Greetings Steem & Crypto Funs!
Introdution
I have really missed out very vital lessons in this Steem Crypto Academy Education. I am back again to share my task researched so far on Cefi,- Defi & Yield farming, homework prepared by
@stream4u.
I see the technology been advance from the old system of transacting money manually to the simplest way that the investors can invest their money on using internet, that is Blockchain. The old system, the is Centralized finance(Cefi) is seen to be some rigidity and too much regulations. Adding to this, there is a long chain processes before money are transacted to the owner. It is also seen as one way affairs, since it is the Banks who have enough money and hence have the capacity to lend. But, with Decentralized finance(Defi), every investor has equal chance to operate without a strict regulatory bodies.
What is the importance of Defi system?
I would therefore throw more light on the importance of Defi system of operate against Cefi. This is explained in the as follows:
1. The inception/inbuilt of Smart Contract system in Defi makes it irrelevant for any third part issue.
Smart contract in Defi is the system of computing code on the block which calculate the transaction instead of the third party making the transaction. This makes it very possible in a situation where the Maker, the Borrower or the lender keeps off from disclosing the transaction incase he wants to maintain his privacy in the trading system. In the case of Peer to Peer trading of stable coin, both the buyer and the seller at their own convenient trading environment feel comfortable in trading.
2. The Investor in Defi is 100% in control of his key without any third party influence.
One insecure way in Cefi is that your Account number get known to the Bankers during entries of business or transaction. When the project manager is queueing the figures your account number is requested to be used. With Defi, since there is no third part acting as Intermediary, you have access with your key without giving to anyone.
3. Defi has provided extra Financial transaction support method Globally
Unlike at former when loaning money, lending money and borrowing money is associated to only Banks, now the trend has changed even to more simpler method with the onset of Defi on Blockchain. Now we have millions of people using smart phones, laptops and other means to getting internet services that people can live in their rooms and queue in transactions. There is no need to walk or pick vehicle to Bank if you are into Defi. We can say that transacting money through this means has become very easy and convenient.
Flaws in Centralized finance:
There are many imperfections in the Centralized finance (Cefi) that makes it difficult for many people to cope with. These are summarised below:
1. Low Incentivization for their Customers: The individuals who operates with Banks do not benefit that much since the ideology that the richer continues to be rich holds here. The Banks are the holders of huge money who still lends to these people who operate with the Banks. When profits are gain, the top ranks, the Board of Directors and the Deputies are the sole shareholders leaving ordinary customers behind.
2. Censorship resistance and monetization are very high under Cefi.
3. Since there are authorities such as Board of Directors, Bank managers, they limit the opportunity of members to express their views if something goes wrong. Even those who try to talk can be sanction of dismiss from their jobs. All these goes a long way to cripple the economy at long round.
Two Defi Products Explained.
The two Defi Products or services I would like to talk about is DEX and Maker. Though there other important ones but I these two commodities are also important. First of all let's consider:
1. DEX:
Dex is simply, Decentralized Exchange which allows Peer to Peer trading where there is no Intermediary dealing with the transaction for both the Buyer and the Seller. The transaction is completed base on each party validation on the Blockchain with your keys. In Binance for instance, they have provided with Dex for BNB coins which there is is only $0.05 fees charge.
At Dex, both Blockchain users on transaction agreement would enter the amount of Crypto they wish to transact within a specified time. On Binance it ranges from Peer to Peer. At times it could be 15mins to 30mins. Since smart contract has coded in the Blockchain, when the time end agreed ends the trade must cancel.
Lending
This is the process where by a crypto holder lend his crypto a borrower who negotiate terms with the Lender. As a result, the Lender earns some profits for giving out his crypto as loan. In the same way, the borrower uses his crypto assets on the Blockchain as collateral and take out the crypto he borrows. This means that one cannot borrow crypto assets if he has zero crypto in his account. Since it would be difficult to be trusted and giving the loan. That is seen as the only challenge.
source
Risks involved in Defi
In every Business, there are pros and cons. As we have discussed the pros of Defi, of course it can't 100% perfect since transactions on internet though very easy and simple but there must be proper tuition for especially the beginners of Defi. They should be able to understand that there is also a high risk of losing their coins or not meeting the authentic platform for making their Defi transaction for them. The following few risks are what I have spotted on Defi:
Deficiency in Insurance of Defi system
There is no guarantee for insurance if in the course of transaction one loses his funds. The question is that who is responsible to bear since there is no Intermediary this is something which become a challenge to investors in Defi. Unlike the centralized finance like Banks where they have insurance for their Institutions, it's not like Defi.
Meagre Liquidity factor
By the end of the day, the borrower receive small amount of money since he has to offer crypto from his account as collateral before giving the loan. There is also high collateral charges. Ideally, in some Banks they only need to verify that you have accounts with them to qualify you for loan. So, it becomes very difficult for the Borrowers to get high liquid money to operate. This is something that we should reconsider it in Defi in future.
