and Yield Farming

(1) What Is the Importance Of the DeFi System?

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Transition from mismanagement or human error.

In CeFi, there is a chance of error in the day to day tabulation of customer data or even mismanagement of fund but in DeFi, these human errors are not possible and can only occur in a poorly written contract.

Quick and easy access

In the traditional finance, you have to get to a financial institution to get a loan or make any other transacts but with DeFi, lending and borrowing is just in one click and at your convenience.

A Healthier System

The outburst of certain pandemics has shown that CeFi could be limited by these pandemics because CeFi require direct individual contacts. However, DeFi has made it possible to stay safe and also borrow and lend huge amount of assets.

No Central Authority is Required

In CeFi, the government regulates the borrowing and lending process and rules.
In DeFi, there is no central body to regulate the borrowing or lending process.

(2) Flaws in Centralized Finance.

• Although centralised financial organisations are secure and trusted yet they are not totally secure.

• In a centralised finance, a single failure point could alter the progress of the network.

• since there is majorly a single server in use in a centralised finance network, it could result to limited scaling.

• In the centralised finance the exchange rate is usually high.

• Government policies on loan and transactions can affect the centralized finance

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

Two DeFi products include;

DODO (DODO)

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Dodo is a provider of liquidity and offers stability using a proactive market maker. This project was initially developed as an ERC20 smart contract on ethereum and then broadened and globalized on the Binance Smart Chain. Because Dodo offers to it's users liquidity that is more sufficient when compared to some centralized exchange, users prefer it's smart contract for activities like auctions and liquidation.

Supply

It's maximize supply is 1,000,000,000 DODO
It's circulating Supply is about 110,551,965 DODO
DODO has a market cap of about $108,198,265.63

The circulating supply of DODO token is supposed to get to its total supply by the end of 2025 but by the end of 2021, its circulating supply is going to get to 40% of the maximum supply.

Allocation & Distribution

The DODO tokens according to Binance Research, will have it's total supply distributed as follows.
• 60% on Vestings by Community
• 1% IDO Liquidity
• 6% Seed Sale
• 8% Operations & Marketing
• 10% Private Sale
• 15% Team & Advisors

Use Cases of DODO include

• Trading Fee Discounts
• Governance
• Staking
• Crowdpooling & IDO Allocation

SYNTHETIX (SNX)

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Synthetix is built on ethereum and majors as an asset insurance protocol. It is one of the widespread and popular DeFi today.
Synthetix offers to its users the means of minting their own synthetic representation of real world coin as token thatallows users to mint synthetic representations of real-world assets as tokens that are dependent upon their base asset value(SNX). Through no-arbiteage principle, these synthetic assets maintain their dependence.

Supply

The maximum supply is 219,252,220 SNX
The circulating Supply is 114,841,533 SNX
The market cap of SNX token is about $989,854,024

The use cases of SNX include

• Trading Fees
• Staking and collateralizing synthetic assets
• Governance
• Yield Farming

(4) Risk involved in DeFi

Uncertaintity

In the case where that blockchain which hosts a DeFi protocol is unstable, then the project will consequently inherit this unstable nature from the parent blockchain.

Scalability

In some DeFi projects, transactions confirmation time is long and that is a very great short coming. Sometimes, transactions become costly due to a congested transaction awaiting confirmation.

Smart Contract Vulnerability

If there arises the least flaw in the development of the smart contract, it could be a potential avenue for fund loss.

Low Liquidity

The Liquidity in CeFi is much more greater than the liquidity in DeFi when the both of them a being compared.

Deficient Fund Insurance

People trust In CeFi, because of the backing of the government in it but in the case of DeFi, there is no assurance of any sort. Every one in DeFi is just a risk taker.

(5)

What kind a Yield Farming?

Yield Farming refers to the total process of locking up your assets, adding them to liquidity pool and in turn, recieving pool reward for the locked up assets. In yield farming, the interest which is recieved by the farmer could be simple or compound interest depending on the protocol that provides the yield farm.

(6) How does Yield Farming Work?

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One important aspect to know is that a yield farm must have liquidity pools and it's liquidity providers for it to function very well.

So with this knowledge, a crypto holder who wants to involve in yield farming would definitely be providing liquidity. This can be done by adding his funds to the liquidity pool that is well known, to power a market for various activities such as exchange, borrowing and lending.
When you add liquidity to the pool, you are going to get a percentage of the revenue that have been generated from the DeFi platform in the form of reward token. A few protocols even offer the reward token in in the form of other different cryptocurrencies. This is done to enable it's users to be able to diversify their portfolio.

