Crypto Academy / Season 3 / Week 4 - Homework Post for [@stream4u] Topic: CeFi- DeFi- Yield Farming by @rokhani
I am @rokhani from Indonesia. I am so glad to join the lecture. It improve our knowledge and make a wide sight. For all kindness I must thank to Professor @stream4u who give many new perspectives. This week I want to do the homework.
Introduction
We are familiar with the CeFi financial system, which stands for Centralized Finance. CeFi is a system in which all orders are controlled by one central party without competing parties. Through this system it aims to conduct fair trade and is built in such a way that all rules are channeled through a central exchange.
The financial system of almost all countries today is highly centralized. The state has government agencies that print and regulate fiat currency through banks. The bank has full control over the customers' accounts.
Third parties also have full control over our clients' assets and money, and we must trust them to protect our assets. But they also charge huge fees for the services they provide.
In other hand, the definition of Decentralized Finance is a term for a variety of crypto asset financial service applications which are a disruption to the conventional financial sector considering that their use is really similar to financial service activities in general, such as lending and borrowing with crypto assets, not fiat money.
DeFi also refers to aiming to create an environment for financial services that is free of access, transparent, and without any intervention in which all financial services can be utilized by everyone and without being regulated by a particular authority.
DeFi users can have full control over their assets and interact with this ecosystem through a two-way (peer-to-peer) communication system via decentralized applications (dApps). All applications that run on this blockchain system will create new products, services, and financial markets that can be utilized by the public.
What Is the Importance Of the DeFi System?
1. Free access and privacy
Anyone can access DeFi as long as there is an internet network and the will. From anywhere not limited by country or time. Week daya or weekend we can make transaction. Even in the midnight we can do it well. This is different if we use conventional financial services that are limited to state regulations or other banking regulations. Users also do not have to provide personal information so they are not prone to being hacked or misused by irresponsible parties.
2. Transparent
With a blockchain basis, DeFi can be seen, find and connected by anyone. Everything is recorded and cannot be deleted so that users or other people can easily monitor it from anywhere and anytime.
3. No intervention and autonomy
There is no authority that can provide intervention because all transactions run very freely and unlike conventional finance, which is still influenced by the fiscal or monetary policy of the country where the financial institution is located. There is no centralized regulation that has power over assets and transactions.
4. Provide access to financial services for those who cannot enjoy conventional financial service products today.
Genberally, the orientation of traditional financial service institutions is to gain as much money as possible. However, the implication is that they are reluctant to reach those from the lower middle income class. Well, the "financial inclusion void" created by the actions of conventional financial service institutions is filled by the presence of DeFi.
5. DeFi is cheaper than CeFi or conventional financial.
Decentralized financial systems are not regulated by regulators, nor do they involve intermediaries (middlemen) such as banks. As a result, activity in the DeFi system goes on without long production. The implication is that the costs of financial services activities in the Decentralized Finance system can also be reduced.
6. Security
DeFi has a higher level of security than CeFi. DeFi has various cryptographic methods. User data is spread across multiple nodes, making it more difficult for hackers to access the data.
7. Stacking opportunity
Every user has the opportunity to do stacking by freezing assets and getting profits. The greater the invested capital, the greater the profit.
8. Make loan
DeFi build economical financial the people. The user can get loan also invest their money. By loan we can make life better to support our business.
Flaws in Centralized Finance.
1. Vulnerable to being hacked.
When we want to become a CeFi user, we are required to provide personal information to the CeFi provider. This data is controlled by them and it is very possible for hackers to penetrate security and sell data or misuse the data.
2. Bound by rules made according to need.
CeFi users must rely on the specified rules. This makes it difficult for us to determine how much or how much time we want to drive when investing, borrowing or otherwise.
3. Engaging third parties
At CeFi will involve a third party as a mediator. This creates other problems both data security and administrative costs.
4. Costs are more expensive and employees are longer
The fees charged are higher because in practice it involves a third party so that financial management at CeFi is larger and takes longer.
