Hope you all are fine and in good health!

Today i am going to participate in the Home Work Task of Season 5 Week 3 Which is "Yield Farming" given by the Professor @imagen.

I am very excited to attempt this homework task and, I would like to say thanks to Professor @imagen on his remarkable efforts in Crypto Academy.

Yield farming and staking are two different ways in which people lock their assets on a platform.

Yield farming

It is technique investors hold their assets to earn interests. These investors are called liquidity providers. The yield farming interest are calculated using the Automated Market Maker technology.

Staking

it is a technique in which investors called nodes lock their assets to be able to participate in the mining of the coins. In this case the investments held in the pool are used to distribute rewards to the node that successfully validates a block.

Differences between Staking and Yield Farming

1. In case of yield farming the investors lock their assets to provide liquidity to a network and get interests on their holdings on yearly basis. The interest rate may vary with every asset. It is calculated on the basis of APY. On the other hand, the sole purpose of staking is not just limited to getting rewards and earning it is in turn to obtain different rights on a network. These may include rights for validation of nodes, taking part in decision making processes etc.

2. In yield farming the investors are called liquidity providers since the network hold their assets for better liquidity and better network worth. On the other hand, stakers are called as the nodes since they are responsible for validating transactions and blocks.

3. The interests that the liquidity providers earn may be in the form of the asset they lock or in other coin. But in case of staking the rewards are in the form of the native token of the blockchain.

4. The interest rates on the assets locked in liquidity pools may differ with the change in the rate of the currency and the percentage of each asset set by the network using the AMM technology. On the other hand, the validators get rewards that is 10 to 15% of the assets locked when they successfully validate a block.

5. In case of yield farming the rewards may be as high as 100% but in case staking it is only around 10 to 15%.

6. The interest rate on the assets locked in liquidity pools are predefined. However, in case of staking the chances of block validation increases with the amount of the assets locked.

The yearn Finance is an Ethereum based yield farming platform which allow their users to lock assets in the vaults and earn calculated interests. The assets are listed in order of highest APYs. It consists of the following feature:

Dashboard
Displays your assets in USD. The total net worth, Vaults earning, and yearly yield.

Wallet
Wallet is used to store assets that are not currently being held in vaults or are used by the investor.

Vaults
Here you will find the list of assets to lock. These vaults are actually liquidity pools. The assets are listed in the order of highest APY. We can see the names of the asset and the percentage yield.

Labs
the labs feature is used to show new opportunities on the platform.

Iron bank
It is the lending and trading protocol of the Yearn Finance. From here liquidity providers can get loans by holding some collaterals. In case an investor do not find a suitable liquidity pool he can also hold its assets in the Iron bank. The assets held in the Iron Bank also give interests.

To Connect to the Wallet

Click on the wallet option and then select your desired wallet in my case I will chose Metamask.

You will have to add your logging password and then you will be directed to the wallets main page and here click on connect to connect your wallet.

Your wallet will be connected

To add to the liquidity pools, go to the vaults option and select any asset in my case I have selected SNX.

On the next page click on Approve

Open your wallets main page and approve pending contract. I had insufficient funds therefore my transaction could not proceed further. However in case you want liquidity the next step is to click deposit.

Collateralization is defined as the process of leaving a security in order to get a loan. On crypto lending platforms you are also required to held a collateral in order to acquire the loan. This collateral is then used to cover the loss in case the borrower fails to pay back the loan. The collaterals in case of crypto platforms are too much and that is done to ensure problems involving liquidation.

These collaterals are even higher than the amount taken as a loan. This phenomenon is known as the over collateralization. This concept simply means that in order to get something from the liquidity pool you have to supply a greater amount.

In case of the collateral percentage is 400% to get 10USDT he will have to supply 40USD. Now these collateral ratios can differ with different platforms and assets. The main goal while setting up collateral ratio is that the collateral must be greater than the threshold.

The function of holding collaterals is to cover the loss on the network if the borrower does not pay the loan.

At the time of writing TVL of the DeFi ecosystem is $107.85B

At the time of writing TVL of the Yearn Finance protocol is $4.46B

At the time of writing

Market cap = $1,052,442,162
TVL of YFI token = $6,016,964,287
Market Cap / TVL ratio of YFI =$1,081,993,414.17/$4,310,000,000
Market Cap / TVL ratio of YFI = 0.174912483

According to crypto experts for a coin to reach an overvalued state its market cap to TVL ratio should eb greater than 1. In the case of YFI token it is less than 1. If we see at the YFI chart of all time we can see that is trading at a level lot lower than its ATH. Se currently it is undervalued. However, since it is a native token of the Yearn Finance, it is bound to rise with the adoption of the Yearn Finance platform.

The developers of the network are working to bring improvement in the network and innovations in the field of yield farming and lending and with that the value of YFI is expected to rise.

In addition to that the use cases that YFI has make it even more valuable than some of the oldest cryptocurrencies such as the Bitcoin which is only therefore for trading, mode of payments and store of value.

The coin is still undervalued and with more adoption and increase of the market its value will raise.

Since the price of Bitcoin increased during this span its APY will be greater and as we can see below the value of YFI decreased during this time so its APY will be less.

Total Yield from BTC = $500 × 151.51 / 100 = $757.55
Total Yield from YFI = $500 × (100-13.85) /100 = 430.75 US$
Amount after investment period = $757.55 + $430.75 = $1188.3
Net profit = $1188.3-$1000 = $188.3
ROI = ($118.30/$1000) ×100 = 11.83%

The major risks in yield farming are the impairment losses. Your investments and rewards are affected by the value of the asset. You get interests as a percentage on your total capital in cases of impairment losses the value of the asset significantly drops in no time and giving you no time to recover. In such cases your capital is at a great risk oof deteriorating and so does your profit. For large investors this is a big issue as this can result in huge losses.

In addition to that everything is controlled through smart contracts and digital protocols any manual wrong, or computational codding errors can be dangerous for the investors. At the end of the day a machine is a machine and these types of faults can result in huge losses.

One of the other risks may be malicious attacks on the network that can result in the loss foy your assets and since these transactions are irreversible you can suffer at the hands of a digital thief.

The problem of over collateralization in order to liquidation is another drawback of the yield farming. In case the borrower does not pay back in time the smart contract will automatically be proceeded and will result in transfers of assets.

In this assignment we learnt about the difference between staking and yield farming, discovered an Ethereum based yield farming platform. We saw how we can connect our wallet with yearn and how to add to the liquidity pools. Lastly, we analyzed the benefits and drawbacks of yield farming.
Yield farming is a great passive income earning technique. The major drawbacks including the coding errors and impairment losses are the only major risks invite that limit its scope

Note :

All the images of the have been taken from the yearn.finance defipulse.com .

CC:
@imagen