Yield Farming - Yearn Finance - Crypto Academy S5W3 - Homework Post for @imagen
Hey Steemit!
Here is my homework post for Professor @imagen. It was a great lesson, and I hope that you will enjoy reading my post.
(1.) Describe the differences between Staking and Yield Farming.
Staking and yield farming are good ways for cryptocurrency owners to earn passive income. It's important to note that DeFi's yield farming needs customers to deposit their crypto coins on the site. There are several ways for cryptocurrency investors to support the blockchain, and staking is one of them.
With this in mind, let's take a closer look at the fundamental distinctions between yield farming and staking.
| Differences | Staking | Yield Farming |
|---|---|---|
| Profit | APY stands for Annual Percentage Yield. According to the staking token and the mechanism, it might be as high as 5 percent. | There must be a well-thought-out investment policy for yield farming. Not as simple as staking, but with the potential for significantly bigger payouts (up to 100%). |
| Rewards | Incentives for helping the blockchain reach and produce new blocks are known as staking rewards. | Liquidity pool payouts for yield farming might alter as the token's price fluctuates. |
| Security | Token staking is governed by a set of rules that are inextricably linked to the blockchain's consensus. If criminals attempt to manipulate the system, they might lose their money. | Using DeFi protocols and smart contracts, Yield farming is susceptible to hackers if the programming is done incorrectly. |
| Impermanent Loss Risk | It's safe to stake crypto, and you won't lose any of your money. | Because of the fluctuating value of digital assets, farmers who depend on their crops for income are in danger. When your money is held in a liquidity pool and the tokens in the pool are not evenly distributed, you may suffer a short-term loss. |
| Time | User money must be staked for a predetermined amount of time on various blockchain networks. Some demand a minimum purchase quantity. | Yield farming users don't need to keep their money in escrow for a certain amount of time. |
To earn a steady stream of passive revenue, you may have a choice to make between yield farming and staking. Cryptographic expertise is required for each one.
The best ROI comparison between yield farming and staking may sway users toward yield farming, but the argument should go beyond that.
For beginner crypto investors, yield farming might be a lot more complicated and time-consuming. Because it doesn't need constant monitoring, staking crypto may be left unattended for extended periods.
A lot will be dependent on what sort of investor you want to be in the DeFi market and how much expertise you already have.
(2.) Login to Yearn Finance. Fully explore the platform and indicate its functions. Describe the process for trading on the platform (wallet connection, funds transfer, available options) Show screenshots.
As we go to Yearn Finance, we land on the homepage where we can see the dashboard and other options such as Wallet, Vaults, Labs, Iron Bank, and Settings
Wallet:
When you click on the Wallet option, you are shown the value of your connected wallet. If you don't have a wallet connected, you can connect it by clicking on the option over the the top right corner,
Vaults:
Then we have the Vaults option. It shows us a set of investment techniques that are aimed to maximize the profits of other DeFi ventures.
Labs:
Labs show you different investment opportunities with their respective interest rates.
Iron Bank:
Iron Bank allows you to borrow tokens in exchange for your crypto. You just deposit your crypto as a security product, you do not sell it.
Settings:
Finally, we have settings. Here we can see different themes and we change them according to our choice. We can also change the language from Settings.
Step 1: At first, you went to yearn. Finance and click on Connect Wallet, After it, you'll get an option of different wallets, and I clicked on MetaMask as I wanted to connect with it, as you can see below:
Step 2: Now, as you can see, I got an option of MetaMask, and after it enters the password and clicks on Unlock.
Step 3: After entering the password, my MetaMask Account has shown, and after seeing it, I clicked on next. After it, I got a confirmation of connecting the Account, and I clicked on Connect, as you can see in the ss below:
Step 4: In the end, my Account has been linked to yearn.finance, and I highlighted it too in the screenshot below. That's how you can connect your MetaMask Account very easily.
(3.) What is collateralization in Yield Farming? What is function?
An individual who wants to borrow cryptocurrency must put up collateral to secure the loan. How DeFi loans are structured. Some lending standards demand security of up to 200 percent of the amount of the loan.
To borrow another asset, a user must deposit an asset first. The pool may sell the collateral to make up for a drop in value, leaving the liquidity providers liable to further loss if the deposit or collateral's value drops.
The collateral is subsequently forfeited by the borrower. If the price of an asset lowers, it is preferable to borrow from a high-ratio collateral pool to prevent collateral liquidation.
Assuming you're borrowing money, you'll often need to put up some kind of collateral to guarantee repayment. This is a kind of debt insurance. What is the significance of this? You may need to keep an eye on your collateralization ratio depending on the protocol you're using to source your money.
Your collateral may be sold on the open market if its value falls below the protocol's threshold. When it comes to staying afloat, what can you do? You have the option of increasing the amount of collateral you have available.
However, each platform has its requirements for this, and each platform will have its own needed collateralization ratios. It's also typical for them to use the term "over-collateralization." To avoid this, borrowers will have to put down a larger deposit. Why? Liquidating a big amount of collateral to prevent major market collapses.