5. Must have access to Cefi.
Only certain people can use CeFi services so that people who need small fees are not covered by CeFI.
6. Limited to the currency specified according to the exchange.
In CeFi there is only one price listed on the exchange so people are not free to choose according to their wishes. Usually, it is only limited to one fiat currency such as rupiah, dollar or other.
7. Convoluted bureaucracy
In general, centralized financial institutions have long procedures and it takes a lot of time to get things done which could be simpler.
For example, when we want to apply for a loan from a bank, we have to follow the bureaucratic desk and of course there are problems where the official concerned is not available, which will further prolong the process.
Checking files also takes time so it will hamper or make the process longer.
8. Need physical presence
When we want to take care of our financial transactions, we still need to be physically present. This, of course, makes people need to come in with time and leave the business. Of course, it would be more efficient if finances could take place without the need for physical presence but with a high level of trust.
DeFi Products.
DeFi potential can target all areas of finance such as loans, insurance, housing, trading and others.
Although the potential for DeFi is quite wide, this time I will discuss lending and
1. Lending
In DeFi lending, it is the most popular sector for DeFi protocol providers. Some well-known projects with lending include MakerDAO, Compound, and from Indonesia there is VynDAO.
Basically, how DeFi works is determined by two important things, namely smart contracts and tokens. These two things replace all processes run by middlemen/third parties in centralized finance (CeFi).
What distinguishes CeFi and DeFi is that in the concept of lending or lending in traditional financial services (Centralized Finance/CeFi) today is the fixed rate and CeFi takes the difference. For example, if the interest rate for savers/depositors/investors is 6% and 14% for borrowers, the bank will take 8% or 40-50%. The bank will set its own interest rate and get the difference.
Lending on
DeFi uses a dynamic rate model where loan interest rates fluctuate depending on the level of network usage and the presence or absence of capital from investors/lenders.
In DeFi which produces lending products, borrowers can get their funds by pledging existing crypto assets. The interest that is installed is also dynamic. The model used in the DeFi system allows borrowers to pay less if there is less demand for loans. On the other hand, if demand is high, lenders or investors can earn higher interest rates.
For example, a DeFi loan service with a total fund pooled by lenders (=savers) of Rp. 1M and Rp. 100 million of loan funds requested by the borrower will have a much lower loan interest than other DeFi services that have a lender's pool of Rp. 1 M and Rp. 800 million requested by the borrower.
This model allows borrowers to pay less if there is less borrowing demand, and conversely if demand is high, lenders/investors can receive higher interest rates.
One of the lending projects as carried out by MakerDAO.? MakerDAO is a place where users can pawn cryptocurrencies and users get cash in the form of DAI stablecoins, and you can deposit DAI to earn interest.
As an illustration, if we need cash then we go to the pawnshop with jewelry as collateral. We will get cash and must return together with the interest set. If we can't pay then the jewelry will become the property of the pawnshop.
Almost the same as pawnshops, we can use MakerDAO services to earn money. In fact, MakerDAO allows us to do the same without having to guarantee family jewelry, but can use ETH and BAT. You don't get USD by mortgaging our crypto, but get the stablecoin DAI Well, to get DAI, you need to have collateral (collateral) in the form of ETH or BAT, as well as a wallet like MetaMask.
The price of the token is quite volatile, so to protect the pawn shop, the borrower must place a greater guarantee (in dollars) than the funds he borrowed. The required collateral ratio is usually 150% of the borrowed funds.
For example, for every 50 ETH or BAT guaranteed, the borrower can get a maximum of 40DAI. The minimum amount that can be borrowed is 40DAI
If the price of the ETH or BAT tokens pledged as collateral falls below the borrowed DAI value, MakerDAO will claim the pledged ETH or BAT and then sell them to cover your debt, including interest and penalty fees, then return the remaining value to the borrower.
2. DAI as the best Stablecoin
Before discussing DAI as one of the best stablecoins, we need to know what stablecoins are first.
