[Yield Farming - Yearn Finance ]- Crypto Academy S5W3 - Homework Post for @imagen

1. Describe the differences between Staking and Yield Farming.

YIELD FARMING

In recent times, yield farming has gained much attention in the crypto space due to its immense returns that investors generate from it. What then is it?

Yield Farming: is basically a Decentralized Finance (Defi) strategy where users/investors who are also known as liquidity providers on the Defi platform commits their assets they hold into a liquidity pool for specific period of time with a specified Annual Percentage Yield (APY) with the main aim of generating huge sums of profits from the fees generated from the Defi platform and as well, investors can be rewarded with governance tokens of the platform which can be ploughed back to generate additional returns.
We can clearly see that this ideology is on the bases of the centralized banking loan system, when we acquire loans from the traditional banks, we agree to pay interests on the loans that we are being giving, the bank uses monies that are sitting idle in the accounts of users to give it to people as loans and when the interest is generated, you get a share of it. In this instance your idle money serves here as liquidity provider.
Yield farming returns calculation is dynamic and may depend of the platform used, some platform uses the APY metrics and others use the APR metrics. The only significant difference is that, platforms that uses the APY metrics factor in compound interest thus ploughing back interest accrued whiles the APR does not factor it in which has accounted for its dynamics.

The following are examples of yield farming platforms;

• Synthetic
• Uniswap
• Aave
• Compound Finance
• Yearn finance

STAKING

As mining is used in the Proof-of-Work consensus where miners use sophisticated machines to mine and validate nodes on the blockchain network, staking is also used in Proof-of-Stake consensus which is also a blockchain verification method which is less risky, a miner is chosen to validate nodes on the network in order to do so, the miner locks up assets in a pool which serves as a collateral for validation of nodes on the network. When a miner is able to validate a block, a reward is received by the validator from the fees charged on the transactions associated with the nodes by so doing the process is termed as Staking. In addition when the chosen to validate transactions validates a fraudulent transaction, part of the staked assets is being lost to serve as a punishment.

Difference Between Staking and Yield Farming

Staking	Yield Framing
The core objective of staking is to make a contribution to the security of the consensus and a bit of profit is made but as compared to yield farming.	Yield farming is profit oriented and investors tend to make huge sums of profit from it unlike staking.
With the issue of security, staking is considered to be secured as its core mandate is based on that than profit oriented.	In terms of security wise, yield farming platforms are less secured and manipulations can occur and can be subject to a major attack by hackers.
Locked up assets cannot be withdrawn until the period allocated for it is elapses.	Users can withdraw their funds at any given time as you so wish

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1. Login to Yearn Finance. Fully explore the platform and indicate its functions. Describe the process for trading on the platform (wallet connection, funds transfer, available options) Show screenshots.

Yearn Finance

Yearn Finance is one of the well-known Decentralized Finance in the Defi scope which also uses the Etherium network and greatly offers yield farming to users with massive APY.
The official site can be assessed on YearnFinance

The Homepage

This briefly gives us the overview of the entire platform, where the various functions are being categorized under sections.
With the first section on the left pane, we have;

• Home
• Wallet
• Vaults
• Labs
• Iron Banks
• Settings

The second section, which is basically the middle pane, displaying the wallet connection and the dashboard which basically gives us an overview of the; Total net worth

Vaults earnings
Vaults est. yearly yield
With a welcome notice on to the platform.

Wallet

From the left pane of the platform, the second item list is the wallet option which displays one’s funds on the platform
in USD.

Vaults

The vault presents us with the various assets on the platform with their respective APY and other investment opportunities which you can as well chose from that pool to deposit funds and you are good to go and it as well displays assets holdings in USD, Earnings and est. yearly yield and such yields can be withdrawn at any given time.

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Labs

This sections basically gives you investment avenue just like the wallets but this time round, it is only limited to only three assets which follows the deposit patterns of the vaults.

Iron Bank

This section provides user with the opportunity to borrow by using their cryptocurrencies as a collateral and as well having assets to new cryptocurrencies and as well lend out their cryptocurrencies out to earn massive interest on them. Just like that of zethyr finance, users are able to borrow and supply their assets on the platform.

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Settings

This feature gives users the opportunity to change some of the default settings on the platform to suit their own likens, among the things you can do here is that, user can personalize the platform theme, language and as well change the slippage tolerance.

formatted theme to cyberpunk

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How to Connect Wallet on Yearn Finance

• From the homepage, at the top right corner you will find connect wallet.

• You will be presented with the various modes of wallet connections which includes; Metamask, Walletconnect, Trezo and Ledger, with my case I want to connect with metamask, so I then click on the Metamask option.

• An authorization notice would be sent to your metamask wallet extension for authorization, click on Next and click on Confirm and lastly click of Switch Network for it to be connected.