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

Two best yield farms include
• Pancakeswap &
• AAVE

PancakeSwap

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PancakeSwap is the best and trending automated market maker and the initial project on Binance Smart Chain. It is the best decentralized exchange protocol that offers yeild farming in the DeFi space with
a 24 hours trading volume currently at $400Million.
It's native token(Cake), that initially started trading at $0.48, now currently have a trading value of $13.

Pancake swap is the best because of the following reasons.

• PancakeSwap has come out with nice products on their platform that gives it's users advantage. Firstly, there is the Syrup Pool where people could stake CAKE and other various assets available at pancake swap at an APR that is about 50% and above.

• Secondly, an automatic compound CAKE pool has also been introduced so that users donnot need to manually take reward and restake.

• Another feature that keeps Pancake swap at the top is the provision of the various farms that users could provide liquidity for in a kind of an asset pair like CAKE and Binance coin so that they can get CAKE as pool reward. These kind of farms can bring very good returns but are also very risky when it comes to providing liquidity for assets that are highly volatile.

AAVE

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Aave is another liquidity protocol whose area of specialization is borrowing and lending assets. Users on the AAVE platform can lend their assets to generate yield or even borrow after depositing their asset.

AAVE lends and borrows about 20 top cryptocoins thereby attracting a good number of investors who wants to maximize their asset returns.
Another notable good of AAVE to it's users is the availability of choices between variable and fixed interest rate by borrowers.

AAVE is the number one DEFI platform on Ethereum in terms of popularity and has gained popularity amongst yield farmers. AAVE has in it's possession about $10 billion worth of collective assets. A good number of about 40,000 distinguished ethereum users now provide liquidity in the AAVE DeFi space thereby increase its popularity, trust and strength amongst the users of DeFi.

(8) The Calculation method in Yield Farming Returns.

APY (Annual Percentage Yield)

APY as the name implies is the percentage reward which a farmer is going to get in the period of a year after staking or adding liquidity to a pool.

For a clearer understanding, let's assume that Jane has just added liquidity to a pool that offers about 2% of her asset. If her asset worth is $100, then at the end of the year, jane would be having 2% of $100 which will give her $102.

Also, one must take note that interest could be paid out in monthly intervals and so to calculate the monthly pool reward of jane, then you have to divide the percentage (2%) by 12 months and multiply it with the staked asset.
Some yield farms also compound their APY.

APR (Annual Percentage Rate)

APR is the percentage of the charge which a borrower from a pool will be will incure in a year interval.

Assuming Jane borrows $100 from a pool at an APR of 20%, then at the end of the year, the percentage charge for borrowing will be 20% of $100 which will give $20.
Also, to find the monthly percentage rate, we divide it the APR by 12 months
Note that the APR is never compounded.

So in general, the higher the APY, the higher the reward yield while the higher the APR, the higher the debt.

(9) Advantages & Disadvantages Of Yield Farming.

Advantages of Yield Farming

• Yield farming can be executed currently with different spaces or target. Currently, there are a lot of DeFi platforms that power and are based on yield farming. Some of these platforms have operated for some years now and have proven yield farming trustworthy and rewarding.

• Yield farming gives farmers access to a huge reward in harvest. These harvest mostly come in a time interval of 6 months to a year and then will be put back into the pool to get a higher profit reward.

• By virtue of farmers providing liquidity, it reduces the amount of readily available sellers in the crypto market. If there are less sellers and more buyers, then there will be an uptrend and subsequently an increase in the price of the invested asset.

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Disadvantages of Yield Farming

• Yield farming is complex and requires people with advanced knowledge on DeFi

• Yield farming favors farmers who provide larger liquidity thereby favoring the crypto whales. Small investors may lose some or all there asset value in commission payment and may not get profit.

• Another great concern of yield farming is the security aspect of the smart contract of the yield farm. If the platform is not designed and programed well, it could be prone to theft that will bring about loss of some or all the funds the platforms holds.

(10) Conclusion on DeFi & Yield Farming.

• DeFi has made financial transactions closer, easier, convinient and stress free as at when compared to CeFi but it still has the challenge of widespread acceptabiliy in the world and that has limited it's dominance over CeFi. People trust government backed finance given that there is someone that can be held accountable for there loss if any but in DeFi, it's just you and your computer system.

• In contrast to what a lot of people believe, yield farming is not a saf or guaranteed line investment as it may seem. In reality, the simultaneous maintenance of various leveraged positions in one or multiple platforms heavily increases the chances of incurring losses in a market with high volatility and for this, yield farming must be done with frequent control and observation and also, proper caution must be applied.

Regards to professor @stream4u