At its core, yield farming is a process that allows cryptocurrency holders to earn rewards on their holdings. With yield farming, an investor deposits units of a cryptocurrency into a lending protocol to earn interest from trading fees.14 Jun 2021
What is Yield Farming?
Yield Farming in Defi refers to the method where crypto investors hold their crypto coins ideally to lend Borrowers so that they end interest at the end of their agreed time. To be able to be yield farmer in Defi, one has to deposit some amount of Crypto so that he can earn interest.
How Does Yield Farming Work?
The Yield Farming works slightly as the Financial institutions in our local environment, they issue loans for Borrowers and at the end of the agreed time, the Borrower pay back the Loan with some interest. In some Banks which issue compound interest, they deduct the the interest and some amount of principal. With the Yield farm, the holder of the crypto who lends the crypto acts like a Bank and he claims all the interest on the crypto lended to the Borrower.
https://trustwallet.com/blog/top-5-yield-farms-on-bsc
What Are the best Yield Farming Platforms and why they are best.? (Explain any 2 in detail)
All the Yield Farming I have researched they all stand out to be the best. But for the benefit of this homework, I will share two of them with you:
Pancakeswap:
This is one of the best Yield Farming which can be found in Binance Exchange platform. The Crypto investors can deposits some amount in the Pancakeswap and ear returns when he lends to the Borrower. Pancakeswap is noted to be one of the booming Yield Farming in Binance. It's therefore easy, cheap and fast.
source
Uniswap:
Ethereum is second largest crypto that investors trade apart from Bitcoin. Being the highest patronize crypto, Uniswap is built with its smart contract chain to trading pair with ERC-20. So the Liquidity providers is able to offer transaction through swapping using Uniswap at the Ethereum wallet. For instance at the Ethereum wallet, if the two traders want to use Uniswap, the seller has to queue in the receiver's address having selected the trading pair, for instance Ether/DAI.
source
The Calculate method in the Yield Farming Returns:
In this case you have two methods of calculating interest accrued for the years returns for Yield Farming. The are:
- Annual Percentage Rate(APR)
&
- Annual Percentage Yield(APY)
The APR is just a a simple method calculation while the APY is base of compound interest calculation.
Let's take for instance the Liquidity provider just input 200dai using Uniswap for the year on 10% interest rate. The formula for APR,
APR = Periodic Rate x Number of Periods in a Year
Let Periodic rate = 10% & number of periods for the year =365days
This would be:
10% x 365= 36.5%^200dai this would be 73dai interest rate for the year. Adding this to his principal would be 273dai per annum.
In this case if we want to know the actual interest accrued everyday, just decide 73dai by 365days and this will give you 0.2dai.
APY = 1 + Periodic Rate^Number of periods – 1
In this case with the same 200dai
APY = 1+10% ^365-1
= 40.15-1
= 39.15%^200dai
=78.3 ÷ by 365days give you
= 0.21dai
Advantages and Disadvantages of Yield Farming:
Advantages
There is Much profit gains by the Investor:
The interest rate accrued on daily basis I are calculated yearly on compound interest. That is APY. This helps the Maker accumulate more resources and expand his Yield Farming the next year.
Flexibility of Trading:
Both the Maker and Taker are on their convenient trading agreement to swap using the one of the Yield farming methods, either Uniswap or Pancakeswap. There is not third party influence.
Disadvantages
The risks of price volatility;
One of the main reasons why may Makers and Takers fear Engaging in Yield Farming is the prices downturn. In case the Maker and Taker enter into trade and it happens that prices of crypto declines, it affects their trading and therefore one would be at lost. This makes it unfair and unpleasant for people to enter
The interest rate for the Taker might be disadvantage especially when prices of crypto increases. Already, the Maker must deposit something in his account and all these would be factored in the interest for the Taker.
Lack of insurance is also another disadvantage.
In case, any of the trading partner Account get loss or compromise, the crypto coin in the Yield Farming would be lost.
Conclusion
As I bring my homework to and end, I would say that both Defi and Yield Farming are of good to support a lot especially in this contemporary era of technology hub. But, per the per the susceptible risks raised here, I recommend that something should be done on the part like lack of insurance, high risks of hackers and proper measures should be put in place for more people to engage in these crypto support apps. I hereby also leave advice for all beginners to read wide and understand what it takes for becoming partner of one of these good initiative.
Hi @oppongk
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@stream4u
Crypto Professors : Steemit Crypto Academy
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Thank you so much Prof. @stream4u for verifying my homework. I will abide by all these recommendations and improve in my subsequent homework.
A well-written one. Thanks for sharing.
Thanks so much for your comment.