Crypto Academy | Season 3 | Week 4 - Homework Post for Professor @stream4u
Hello Everyone, so today I invite you all to read today's Homework Defi, Cefi, and Yield subject which is given by Professor @stream4u.
So let us continue with our homework.
The Defi system or Decentralized Financial system is a system in which financial things become available to normal people or the public which does not allow any third party such as banks.
But if we see in the centralized financial system the things there work a little differently as there is a bank and an authority who oversight your money, while in a Decentralized Financial system you are the only one who controls your own money.
Protocols and Technologies: In Defi or Decentralized Financial system there are different protocols and technologies, as it consists of blockchain and open source technologies. And it also has smart contracts to agree with buyers or sellers and lenders. Defi has actually removed the intermediaries from its system, unlike Cefi.
Benefits of Defi:
So the main benefits of De Fi is that:
It gives you full authority over your money.
Defi can also reach the maximum level of accessibility.
Defi is much safer than the Cefi system as it has a blockchain-powered platform that helps to keep it safe from hacking.
Decentralized exchange:
So now as there is no mediator in the Decentralized finance system unlike the centralized finance system as which has banks that are working as a mediator which took your money and then gave that to other people and make profit from that but while
Control: So as I also have told you all about this that in the Decentralized financial system an individual or a person has full authority over its money, and even also in making transactions as Defi works on blockchain and as blockchain works 24/7 a person got no issues while doing transaction unlike in Cefi we have to do the transaction and have to deposit money which takes a lot of and also got a lot of issues of timing. In Defi, we can do transactions and deposit our money anytime and everywhere.
Total Freedom: As if we see in the Defi there is total freedom of transactions as you don't have to verify yourself but as in centralized finance system I remember some days ago I went to the bank to do some transaction and there they asked for my original ID and an ID copy as well, and I got to know that it is the process of that but if we see in Defi there is no point to verify yourself, so in other words, there is full freedom.
No Third Parties: As in a centralized finance system there are the third party like banks and government, for example as if we have to send some money to someone, so we first will have to deposit it in our bank account and then from there we can transfer it to the person we want to gave. But in Defi, there is no such third Party or intermediaries in this and you can do transactions with being in the full authority of your money.
So above I have shown you all the importance of the Defi System, how it works its advantages, and how it has changed the financial system from top to bottom.
The few flaws that are associated with or in the centralized finance system is listed below with the details in it too:
- Authority: So if we see in the Decentralized Finance system so there is no third party in the business and a person has full authority of its money or transactions but while in centralized finance system or Cefi a person does not have full authority over its money. And as it has a central Authority then we also must have to take permission or approval every time while doing any transactions.
- Security: So the security function of a centralized finance system is also very low and usually we see in the news that money has been hacked from the bank's accounts and also the cases of theft and robbery. Also if the bank got bankrupt you will lose your money.
- Intermediaries: So while doing transactions are there are mostly the intermediaries working in a centralized finance system which gets our more transactions fees and it also affects the time period of the transaction, which means it will take a lot of time to get the transactions done.
- Verification issue: So the other main flaw of the centralized finance system is that it has the verification issues as I also have told you above that when I went to the bank to make a deposit and then had to do a transaction they asked me for the ID and if I don't provide a correct ID or the papers they asked for, the process will not be done, so I must have to verify myself every time I do any transactions. But if we see in Crypto exchange as I only use Binance so in Binance you can still do p2p in local cryptos and even for the main p2p platform you just have to verify yourself only one time.
So these were some flaws in the centralized finance system.
So in this question, I will be explaining in detail the 2 products of Defi product which will go to be the Lending and then DEX (decentralized Exchange), so let us start on that.
1. Lending:
Defi or decentralized platform is a place or a financial application based on the block in which you can do the transactions or can operate it without having any third party between the lender and buyer. And it works on the P2P system.
So in De Fi or decentralized finance system allows people to have loans or offer people loans in crypto without any third party interfering and no intermediaries. it also allows the people to enlist their assets in the crypto lending sites for lending purposes and in return, they got interested in that.
A borrower can take a loan directly from the lender through the P2P system.
Defi has the most lending growth rate as compared to all Dapps. So in Defi, we can see that it uses the most advanced technologies and functions as compared to a normal lending system. Decentralized finance also has the best transparency which makes it very easy to transfer money and to do transactions.
Decentralized finance benefits both the lenders and the borrowers, as the ones who do long-term investment, can earn through interest rates while lending their assets, and the borrowers can get the crypto at a lower price than the Decentralized exchange. So now let see a lending and borrowing site, which is JUST LENDSo now let us see it in detail:
So JUST LEND is the first leading platform that is built on the Tron Blockchain where users can lend, borrow, deposit assets and earn interests. It is basically a fund pool which interest rate is determined by the algorithm which words according to the supply and demand of the TRON assets.