• At this point, our wallet is connected successfully.

Deposits

From our vault we can select the asset we want to deposit, in this case I choose SNX as an example.

• Click on deposit

• Key in the amount you wish to deposits, and click on approve

• An authorization notice would be sent to my metamask wallet for confirmation with transaction fee of $263.68 and click on confirm for the transaction to be completed. Due to insufficient funds, the deposit was not complete.

How to Supply

Supply

After clicking on Iron Bank, select the asset you wish to supply,

• In my illustration I’m using USDT, click on supply which comes with an APY of 6.88%.

• key in the amount to supply and Click on approve

• An Authorization notice would be sent to metamask wallet for confirmation with the respective transaction fee, click on confirm, at this point due to insufficient balance the transaction was not able to complete, if I had enough balance, we have a smooth supply.

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1. What is collateralization in Yield Farming? What is function?

Collateralization in the normal context is using an asset of higher value which is normally physical in nature which can be used to secure a loan, in the case of a default, the collateralized assets is then sold and used to defray the debt.
Think of it in the real-world situation where one wants a loan from a bank, the person is recurred use an asset of higher value to secure the loan, in a situation where the person does not pay back the loan as agreed, the asset is seized and sold the pay off the debt.
In the Defi ecosystem and for that matter the yield farming, users borrow on the platform and to be able to borrow assets on the platform you need to use a crypto asset as a collateral to be able to get loans at a better rate. The main important of collateralization is funds of lenders are protected when signing the smart contract and therefore giving the lowest risk of liquidation.

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1. 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.

To be able to carry out this task and have access to the TVL of the Defi space, we need to visit, defipulse

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From the platform, we can see that as at the time of writing this, the Total Value Locked (TVL) was $108.46B on the protocol.

Then when scrolled down in order to view the yearn finance, on the list of pools provided, yearn finance is ranked number 8 on the platform and has a Total Locked Value of $4.45B locked as at the time of writing this.

In order to have access to the market cap of the yearn finance, we as well visit the coinmarketcap.
The market value was $28,572.92, a market cap of $1,046,846,581 and TVL value of $6,016,964,287 with a market cap/TVL ratio of 0.1742 ranked #103 as at the time of writing this.

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(4.1.) The YFI token, is it overvalued or undervalued? State the reasons.

To properly answer this, we would need to apply what we learnt from class, when a token is overvalued, its market ratio should be greater than 1 and when a token is undervalued it market ratio should be less than 1.
We can vehemently say that, yearn finance token is undervalued based on the data provided by coinmarketcap having a market cap/ TVL ratio of 0.1742 and we can conclude that the yearn token is undervalued based on the data provided.

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1. 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.

Calculation for BTC

To be able to do this, we first of all have to refer to the historical data on 1 August 2021 of BTC to check for the closing price and in doing so, the price was at $39,974.90.

1st August 2021 $500 = 0.0125 BTC
0.0125 BTC will worth today 2nd December 2021= $704.83 as seen below using coinmarketcap converter.

Return on investment (ROI) = (($704.83 - $500) / 500) * 100 = ($204.83 / 500) * 100 = 40.97%.
Bitcoin = 40.97%

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Calculation For Yearn Finance

Taking the historical data of yearn finance on 1 August, 2021. The closing price of the yearn token was $31,779.15.
1st August 2021 $500 = 0.01573 YFI

0.01573 YFI will worth today 2nd December, 2021 = $449.08 as seen below from coinmarketcap converter.

Return on Investment (ROI) = (( 449.08-500) / 500) * 100 = (-50.92/500)*100 = -10.184%
YFI = -10.184%

TOTAL RETURN ON INVESTMENT OF BTC AND YFI

BTC ROI + YFI ROI = $204.83 – 50.92) = $153.91
Percentage = (40.97-10.184) = 30.786%

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1. In your personal opinion, what are the risks of Yield Farming? Give reasons for your answer.

Risk of Yield Farming

• Risk of Liquidation: When borrowing from Defi platforms and for that matter yield farming, one is required to provide an asset as collateral before he/she is being borrowed, in a situation where by the user doe not pay back, the collateralized assets would be liquidated and be used to pay off the loan taken.

• Poor Security: Defi platforms are known to have poor security networks which makes it vulnerable to hackers and can be compromise and when happens millions of dollars would be lost.

• High Fees: Fees associated with Defi platforms are very high due to the Ethereum gas fees emitted and thereby scaring aware potential investors with low capital.

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CONCLUSION

To conclude, this class has been one of the best as it was an eye opener to the Defi space, yield farming has gained much attention in the crypto space and huge sums of profits has been made by investors, there is much risk associated with yield farming and much care must be taken when investing in it and I must say Decentralized finance has come to stay for good.