Yield farming- Yield finance- Cryptoacademy S5W3- Homework post for @imagen

Hello friends

I humbly welcome all to my Season5 week3 assignment post of the steemit crypto academy.

This lecture is a promising one, given by our great Prof @imagen.
Please follow along as we begin our exploration by tackling the first question

Yield farming which is also known as liquidity or yield harvesting has to do with the lending of crypto assests, and in return the lender gains profit which comes in form of interest.

Yield farming is a very nice investment strategy in the cryptoworld that gives hopes of larger returns than any other investment platform available today.

Just as it is when banks lend money on interest, that is, they can lend you a sum of $10000 but you will be required to pay back $11000 within a specific time.
So also is the function of yield farming, but it has to do with the lending of crypto assests.

Crypto investors no longer wait for the rise and fall of cryptocurrency before they can make profit, they are now actively participants of yield farming, lending out their crypto assests, in expectation of a larger returns.

Yield farming works mainly with liquidity providers who duty is to add fund to liquidity pool.
A liquidity pool is a smart contract consisting of funds, and liquidity providers receives rewards for making liquidity available to the pool.

Yield farming is basically carried out using ERC-20 tokens built on the Ethereum blockchain, and rewards earned are also in the form of ERC-20 tokens.

Staking is a bit related to yield farming, in that, they both give out their crypto assests.

Staking is refered to the act of delegating a given number of tokens to a blockchain, thus removing them from circulation over a given period of time.

Staking has to do with the locking up of a certain amount of token, inorder to remove them from circulation, and this, in a sense, benefit the blockchain.

Staking helps a blockchain network by limiting the supply of it's tokens in existence, hereby making it limited in quantity and this in turn leads to escalation of price and it can be used to support the network.

Shall we proceed to the next phase of our adventure.

To participate in this task, I visited the yearn finance platform, and I saw some list of features which I will love to explore.

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On the home page, we can clearly see the total net worth, vault earnings, vault est yearly yield.

• I then clicked on wallet, and a new display appeared, here I am being requested to connect my metamask, of which I attempted doing

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I clicked on connect wallet and I then selected the wallet I wanted to connect it to, which is my metamask wallet

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Unfortunately it did not connect, and I believe that the reason for this is the absence of a system, I plead with my able professor, to please consider my condition, as not everyone possesses a laptop.

• I then proceeded to click on vault which is located on the left hand side

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And a list of crypto pair appeared, the vault feature allows a user to transfer funds.
So I selected the pair USDC

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From the screenshot above, it is seen that I can transfer funds from my wallet to my vault, all I need to do is input the amount I want to transfer and then click on the approve icon and my funds will be transferred.

• Next I clicked on the iron bank icon displayed on the right hand side, this feature enables a user to borrow funds

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After the above screenshot has been displayed, a user will select any tokens he wishes to borrow and then click on the borrow icon at the right and then a display will appear where he needs to fill the amount he wishes to borrow, and he can proceed to confirm the transaction.

• We also have the settings icon

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Here, a user can change his language, set slippage fee and perform many other functions as seen above.

Having explored this, shall we proceed to the next task.

From the word collaterization, we can easily coin out the word collateral.

Collateral is a substance of value, that is used as a pledge for repayment of a loan borrowed.
In other words, collateral is a substance that is usually staked by a borrower when he wants to borrow something of huge value.

For example, in a bank, if Mr A wants to borrow a loan, he will be asked to bring a collateral that will be held on to incase he fails to repay the borrowed funds.

The collateral, is a substance usually of greater value than the funds intended to be borrowed, and it is usually used as compensation, if the borrower fails to repay.

In the same manner is collaterization in yield farming, it is the act of staking assests inorder to borrow crypto tokens of equal value.
The function of collaterization is that it serves as liquidity providers, it's provides liquidity in the sense that exchanges are going on.

It also serve as collateral, in case the borrower fails to pay his debt or decides to run with the funds. It can then be used as compensation.

As of the time my post was made, the current TVL of the Defi ecosystem is $101.86billion

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And the TVL of the yearn finance protocol is $5,473,690,548

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And the ratio of market capitalization/TVL is 0.1641

https://coinmarketcap.com/currencies/yearn-finance/

From my perspective, I will say that the YFI token is under valued, I chose this because from the screenshot above, the ratio of market cap/TVL is 0.1641, meaning it is less than 1.

When the ratio of market cap/ TVL is less than one, it is said to be undervalued and when it is equal to one, it is overvalued.

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On the 1st of August, the price of BTC was $41,460.84 and the price of BTC as at when this post was made is $57,217.37.

If I invested $500 on the 1st of August, I will have a total of 0.0121btc gotten from 500/41460.84.

The current price of BTC = $57,217.37
So therefore,
0.0121 × 57217.37 = $692.33

Return investment= (692.33-500/500)×100
= 192.33/500×100 = 38.5%.

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The price of YFI as at August 1st = $33,125.12
And presently the price of YFI = $28,941.88

If I purchase YFI worth $500 on the 1st of August, I will have a total of 0.015YFI, gotten from 500/33,125.12

So therefore,
0.015×28,941.88 = $434.13.

Return investment= (434.13-500/500)× 100
= (-65.87/500)×100
= -13.2%

Now, ROI FOR YFI + ROI FOR BTC = -13.2+38.5
= 25.3%.

Shall we proceed to consider the last question of the week

From my personal opinion, below are the risk of yield farming:

• UNFAIRNESS:
  Due to the fact that the Yield farming are mostly manipulated by wealthy investors, the small scale investors are always at risk, especially when the whales decides to pull out their investment

• GAS FEES:
  Everyone would agree that the has fees on Ethereum network is very high, and this is a challenge for small scale investors.

When a lot of cryptocurrency are locked, the gas fee will no doubt escalate, and if small investors attempt to pull out their funds, they mind end up using all funds for gas fees.

• LIQUIDATION RISK:
  The risk of liquidation is one challenge faced by investors. For example, if the total value of coins in a pool is equal to $500 and the value keep depreciating, two things comes to mind, either to opt out of the system or to stick to the token.

If an investor decides to pull out, the market might begin to increase again and if he decides to stick to the token, the market might continue to decrease.

• RISK OF SCAM:
  Investors need to be extra careful when selecting a yield farming pool to make use of because any skilled crypto developer can develop an app for yield farming.

Please users should make use of apps in which their inventors are popularly known.

Yield farming is indeed a new innovative to make good profits, investors no longer wait on the rise and fall of cryptocurrency again.

Staking is another good innovative that helps to promote and enhance the blockchain.

Staking can be likened to investing on steem power, this helps to develop the steem blockchain.

I thank my able professor for his lecture, I look forward to learning from you professor.