So in JUST LEND there are 9 different markets available TRX, USDT, BTC, ETH, SUN, JST, USDJ, WBTT, and WIN. And in that, we have to supply the Token and can earn APY on that. So when we supply the token or asset into the JUST LEND lending pool, I will receive jtokens in exchange for that which is used to collateralized to borrow on the platform. So if I for example Lend my TRX in JUSTLEND lending pool, I will get the APY on it and as well as the jtokens which I can use to borrow some assets or tokens.
2. Decentralized Exchange:
So the Decentralized Exchange or DEX is used to do the Peer to Peer cryptocurrencies transactions and also to swap any crypto with any other crypto according to the current market price and also can provide the liquidity and can borrow and lend any coin of their choice without and the third party or any intermediaries. And a user has full authority over his money or asset.
A decentralized Exchange also prevents the price manipulation of the market. There are as of now 35 Decentralized exchanges which are working some main examples of that are SushiSwap, PancakeSwap, QuickSwap, JustSwap, Uniswap, and more.
So now I am gonna share about the JUSTSAWAP as I have worked on that before and have a little experience in that.
Justswap is also a Tron-based dApp. As you can consider from its name that Just swap. Swap means change means to say you can change your assets by using justswap.io. You can swap your Token or assets here and it may be very fruitful for you to get benefit in the form of profit. JUST SWAP allow people to do the Peer Peer cryptocurrencies transactions and also to swap any crypto with any other crypto according to the current market price and also can provide the liquidity and can borrow and lend any coin of their choice without and the third party or any intermediaries. But the most important thing to see here is to save our TRON from burning as JUST SWAP as a Tron based site and it charge TRON as fees and as it also does the smart contract so that get a lot of Energy and usually we don't have energy so we end up burning our TRON.
As of now, I have told you about the 2 Defi products here
So if we see around us everything has some risks and even the Decentralized Finance system or Defi also have a risk which involved around it, so the few risks associated with the Defi system are:
Volatility in Price: So there is high volatility in the Decentralised finance system or Defi as we can see the price of Bitcoin as some months ago it was on $75k and then in some days it drop to near $35k. So it is like at one moment the price is up so the other moment the price is down. So that's a high risk in that as in Cefi the market is much stable.
Impermanent Loss: So this risk is like when you gave your asset or put your asset to liquidity pool and in this, you risk something which is "Impermanent Loss". So this risk is like that when we locked our asset or crypto into a Liquidity pool and in that, we lose some money, and usually, it is an unrealized loss which people don't get in first. So that Impermanent loss also usually happens in a Defi system when it increases the price of an asset in high supply and lowered the price of the asset in low supply to balance the market.
Smart Contracts Risks: So like in everything the Smart contract in De Fi also has some risks, but the smart contracts are like the pre-written codes which are used while doing transactions. So the risk in that is if it gets hacked or gets any minor issue it can risk all your investment, funds, or your assets.
Technical Risks: So I guess everything related to technical things has a risk of technical risks, so in Decentralized Financial System or De Fi there is also a technical risk which are the risks related to the issues with protocols, hardware, and software. And the technical risks can depend or rely on different factors such as API, exception handling, memory safety, and many things like that.
So these were the few risks from the risks in the De fi system, and here is a tip for the people who wanna enter this Decentralized world is that he/she should look into the risk of this market other than just seeing the good things.
Yield farming is basically a process of multiplying your crypto or making more crypto out of the pre-acquired one. In this process, de Fi platform is usually involved where the crypto is sent by the lender (i.e., you) to a de Fi platform which acts as a bank and may give out loans to the borrower without any paperwork or id requirement, and that's the real business
Yield farming is also explained as liquidity mining. This liquidity mining involves liquidity providers that carry out the fundings of liquidity pools. These funds remain in the liquidity pool and the provider gets a reward. These rewards may also be in the form of tokens and these tokens, in turn, may be used to earn rewards from other pools.
For high yields, the yield farmers move their funds quite a lot.
So the yield farming works is that when a person locked their assets in a liquidity pool for example as I have some assets so I will provide liquidity to the pool to earn the token and interest in that. So the tokens which are being locked are used by the AMM ((Automated Market Maker)) the quoting price in the decentralized exchange and also in the DEX.
So as in simple words as we have seen above if I provide the liquidity of the TRX-20 so in return I will earn the interest in the form of APY or APR and as well as I will also earn some extra tokens such as the token which helps me to borrow the assets.
Adding Liquidity in JUSTSWAP.
Hereafter landing on the page I have to click on the pool and then I will click on the Add Liquidity.
There as I have TRX and NFT, so I have chosen the MAX and then I have clicked on the supply.
There then it will ask for the sign in so I will just sign into that and then I will ask for confirmation of supply so we will have to confirm that also.
Then we will have to sign the signature to add the liquidity in the market.
It will then show that the liquidity is added.
And then in the main dashboard you can see that I have added two liquidity as the first one is of before and the second one is which I just made.
So the best two Yield Farming Platforms which I am gonna tell you all about are Pancakeswap and uni swap so below I am gonna tell you about that in detail.