A stablecoin is a crypto asset whose value is pegged to a specified asset. As the name suggests, stablecoins tend to be stable in value. This type of crypto asset is also often an option for investing in crypto assets.
DAI is one type of stablecoin that we can invest in. DAI is an algorithmic stablecoin released by MakerDAO (Decentralized Autonomous Organization). Using the Ethereum-based protocol, DAI maintains an exact 1:1 ratio to the US dollar.
DAI is one of the most integrated digital assets in the blockchain ecosystem. Besides being able to be borrowed, DAI can also be used in decentralized finance (DeFi) applications, blockchain-based games, and so on.
In contrast to most other stablecoins which are only pegged to one type of asset or fiat currency. DAI has many types of assets that can be used as price benchmarks.
However, this coin also uses other types of crypto assets as the basis for its value.
These stablecoins are often used as a means of borrowing and borrowing crypto assets without using an intermediary. Thus, DAI can create a system with a high level of transparency.
In DAI developed by MakerDAO, it takes developer functionality and turns all aspects into smart contracts. This system allows the community to be able to manage the organization transparently.
Initially, DAI was first introduced in 2015 by Rune Christensen, and Maker Protocol which was later launched in December 2017.
The stablecoin created by MakerDAO, namely DAI, has many unique features that other stablecoins don't even have. This is because this coin uses a level of decentralization that has never been used before by any token or crypto asset.
In DAI no other entity or party can have control over the issuance of these tokens.
Instead, users wishing to hod this coin can submit Ethereum-based assets into smart contracts that use it as collateral to maintain its value against the US dollar.
Also, unlike most other stablecoins whose value is based on a single fiat currency or one of the crypto assets. DAI can use various crypto assets as collateral, such as ETH, BAT, USDC, wBTC, COMP, and many more.
The development of this stablecoin began with a stub. At first, Maker Protocol only supported Ethereum as collateral. However, in November 2019, the technology was updated to include BAT and USDC, which then created a system that became multi-collateral as it is today. The greater the number of crypto assets that can be pledged, the less user risk and increased DAI price stability. New collateral options will continue to be added via voting by the MakerDAO community.
How DAI works using ERC-20 tokens that can be purchased through centralized exchanges and decentralized exchanges (DEX).
In addition, users can create and borrow DAIs by opening Maker's collateral vault via MakerDAO's Oasis Borrow dashboard and then you can deposit assets in the form of Ethereum as collateral.
Maker collateral vaults, or previously referred to as collateralized debt positions, are smart contracts that can keep collateral in escrow until the nominal amount of the borrowed coins can be returned. The value of the collateral deposited must always exceed the value of the issued DAI. If the value of the collateral falls below the value of the issued DAI token, your collateral will be liquidated.
How DAI Gets Its Value
it is the hard work of cryptography experts who are members of the DAI team. DAI can offer traders and investors a powerful strategy to avoid sometimes extreme volatility. Volatility certainly cannot be separated from crypto assets whose prices are determined by the open market.
For example, by exchanging Litecoin to DAI, you can reduce the risk of a sudden drop in Litecoin's price. However, you also need to anticipate the risk of losing exposure in the event of a sudden increase in value as well.
Advantages and Uses of DAI
1. Value stability
In contrast to crypto assets in general, which have a high level of volatility, this DAI can be an alternative form of fiat currency due to its constantly stable value and means of financial inclusion for regions with severe economic instability. This stable value is the advantage of DAI crypto asset holders.
2. Decentralized
The decentralized character makes us feel more free. This stablecoin has a transparent system and no regulatory party. This can certainly help to ensure that traders and investors have greater unrestricted access to their own investments.
3. High Efficiency Rate
Crypto asset transaction fees can be very high, and the time it takes to complete a transfer can be very long which will cost you time and money. By using this stablecoin, processing time can be done faster. That way, global transactions from one user's wallet to another become much more transparent and efficient.
