Good morning everyone. This morning I will start my writing activity in the Steemit Crypto Academy community by taking a class mentored by professor @stream4u. The topics discussed by the professor in this class are CeFi, DeFi, and Yield Farming. There are nine main questions that must be answered in this homework and in this post I will try to answer these questions. Let's answer it...
Q1.) What is The Importance of The DeFi System?
Blockchain technology continues to develop and presents various innovations that bring positive changes to the cryptocurrency ecosystem, one of which is the DeFi system. With various advantages offered, this decentralized financial service system is considered a very important financial system to date. Some of the reasons include the following.
- No central authority can control and block your assets.
- The user has full control over the assets owned.
- Runs on a well-known blockchain network.
- Can be accessed without having to verify KYC (Know Your Customer).
- Transactions can be done anytime and anywhere using internet connection.
- Supported by a high security system and difficult to hack.
- High transaction speed and transactions can be done easily.
- Offers very low transaction fees.
- Can make transactions in large quantities.
- Transactions are carried out without involving third parties, only using smartcontracts.
- It is transparent because every transaction can be accessed by the public and cannot be manipulated.
- There are no problems related to the server because it is run by nodes.
- There is no charge for assets saving .
- You can borrow assets without having to wait long.
- There is an option to get passive income if you give a loan.
Q2.) Flaws in Centralized Finance
CeFi has a big role in the financial world, but the presence of DeFi has proven to be able to overcome the various shortcomings that exist in the CeFi system and people's dependence on CeFi is also starting to decrease at this time. For various reasons out there, DeFi is considered better than CeFi so CeFi is starting to be replaced. Some of the disadvantages of CeFi include the following.
- There is a central authority that can control and block your assets.
- The user does not have full control over the assets owned.
- KYC (Know Your Customer) verification is mandatory.
- Has a number of procedures that must be met.
- Transactions cannot be made at any time due to limited working hours.
- There are security threats, hacking, and fraud.
- Transaction speed is not high.
- High transaction fees.
- The number of transactions is limited.
- Transactions involving third parties.
- Non-transparent, transactions cannot be accessed by the public and can be manipulated.
- Server down is possible.
- There are fee for assets saving.
- The process of borrowing assets requires a long waiting time.
Q3.) DeFi Products. (Explain any 2 Products in detail)
This is the main DeFi product that has been used by many users to trade/swap cryptocurrencies based on smartcontracts and without intermediaries, some of the famous ones are Uniswap, Pancakeswap, and Justswap. Here trading is carried out between users so that buying and selling transactions and cryptocurrency swap activities are only carried out by fellow users with very low commissions and more transparency.
Decentralized exchanges or DEXs execute trades not based on an order book but using Automated Market Maker (AMM) technology which utilizes a liquidity pool to provide liquidity and then prices are determined automatically, including fees assigned to liquidity providers. That way, AMM ensures that the user automatically meets the requirements before the transaction is completed.
You can use DEX by connecting your decentralized wallet or web 3.0 wallet, such as Metamask and TronLink. On the Uniswap you can trade/swap between tokens running on the Ethereum network, on the Pancakeswap you can trade/swap between BEP-20 tokens running on the Binance Smart Chain, while on the Justswap you can trade/swap between tokens running on the Tron network.
You can make swap transactions on the DEX platform easily, after connecting the wallet you have, then you only need to select a token pair and fill in the number of tokens you want to swap, and then click “Swap”.
This is an attractive offer in the DeFi system and this process is carried out without a central authority making it more profitable. This loan process is carried out based on a smartcontract so that both parties can do it without intermediaries.
In this process, the borrower will pay a small amount of interest while the lender will earn some passive income. The maximum amount of assets that can be borrowed by the borrower is usually calculated based on the amount of the deposit held and multiplied by the collateral factor, the value of the collateral factor is usually calculated by the service provider.
Currently, there are various decentralized platforms that provide lending facilities, some of the well-known ones are Justlend, AAVE, Compound, Maker, bZx, Uniswap, Sushiswap, Pancakeswap, Nexo, and CoinList. You can use it by connecting a decentralized wallet or web 3.0 wallet that you have, such as Metamask and TronLink.
Q4.) Risk Involved in DeFi
Wherever it is, the risk will always be there. But we need to consider various factors and study them to minimize the various risks that may occur and all the choices are in our hands. With all its advantages, DeFi also has several risks that need to be considered, some of which are as follows.
- The volatility of cryptocurrencies greatly affects the selling value of your assets so that the value will not always be the same, it may be higher and it may be lower because this is the world of cryptocurrencies. But it is very suitable for investment and you have known it for a long time.
- Errors in making transactions are entirely borne by the user because there is no solution if this happens and means your assets will be lost.