1. Pancakeswap:
So as we know that pancakeswap is a decentralized exchange or DEX and is one of the DEX that offers yield farming and as it is also made on the bitcoin smart chain. In pancakeswap liquidity pools we have to work through automated market maker(AMM).
Pancakeswap offers the buy and sells of the asset, lending, and borrowing, and also the swap and exchange of the assets of the BEP-20 Tokens. Moreover, the Pancakeswap gives different opportunities to earn which are through farming, lottery, collectibles, and other many more options though. In this, we can stake our assets to earn the Cake token directly and can also stake that cake token to earn more and also can trade BEP-20 token.
Why it is best?
Pancakeswap also has very low fees, has fast transactions as it only takes 5 seconds in transactions in pancakeswap. It gives more benefits at less cost as there are many ways of earning in there as I also have told above that we can earn through the yield farming, can stake the assets and earn interest, collect collectibles which are NFTs and also participate in the lottery. It is also really cost-effective as compared to other decentralized exchanges and it is faster than Ethereum. Uniswap also has substantial liquidity that can even be compared to some centralized exchanges.
2. Uniswap
so the uniswap is also a decentralized exchange as it is not owned by anyone, there is no third party or intermediaries, and is one of the best DEX. The Uniswap was built in 2018 before the creation of Pancakeswap as it was built in 2020 and was on top of the Ethereum blockchain. In uniswap you can swap the ERX-20 token which is connected to the Ethereum and also can earn from the yield farming and staking or lending your assets and can get interested in that. On Uniswap you can buy and sell, swap and exchange and do yield farming as well.
Why it is the best?
As in Uniswap, we can earn through a different process such as yield farming, from staking and lending our asset and get returns in APY or APR annually, as well as it also provides good APY as you can even earn 50% APY on normal stake which is quite high from others decentralized exchanges. It is also fast in doing transactions fully independently with no third party involved.
An annual calculation is done for the profitability of the yield farming by two measures known as APY- ANNUAL PERCENTAGE YIELD and APR- ANNUAL PERCENTAGE RATE. Along with APR in tracking the returns of assets, APY also tracks the reinvesting of the asset returns simply known as compounding. So let see the both of them:
APY - ANNUAL PERCENTAGE YIELD:
In APY you get an annual return on your investments and it's based on the compound interest and this compound is the main thing that different APY from APR. Now let us see the calculation of APY - ANNUAL PERCENTAGE YIELD:
Calculation:
So just guess that I have $500 worth of ADA, so I stake that $400 into a pool that offers maybe 200%.
If we use the (1+r/n)^n-1
Where;
r = interest rate = 100% = 1
n = number of compounding periods = 365 days
So now if we put these values in the formula,
= (1+r/n)^n-1]
= (1+ 2/365)^365-1
= (1+ 0.00273)^365-1
= (1.00273)^365-1
= 2.704-1
= 1.70
Now the APY will be 1.70 X 400 = $680
My total investment after the year will be:
Now my total investment after one year = Initial investment + APY = 400 + 680 = $1080.
Hence my total return of the year will be = $1080.
APR - Annual Percentage Rate (APR):
So APR is also an annual return on the investment but without compound interest. Yet it is used in crypto yield farming. Now let us see the calculation of APR - Annual Percentage Rate (APR):
Now again just take the example of ADA that I have $400 of worth with an APR of also 100%,
So my APY for the year will be = $400 * 100 % = $400
And therefore initial investment + APY = $400 + $400 = $800.
Hence after a year I will get $800with interest.
ADVANTAGES:
High Returns: New offered strategies may promise a high return, it gives their users a chance to earn high returns on the APY as there is no middle man here so all the returns are so the user itself.
High Profits: High profits are seeking, as it is highly profitable and the ones who get involved in it get more profits at the end, as compare to normal investments.
Receive token:Tokens received from the borrower. As yield farming gave users the opportunity in the governance of protocol as well.
DISADVANTAGES
Hacking: yield farming is mainly through an open platform called Defi so it can be easily hacked.
No token value: This type of open platform, also known as the dAPP ecosystem, may wholly crash due to certain young or unproven tokens that literally have no value.
Liquidation: As yield farming is also called liquidity mining, where farmers lend and buy crypto to maximize their earnings, a sudden drop in the under usage crypto coin may cause the loss of the lenders and buyers.
Price volatility: So there is high volatility in the Decentralised finance system or Defi as we can see the price of Bitcoin as some months ago
In conclusion that now we have a clear idea of CeFi, Defi, and Yield farming. We learned that Defi is better than CeFi as it gives more authority to the people.
We also learn that we can also earn extra by yield farming. We see the decentralized exchanges and how we can swap/exchange the assets from there and how to do the lending and borrowing and how we can earn good interest by lending our assets annually on the basis of APY or APR.
We also have seen the risks as like even if the thing is very good there is also a risk which is evolving around it so had a clear vision on those risks now to save us from that.
Now that was all from my side thank you.
Regards,
@maazmoid123
Hi @maazmoid123
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@stream4u
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