4. Strict Security
Security is one of the attractions in finding the right investment. MakerDAO systems are known for having extensive auditing and research systems that can help to ensure robust platform security. Using mathematical analysis, the development team was officially able to verify all the smart contracts and underlying protocol mechanisms that make up the internal structure of the system.
5. Alternative Forms of Borrowing
The ability of DAI to access loans or lending in a way that can provide benefits. Unlike the conventional credit process, where the process is evaluated by a bank or financial institution, users just simply use Ethereum and then they will receive a certain amount of DAI.
Risk involved in DeFi.
1. Performance that has not been maximized
Blockchain technology, its performance is still relatively slow compared to centralized finance. This is also reflected in the processing speed of the applications on it. DeFi developers need to take these limitations into account in developing their products.
2. One Error Occurs, User Exposed to Big Risk
This becomes a big problem if an error occurs. The Decentralized Finance (DeFi) application throws the responsibility that should be carried out by intermediaries on to its users. This can have a negative impact as the user is the only one who bears all the risk in the DeFi app.
3. Poor User Experience
The lack of comprehensive understanding allows users to experience bad things. Lack of understanding of access to DeFi technology often makes users unable to switch from CeFi to De Fi.
4. The messiness of Ecosystem
Finding a specific decentralized finance application for a particular financial service activity is still quite difficult. So, users must be smart to "scavenge" the DeFi ecosystem to find the right application choices.
What is Yield Farming?
Yield farming is the practice of storing and lending crypto assets to earn high returns. In Indonesia, there are types of savings that can only be taken after the saving agreement period ends. We know it as Deposit Savings. The purpose of yield farming is to fix major problems that occur in the crypto asset trading market.
Compared to saving money in the form of deposits, yield farming offers options with greater passive income. Interestingly, thanks to the DeFi service, anyone can take advantage of it.
We can try this strategy by lending crypto assets that we have to get passive income. Yield farming has the potential to shift conventional methods, for example by HODLing assets, to become more profitable. Yield farming can be another alternative for new users in the crypto market who want to get passive income more easily.
In Yield Farming we will be familiar with several terms such as;
Liquidity Providers (LPs)
It can be interpreted as a person who invests in yield farming. These Liquidity Providers can be interpreted as lenders, considering that their crypto assets can later be borrowed and used by other users.
We need to know, Yield Farming will only run when Liquidity Providers (LPs) act as users who place their crypto assets in Liquidity Pools.
Liquidity Pools
Liquidity Pools are smart contracts that lock/contain funds from the lender. With the inclusion of crypto in the liquidity pool, lenders will later get rewards or interest according to the crypto they lend.
Yield Farming is usually done using ERC-20 tokens on the Ethereum network. Furthermore, rewards or interest that will be obtained by lenders are also in the form of ERC-20 tokens.
In addition, with the development and growing space of DeFi technology, these platforms or Decentralized Applications (DApps) will be able to support smart contract capabilities by switching protocols.
Of course, if this can be realized, platform users as lenders will be able to transfer their crypto holdings to many other protocols in search of even higher profits.
In addition to the benefits that lenders get, this can also benefit the platform as more capital will enter their protocol.
How does Yield Farming Work?
Platforms that offer yield farming have different specifications and methods. Therefore we must really understand the benefits of each platform such as the lock period or the rate of return.
In carrying out a yield farming strategy, it is obligatory to lock crypto assets into smart contracts. The collection of assets that have been locked with the smart contract occurs for various purposes.
As investors, we must be able to determine how long we choose to lock their assets. We can also lock assets in a public pool that allows other users to borrow funds at interest. This strategy can certainly create a profitable asset turnover for investors.
Well, platform users or asset borrowers will later be charged a certain fee, the fee will be paid to the liquidity provider according to the share they give to the Liquidity Pools.
Aside from those fees, the way Liquidity Pools get their funds turned is through the distribution of new tokens that go into the protocol. The more tokens that enter, the richer the Liquidity Pools will be, which will certainly benefit all parties.
