Greetings to all of the other people who utilize this platform. It's wonderful to see so many of you in the third week of Crypto Academy Season 5.

This course focuses primarily on yield farming. I read the instructional post and will therefore complete the chores.

Yield Farming

One of the most common methods of creating passive income with cryptocurrencies is yield farming.

Yield farming is a technique in which investors (referred to as liquidity providers) donate their assets to a liquidity pool only for the purpose of earning interest over time.

The interest received from blocked commodities would be the same crypto asset as the one that was locked, or a mix of crypto assets.

The APY is used in the income yield mechanism of yield farming systems, and it yields investment returns on the assets staked.

Examples of platforms that offer yield farming are:

• Aave
• Compound Finance
• Synthetic
• Uniswap, etc
  

Staking

The APY is used to calculate the interest yield on the goods staked by yield farming platforms.

Staking entails depositing cryptocurrency in a pool that will serve as nodes for block validation. The node authorized for block validation receives a reward when the block is validated. The coin staked in the protocol is always the reward.

Staking has proven to be a superior alternative to the old Proof of Work technique, which necessitates the use of complex equipment with a lot of computing power. The mining process would consume a lot of energy if it had a lot of computational power.

The number of assets a person has locked up improves his or her chances of validating a block and receiving incentives.

Differences Between Yield Farming and Staking

Despite the fact that yield farming and staking are frequently misconstrued, they are two distinct concepts.

Yield Farming

• The main goal of yield farming is to earn money by getting interest on assets that have been locked up.
• Yield farming is viewed as a more profitable industry because APY rates might exceed 100%.
• Automated Market Maker is the technology used by platform offers yield farming as an interest mechanism.

Staking

• The sole objective of staking is to contribute to the network's block validation.
• The annual percentage yield (APY) ranges from 5% to 15%, making it a less advantageous investment.
• For systems which use the Proof - Of - stake consensus protocol for verification and security, staking is conceivable.
  

Yearn Finance

Yearn Finance is an Ethereum-based project that provides lending and trading services.

The project has the following features:

Dashboard

This shows the value of a user's assets in US dollars.

Wallet

This is used to store assets that aren't being used right now.

Vaults

This provides groups where assets can be locked for income generation. As per their APY rates, the pools are ranked from best to worst.

Lab

This tool provides firsthand knowledge of the platform's most recent opportunities.

Iron Bank

This feature enables users to both borrow from and supply to the pool. If a user cannot discover a suitable pool, assets can be retained in the iron bank. Interest would be paid on the assets held in the iron bank.

Wallet Connect on Yearn Finance

Step 1:

Open the Yearn Finance site on a wallet with a web 3.0 browser for mobile devices. I used Trust Wallet to create my illustration.

Step 2:

Choose "Connect Wallet" from the drop-down menu.

Step 3:

Choose Trust Wallet as your wallet.

Step 4:

Wallet Connect successful.

To send money to Yearn Finance after connecting your wallet, simply send money to the associated wallet's wallet address. As long as the wallet is linked, all funds will be deposited to the platform.

Locking Assets

Step 1:

To lock assets, choose a preferred pool.

Step 2:

Approve.

Step 3:

On the wallet, approve the smart contract. I don't have enough balance in my illustration. As a result, I am unable to authorize the smart contract.

Step 4:

After you've received approval, deposit into the pool of your choice.

Collateralization in Yield Farming

In the actual world, a company or group had to put up security in order to secure a loan. Collateral is a physical asset (or asset) that the lender can take if the borrower defaults on the loan.

To receive a loan in yield farming, the borrower must put up collateral. To avoid liquidation, the collateral is always more than the amount to be borrowed. Overcollarization is the term for this phenomenon.

Varying yield farming platforms have different collateralization ratios. A 500 percent collateralization ratio means that for every 100 dollars put into the pool, you can get 20 dollars back. The goal of this protocol is to keep the collateral value above the platform's defined threshold.

TVL of the DeFi Ecosystem

The DeFi ecosystem has a TVL of $105.36 billion.

TVL of the Yearn Finance Potocol

Yearn Finance Protocol has a TVL of $4.23 billion.

Market Cap / TVL ratio of the YFI Token

Market cap = $1,081,993,414.17

TVL of YFI token = $4.23 billion

Therefore, Market Cap / TVL ratio of YFI = $1,081,993,414.17/$4,230,000,000

≈ 0.25

Is the YFI Token Overvalued or Undervalued?

The YFI cryptocurrency is significantly discounted. Why? Let's start with the market capitalization to TVL ratio. This ratio has a value of 0.25, which is a fraction of one. In most circumstances, if a coin's market cap to TVL ratio is less than one, it is considered cheap. One of those instances is this one.

Second, as the native token of a network that allows yield farming, the YFI token has a wide range of applications. The YFI would be more than a token used to provide liquidity in a yield farm as its value rises and the enterprise develops. The YFI token is significantly undervalued when compared to coins like Bitcoin, which are only utilized as a means of payment and a store of value.

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 August 1 till date (december4), Bitcoin has made a +46.52% movement in price

YFI has made a -10.53% movement in price.

otal Yield from BTC = $500 × 146.52/ 100 = $732.6

Total Yield from YFI = $500 × (100-10.53) /100 = $447.53

∴ Amount after investment period = $732.5+ $447.53= 1180.03

Net profit = $1180-$1000 = $180

∴ ROI = ($180/$1000)×100 = 18%

Risks of Yield Farming

Yield farming, like any other possible investment, is a risky endeavor. The following are the most of the risks associated with yield farming:

• Bugs in the DeFI's programme (smart contract) can result in asset loss. Because the DeFi is a programme, it is vulnerable to coding faults and even assaults that can alter the digital code, resulting in a widespread loss of investment.

• In the network, there is a possibility of impairment loss. Impairment loss occurs when the price of an asset drops suddenly or dramatically, causing the value of interest and investment to fall below the initial value of the investment. In the blink of an eye, this results in a significant loss for investors.

• Liquidation occurs when the value of the collateral falls so low that it is no longer sufficient to cover the loan amount. In this case, the collateral and loan are forfeited in order to repay the borrowed funds. Because of the challenge of liquidation, collateral is frequently far more valuable than the loan amount.
  

Conclusion

Yield farming is a lucrative business that allows investors to make money while they sleep. Yield farming, while similar to staking, is a considerably more profitable (and riskier) venture.

It is necessary to get an appropriate understanding about yield farming before embarking on such an enterprise in order to minimize losses.

Special thanks to @imagen

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