[Yield Farming]- Crypto Academy /S5W3-Homework Post for imagen.
Q1:- Describe the differences between Staking and Yield Farming.
Staking
Staking is a method in blockchain where users are supposed to lock their funds for a certain period,and for that they are rewarded on the basis APY of the network they have staked in. Proof of Stake mechanism is an alternative that uses coins in place of computers and that makes energy-effictient and valuable.
Staking is an effortless strategy to earn rewards on our cryptos as no costly devices are required to lock up funds.By staking cryptos in any network we basically upgrade the security and that is for what we are being rewarded.
In Proof of Work(PoW) the mechanism, miners require not only high computational machines but high electricity as well which makes an energy-inefficient.
Bitcoin miners use this energy inefficient and high costly method known as the PoW mechanism which not only consumes high electricity but high resources as well.
Yield Farming
Yield Farming is a technique by which we can make money on crypto assets, by lending or staking them in any network.By locking up assets in the pool, we basically provide liquidity to that and for that we earn rewards. In Yield Farming, the rewards are selected by the liquidity pool and can fluctuate according to the value of the asset.If the price of an asset goes up, so will be your profit and the price goes down, so will happen to your profit.
In staking APY is specified to 10-15% only, while as in Yield Farming it can gain up to 100% profit.
Staking is more secure and safe than Yield Farming.As YF is based of AMM, so it's security can be compromised and we could loose our funds.
Staking uses the Proof of stake consensus algorithm for validation while Yield Farming uses AMM for evaluating income generated.
In staking users need to lock up their assets for a certain period and cannot be withdraw before the period is over while as in Yield farming users doesn't require to lockup assets for any particular period and can be withdrawn whenever we want.
Q2:- Login to Yearn Finance. Explore the platform completely and indicate its functions. Describe the process for trading on the platform (wallet connection, funds transfer, and available options) Show screenshots?
- On the primary interface of Yearn Finance, you can see the Dashboard where we can see our Total Net Worth, Vault Earnings, Vaults est. yearly yield.
- In Wallet we can access all assets and products available on Yield Finance.
- In Vaults our assets are secured and can be used automatically to earn interest on them.
- In Labs section new strategies and opportunities are added to gain knowledge about the tokens.
- In IronBank we can lend and burrow the funds at variable APY rates.
- In Settings we can adjust the Slippage Tolerance", 1%, 2%, 3% as per our tolerance. Also, there is an option to choose a theme.
How to connect Wallet to Yearn Finance.
- Go to wallet menu then Click connect wallet
- Select MetaMask from the list of options
- Click on connect
- Click on switch network
- See my wallet is connected
To transfer assets go to wallet and select the aseet and approve the transaction.
- To borrow funds we have to go to iron bank and select the asset to borrow.
Q3:- What is collateralization in Yield Farming? What is a function?
Collateralization refers to depositing some amount of funds to borrow funds from the platform that support yield farming. It is analogous to a mortgage of assets in traditional finance for taking loans. In DeFi, exchanges have their set guidelines to borrow funds like collateralization ratio. A borrower needs to deposit some funds to borrow and that is known as the collateralization ratio. For example, a Collateralization ratio of 100% would mean depositing funds equal to borrowed funds.
The function of Collarerisation is that the deposited amount act as a security deposit for the borrowed fund. In case a borrower is unable to pay back funds, the exchange takes over collaterals to compensate.
By lending funds into the market to borrow assets, investors provide liquidity to the market and in this way serves as a liquidity providers to balance the ecosystem.
Q4:- At the time of writing your assignment, what is the TVL of the DeFi ecosystem? What is the TVL of the Yearn Finance protocol? What is the Market Cap / TVL ratio of the YFI token? Show screenshots?
At the time of writing this post, the TVL of DeFi ecosystem was 99.13 B.
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DeFi Ecosystem
TVL of the Yearn Finance protocol is 3.99 B.
The price of yearn.finance (YFI) token at the time of writing this post was $ 24,526.18 , with a Market Cap of $ 898,583,235 and a Total Locked Value (TVL) of $ 6,905,420.545, and with 36,637.72 units in circulation. Ratio of Market cap /TVL is 0.1299.
Q:-4.1 The YFI token, is overvalued or undervalued? State the reasons.
The YFI token as at the time of performing this task has a value of 0.1299 in terms of Market Cap / TVL Ratio, we know that value suggests that the yearn finance is undervalued currently. The reason is that when Market Cap / TVL Ratio is below 1 and is considered as undervalued.
So YFI is undervalued.
Q5:- 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.
To check for the value of the YFI token and Bitcoin, I'll be using the coin market cap price charts.
The price of the YFI token on August 1, 2021, was $33,174.81.
The price of Bitcoin as of August 1, 2021, was $41,594.36.
The current price of the YFI token is $24,956.05.
The current price of Bitcoin is $49,338.64.
YFI Performance
Price as at Aug 1 2021 = $33,174.81
Current Price = $24,956.05
Percentage drop = [($33,174.81- $24,956.05) / $33,174.05] x 100= 24.77%
If an investment of $500 was made on the YFI token on August 1, 2021. the value of the investment today would be = $500 x 24.77% = $123.85
$500 - $123.85 = $376.15 will be the present value of investment.
The YFI token experienced a 24.77% decrease in value.
BITCOIN Performance
Price as at Aug 1 2021 = $41,594.36.
Current Price = $49,338.64.
Percentage increase = [($49,338.64 - $41,596.36) / $41.596.36] x 100 = 15.69%
If an investment of $500 was made on Bitcoin on August 1, 2021. the value of the investment today would be = $500 x 15.69% = $78.45
$500 + $78.45= $578.45will be the present value of an investment
Bitcoin increased a 15.69% increase in value.
Q6:- In your personal opinion, what are the risks of Yield Farming? Give reasons for your answer?
Risks of Yield Farming
Security is the major concern of yield farming. As most of the DeFi platforms are based on the AMM concept which is smart contract-based. These smart contracts are liable to be corrupted by bugs. Bugs may be inherent or planted by hackers. For inherent bugs, no one can be blamed. For planting bugs, tech-savvy hackers are not uncommon these.
The risk of impermanent loss is inevitable at times because of the inherent volatility of crypto assets.
Just like manipulation of markets carried out by large-cap investors while trading, removals of liquidity by financial large-cap investors sometimes turn the table and sweep small-cap investors by the significant devaluation of assets in the pool.
As most of the yield farming contracts are based on the Ethereum blockchain, the gas fee charged by the ethereum blockchain is also a burden for small-cap investors.
Risk due to scam projects to bag bucks by looting innocent poorly experienced and less knowledgeable and new investors can't be neglected.
Q7:- Conclusion
Crypto enthusiasts are on a mission to mainstream the DeFi and therefore leave no stone unturned to explore the possibilities to maximise the profit accrued out of DeFi and two leading examples have been staking and yield farming. Staking has changed its form from empowering users to validate transactions to new forms of earning rewards by locking assets. Yield farming is a novel modification of staking where the locking period range from days to weeks to months and there are smart contracts based liquidity pools at the back end to maximise profits.