Each protocol that implements yield farming has different distribution rules. However, liquidity providers will still get a return on the assets they lend in the Liquidity Pools.
Usually these funds are stored in USD-pegged stablecoins such as DAI, USDT, USDC, BUSD, and others. Some protocols usually print their own token which will later be stored in the system.
What Are the best Yield Farming Platforms and why they are best.
Actually many platforms serve Yield Farming. However, when asked to determine the best, almost everyone agrees that Pancakeswap and Uniswap are the best platforms so far.
Uniswap
For my first choice is Uniswap. It is a decentralized exchange that offers users a wide service especially on token exchange. Since its launch in November 2018 Uniswap has continued to grow. September 2020, Uniswap goes a step further by creating and providing its own token, UNI, to users of the previous protocol. This adds potential benefits and the ability for users to shape their future—an interesting aspect of decentralized entities. This DEX is also used to lend tokens to different users of the liquidity pool and ultimately the user pays it back with a certain percentage of interest. Uniswap has its own native token known as UNI and is currently number 11 by market cap ranking and has a value of Rp267,814.29
The reason Uniswap is the best
As far as my knowledge and reading that I follow from information on the internet concerning the Etherium network, Uniswap is one of the most popular DEXs. This is not without reason. The biggest factor is the amount of liquidity locked in the pool. Options on this platform will feel very secure when compared to other DEXs that offer services that earn more. Users prefer it because they are sure that all assets are safe. Every time you do a swapping service, the cost will be extra.
This will increase passive income for investors. This is part of how liquidity providers continue to generate more passive income. Of course everyone hopes to get more income right?
Pancakeswap
Pancakeswap appeared in 2020. In this decentralized exchange it is a breakthrough as it offers many services such as staking, yield farming and games. Pancakeswap is built on the Binance smart chain network. The protocol chosen is the Automated Market Maker Protocol (AMM). This protocol allows the user to access the yield Farm easily and very efficiently.
This is a worthy choice for users to consider when dealing with liquidity on the platform. Pancakeswap owns a native token called CAKE and is currently ranked 33 in the market cap ranking and has a value of Rp202,003.71 at the time of writing this assignment.
The best reason for Pancakeswap
Pancakeswap is one of the top decentralized platforms and has many features related to Yield Farming such as adding liquidity, liquidity pools etc. Another reason is that Pancakeswap is also cost-effective when compared to other decentralized exchanges built on the Ethereum blockchain. Liquidity providers get an imbalance of a fraction of the transaction fees for each swap. This becomes a source of passive income for investors. Maybe what we can know the only weak point related to Pancakeswap is the Loss Impermanent issue which also applies to almost all yield farming platforms. This of course must be managed by the owners of investments there.
The Calculation method in Yield Farming Returns.
Yield farming yields are usually calculated on an annual basis. Some of the commonly used metrics are Annual Percentage Rate (APR) and Annual Percentage Yield (APY). The difference between the two, lies in the merging of tokens, if APR takes into account the value of compounding tokens, APY does not take this into account.
Compounding here means reinvesting profits directly to generate more profits. Between APR and APY these can be used interchangeably.
Please note that the results of these APR and APY cannot be estimated accurately. This is motivated by the condition of the yield farming market which is very competitive and moves very fast, this makes the rewards/returns received also fluctuate rapidly.
This metric is actually felt to be getting better if the calculation is done on a weekly or even daily basis. So that it can provide reasonable profits and calculations for lenders. However, this is still under consideration by DeFi platform developers.
How to calculate income from investment through Yield Farming can use APR or APY.
So now we have to know what APY and APR are.
APY stands for Annual Percent Yield
APR stands for Annual Percent Rate Rate
Annual percentage rate (APR):
Annual percentage rate in agriculture Yield is the interest rate given to liquidity providers or users for locking or reducing their assets for a certain period of time. The interest here is based on the investor's initial capital. For example, I decided to invest $200 at 60% APR for one year. How much interest will I get?Counting
It can be calculated in the following way
60% * $200 = $120,
It means
I will earn an additional $120 from an investment of $200 for a year.