A collateralization ratio of 200 percent is what you're looking for in your lending process. In other words, if you put in $100 worth of value, you may borrow $50 worth of value. It's typically a good idea to put up more collateral than is necessary to limit the risk of liquidation even further. Despite this, several systems use extremely large collateralization ratios (such as 750 percent) to protect the whole platform from liquidation risk.
(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 Market Cap / TVL ratio of the YFI token? Show screenshots.
TVL of the DeFi ecosystem
In the screenshot below, it is seen that the TVL of the DeFi ecosystem at the time I'm writing this assignment is $107.73B
TVL of the Yearn Finance protocol and its token's Market Cap / TVL ratio
From the screenshot below of coinmarketcap, we can see that the TVL of the Year Finance Protocol is around $5.86B. The Market Cap / TVL ratio of the YFI token is also shown below, which is 0.1817.
(4.1.) The YFI token, is it overvalued or undervalued? State the reasons.
The YFI token is undervalued. This is because the value we get when we divide the Market cap by TVL is 0.1817 which is less than 1. If this calculated value comes less than 1 for any token, it is considered to be undervalued.
Since its inception, YFI has become one of the most sought-after assets on the crypto market. The DeFi protocol token on Ethereum is now trading at $13,564 with a 330.6 percent increase in the past month. Bitcoin's price was $11,392 at the time of publishing, while YFI was trading at a 15% premium. The Messari research group says the token is still one of the most undervalued in the DeFi market, even though the market is crowded.
Year.finance aims to "industrialize" the yield farming process using its protocol. Therefore, investors may utilize the platform to deposit money and get the most returns without having to go through the difficult learning process the finest platforms with the highest returns in the industry.
"Vaults" were introduced by yearn.finance as a result. Investors merely need to deposit the cash, and the funds are distributed to the protocols with the highest returns, via them. An economic model based on yearn.finance's loan optimization and yield farming optimization may be seen in this context.
A 0.5 percent withdrawal fee and a 5 percent gas subsidy fee are charged by Messari's analyst, Ryan Watkins, for withdrawing monies from YFI. In only two months, the DeFi protocol has transformed into "an industrial yield farming machine." A total of $390 million worth of protocol-protected wealth has been amassed throughout that timeframe
It's worth noting, though, that YFI generates $21 million in yearly cash flow. According to the analyst, YFI has a P/S (Price-to-Sales) ratio of 20x based on this and the company's market capitalization of $390 million.
An asset's value is compared to its profits using this metric. To see it in action, you can go here to view the DeFi sector's cheapest interest rate of all. To put it another way, the YFI coin has a low price-to-sales ratio (P/S). Therefore, we can say that the YFI token is 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 in the actuality? Explain the reasons.
From the chart, that is shown above, we can see that the price of BTCUSD was 41472.69 on 1st August 2021. Therefore, if we invested 500USD in BTC on 1st August, we would have got 0.01205 BTC. (500/41,472.69)
The return on this investment now (3rd December 2021) would be 685.69USD. (0.01205*56,904.13)
Return = (685.69-500)/500 = 0.37138*100 = 37.13%
In the YFIUSD chart above, it can be seen that its price on 1st August 2021 was 33112.419. If we had invested 500USD in it, we would have got 0.0151 YFI (500/33112.419)
The return that we would have received on this investment now (3rd December 2021) would have been 437.44USD.
Return = (437.44-500)/500 = -0.1251*100 = -12.51%
BTC ROI + YFI ROI = 37.13% + (-12.51%) = %24.62
(6.) In your personal opinion, what are the risks of Yield Farming? Give reasons for your answer.
Produce growing is fraught with danger. The following are some of the dangers:
The danger of a smart contract:
There are faults and vulnerabilities in the smart contracts used in yield farming, putting your bitcoin in danger. Smart contracts, according to Kurahashi-Sofue, are a major source of yield farming's dangers. Increasing the contract's security requires more thorough code vetting and external audits.
Temporary loss
While your bitcoin is staked, it may grow or decrease in value, resulting in unrealized profits or losses. It is possible that if your loss exceeds the interest you received while keeping your coins accessible to trade, you would have been better off if you had kept your coins open to trade.
Restrictions on business:
A lot of things remain unanswered in regards to the regulation of bitcoin. As a result, the Securities and Exchange Commission (SEC) can supervise certain digital assets since they come within its jurisdiction. There have been stopping and desist orders filed against one of the most popular crypto lending platforms, BlockFi.
One of the newest developments in decentralized finance (DeFi) is yield farming, which is increasingly making its way into the mainstream. Investors look at it as a viable option when looking to boost their bottom lines. Approximately $13 billion in yield farming liquidity pools were locked up on March 10th, 2021, according to data from a cryptocurrency exchange, CoinMarketCap (note that the statistics are constantly updated).
Using yield farming, bitcoin owners may lock up their assets in exchange for extra cryptocurrency in the form of tokens. DeFi markets enable investors to earn either a fixed or variable interest rate on their investments by investing in their cryptocurrency.
Thank you so much Professor @imagen for teaching us such an amazing lesson.
@steemcurator02
@steemcurator02