- The Private Key is the primary key to enter your account, losing the Private Key means losing the asset permanently and it cannot be recovered because you have full responsibility for the ownership of your account.
- Low liquidity issues may occur, and if this happens then the number of trades will be very limited, many transactions that cannot be fulfilled, and it will take time to wait.
- DeFi sometimes experiences a number of abuses by various irresponsible people, such as drug trafficking, illegal goods trading and other black markets because transactions on the blockchain cannot be specifically traced.
- Based on the energy consumption run by the system that works behind it, this has proven to be very inefficient because it uses large amounts of energy and has an impact on the environment because it creates carbon emissions.
- In the event of a hack, your assets may be permanently lost because there is no central authority to guarantee this case.
Q5.) What is Yield Farming?
Yield Farming is a way to get passive income from a number of crypto assets that you have by lending them to other users. Besides being able to get loans easily on various DeFi platforms, we can also act as lenders to get this passive income. This is a better solution than just keeping an asset for a long time, by lending the asset you own, you will get some additional income from the amount of assets you lend. This is clearly more profitable.
Many investors are starting to do this because it looks more instant. At a certain period of time, you only need to lock in your assets a certain amount to provide liquidity into the liquidity pool. And then you will get passive income in a certain amount based on a predetermined interest rate, namely based on the percentage of APR or APY returns ratio. However, as an investor, you must deposit more assets than the amount of assets that you will lend to the system.
Q6.) How does Yield Farming Work?
Yield Farming requires investors to lock assets on a Decentralized Exchange platform and all of it is run based on Automated Market Maker so there is no order book here and transactions can be carried out more instantly, and this is a very different thing when compared to Staking which is usually found on stock exchange or the like.
Investors who have locked a number of assets in the system will get a replacement asset that shows the amount of rewards earned and investors cannot take it out until the asset locking period ends. When the lockout period ends, the replacement asset will turn into the same original asset as the main asset that you lent in the system. Now all your assets have come out of the lock period and you have also earned some rewards. The number of your assets is now becoming more and more of course.
For example, if you as an investor do Yield Farming a certain amount of TRX assets on a DeFi platform that runs on the Tron network, then you will get jTRX as a reward and when the locking period ends, the jTRX will turn into TRX. If you Yield Farming ETH assets on a DeFi platform running on the Ethereum network then you will get cETH in return and will be ETH after the lockout period ends.
Q7.) What are The Best Yield Farming Platforms and Why They are Best. (Explain any 2 in detail)
There are several decentralized platforms that have provided Yield Farming services, but in this section I will say that Uniswap and Pancakeswap are two of the best and I prefer to explain both types of DEX. In addition, both are also pioneers in DeFi systems.
Uniswap is the most popular DeFi platform to date. Launched in 2018, this DEX was warmly welcomed in the cryptocurrency world and has proven to be successful in attracting a large number of users, it can be said that it is the DEX with the most number of users to date. By using a decentralized system, Uniswap has also proven to be able to deliver more efficient trading/swap transactions when compared to the CeFi system.
Uniswap also has a native token named UNI and this token has become one of the most successful tokens with the airdrop program in the past. The UNI price at the start of the launch was around $2 and a drastic increase compared to its current price. Marketcap UNI is currently 11th at $14.19 per UNI and is the best when compared to other DeFi tokens. UNI token holders here also have the privilege of being able to participate in governance.
Uniswap runs on the Ethereum blockchain network to provide various ERC-20 token exchanges using AMM technology that works automatically based on the amount of assets available in the liquidity pool and transactions here are carried out directly without involving intermediaries. However, the transaction fees/gas fee here are slightly more expensive because this platform runs on the Ethereum blockchain network so it is not suitable for small investors.
You can easily perform various cryptocurrency operations here, including doing Yield Farming. Every investor who provides liquidity into the liquidity pool will get a certain amount of reward. By doing Yield Farming, investors can get passive income whose APR ratio reaches 20% to 50%. Some of the well-known liquidity pools here include ETH-DAI, ETH-WBTC, and many more. The volume of exchanges taking place on Uniswap is also very high and suitable for transactions in large quantities.
It is a DEX created in 2020 with native token CAKE (marketcap rank, 32) and running on the Binance Smart Chain network to provide various BEP-20 token exchanges with very low transaction fees and faster transactions. Apart from exchange, there are also other services such as placing bets in the prediction section, NFT collection, and buying tickets in the lottery section.
Pancakeswap also offers Yield Farming services that users can use to earn passive income. There are several liquidity pools that can be used to do Yiel Farming and of course with different APR and APY ratios, some of which are Manual CAKE, Auto CAKE, CAKE-BNB, BUSD-BNB, TRX-BNB, TITAN-BUSD, Earn TRX stake CAKE, and others. By providing sufficient liquidity and low commission fees, this DEX is perfect for both small and large investors.