Then if we calculate then the interest per day is
$120/365 = $0.328 daily.
Annual Percentage Yield (APY):
The annual percentage yield is similar to the annual percentage rate, the only difference here is that the interest paid is compounded. This means that the liquidity providers will lock up their assets for a certain period of time and will eventually receive their interest in a compound interest format.For example, I decided to invest $200 at 60% APY for one year. What interest will I receive?
Counting
Using the formula
(1+r/n) power to n-1
From the formula given above,
APY= (1+60%/365) power to 365-1
=(1+0.6/365)365-1
= (1+0.0016438356)power to 365-1
= (1.0016438356)power to 365-1
= 0.8212214149%
= 0.8212214149 %* $200
=$164.24428298
Therefore APY = $164.24428298
If I get additional yield from yield farming with APY of $164,24428298, initial capital of $200
Advantages & Disadvantages Of Yield Farming.
ADVANTAGES
1. Get rewards or prizes if the tokens obtained are sold or used again for trading at the right time.
By using yield farming, we get more prizes. This is certainly an exciting thing because it becomes a source of income outside of the fixed income that we get
2. Can be an alternative to developing your crypto portfolio apart from crypto price fluctuations.
Opportunity for crypto owners to make their assets grow. The increase in crypto assets that we have means that we can increase the money we have. This is proof that DeFi provides great benefits.
3. Save time and energy and mind while waiting for profits
We don't need to work because our asset will grow without our presence, without our hand. The system will arrange work and give us benefit.
4. By calculating APY we get a bigger interest than using APR.
Although the interest is calculated annually APY m, it has a higher interest rate. As in the calculation example I did, the APY value was greater than the APR.
5. Simple to lock fund/asset
It's not too complicated with various protocols to lock assets to get rewards. We just need to enter the assets and then wait for the system to work and the income to enter our wallet.
DISADVANTAGES
1. Too long for getting profits.
Must be patient to wait one year because interest is calculated in an annual term. There is no short time of lock, and then it need time to get profit.
2. Impermanent loss always has to be faced by yield farming users.
Price instability make us as user will haunted by risk of loss. We can imagine when in the end of year the price of asset was very low. It make us get impermanent loss.
3. Hacking and attack
There are still many bugs in the system, so yield farming will face hacking and attack problems and can be detrimental to the user.
4. Vulnerable lost
The platform is built by a small team with a limited budget, this can increase the risk of bugs in the smart contract programming. Generally, bugs are found when checked by the audit company, plus the protocol is already running. This makes user funds that have been locked in the protocol vulnerable to being lost.
5. Not maximum of ecosystem yet
This DeFi ecosystem relies heavily on each of its building blocks. This condition makes it vulnerable to errors or errors in the protocol. Just imagine, if even one building block doesn't work properly, it will destroy the whole network ecosystem. Furthermore, this can pose a risk to lenders as well as the return that will be received.
Conclusion
Finally, what I can say in this lecture is that we gain an understanding of the development of the financial world, from CeFi to DeFi. In my notes, DeFi is able to break the modern world's financial order. Although it still has to be refined again, DeFi is able to provide income for investors and meet the needs of everyone who uses it.
We can use yield farming as a part of DeFi to increase passive income, so that it can become an oasis from a situation that is still not recovering due to various commotions and pandemics. Of course, wisdom is needed so that we don't fall into the trap of choosing a path in the world of DeFi. There are many advantages but there are still challenges that must be faced by all.
Once again I thank Prof @stream4u for all the knowledge that has been shared.
Best regard from Indonesia
@rokhani
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Hi @rokhani
Thank you for joining The Steemit Crypto Academy Courses and participated in the Homework Task.
Your Homework Task verification has been done by @Stream4u, hope you have enjoyed and learned something new.
Thank You.
@stream4u
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Thank you Sir @stream4u. I will pay attention next class