Pancakeswap developed very fast and managed to attract a large number of users, making this DEX well received in the cryptocurrency world. The price of assets available on Pancakeswap is determined using AMM technology which works automatically based on the amount of assets available in the liquidity pool and transactions are carried out directly without involving intermediaries.
Q8.) The Calculation Method in Yield Farming Returns
This return is calculated in two ways, namely based on Annual Percentage Rate (APR) and Annual Percentage Yield (APY).
This is a method of charging a certain percentage of interest to the borrower and then giving it to the lender so that the lender will get an annual fee or return based on the percentage of interest that the borrower has to pay.
Annual Return = P x R x T
P is the number of assets locked into the liquidity pool.
R is the interest percentage or APR ratio.
T is the asset lock-in period calculated on an annual basis.
Example How to Calculate based APR
I have a balance of 40,000 TRX in my wallet, then I am interested in joining Yield Farming on one of the DEX platforms and I decided to lock my asset of 40,000 TRX into the liquidity pool. If the given APR ratio is 80% (0.8), then calculate the amount of return I will earn and the amount of TRX assets I have after one year!
To calculate it, we need to use the formula as follows.
Annual Return = P x R x T = (40,000 TRX) x 0.8 x 1 = 32,000 TRX
Total aset = P + Annual Return = 40,000 TRX + 32,000 TRX = 72,000 TRX
This is a method of applying compound interest and this is the difference between APY and APR. By using this method, your daily returns will be automatically reinvested so that the amount of your investment becomes more and more and the profit (in quantity) you get is also increasing.
Annual Return = P x (1 + R/N) ^ N – (1)
P is the number of assets locked into the liquidity pool.
R is the interest percentage or APY ratio.
N is the asset lock-in period calculated based on the number of days in a year.
Example How to Calculate based APY
I have 80,000 TRX balance in my wallet, then I am interested in joining Yield Farming on one of the DEX platforms and I decided to lock my 80,000 TRX assets into the liquidity pool. If the given APY ratio is 50% (0.5), then calculate the amount of return I earn and the amount of TRX assets I have after one year (365 days)!
To calculate it, we need to use the formula as follows.
= P x (1 + R/N)^N – (1)
= (80,000 TRX) x (1 + 0.5/365)^365 – (1)
= (80,000 TRX) x (1 + 0.00136986301369)^365 – (1)
= (80,000 TRX) x (1.00136986301369)^365 – (1)
= (80,000 TRX) x 1.648155441 – (1)
= (80,000 TRX) x 0.648155441
= 51,852.4353 TRX
= P + Annual Return = 80,000 TRX + 51,852.4353 TRX = 131,852.4353 TRX
Q9.) Advantages & Disadvantages Of Yield Farming
- Earn passive income instantly which makes your asset count increase because the DeFi platform offers competitive interest rates for liquidity providers and this is an attractive investment option rather than just keeping assets for a long time without getting anything.
- The rewards earned can be multiplied by “reinvesting”.
- There are no intermediaries and central authorities involved in this process.
- Has high security because it is decentralized.
- There are no special procedures that burden users and do not require KYC verification because you only need to connect your decentralized wallet.
- Has the privilege to participate and have a voice in the development of the ecosystem and its governance.
- The more assets you invest, the more profit you will get.
- Impermanent loss is something that often happens here because cryptocurrency prices are always volatile, but in some cases permanent loss may also occur.
- Especially for the DeFi platform that runs on the Ethereum blockchain network, the network fees here are relatively higher than others because you have to pay more gas fees.
- Less effective for inexperienced small investors.
- Despite having a good security system, security threats are always there and if that happens then your assets may be permanently lost.
DeFi has proven successful and is able to overcome the various shortcomings contained in the CeFi system. DeFi is becoming one of the leading choices in blockchain networks. DeFi is also starting to take the market's trust with a growing number of users. With all its advantages, DeFi continues to grow and offers a variety of attractive services such as DEX, Stablecoin, and Lending. The use of DeFi is also very user friendly. Behind it all, there are also some shortcomings of DeFi, but I believe that these shortcomings can be corrected and updated over time.
Meanwhile, Yield Farming is one of the most sought after projects by investors involved in the DeFi system. With all the benefits offered, making Yield Farming as the main choice for investors to get passive income from their assets. Apart from offering attractive advantages, yield farming also has some disadvantages, particularly the risk of volatility. To avoid losses, we should use Stablecoins.
Thank you professor @stream4u for presenting this class with a very interesting theme and concept. Thank you readers for reading this post and see you in the next post.