Hi Friends
How are you, I hope all will be happy and well, I am also well.
This is my homework post for my Prof. @sream4u. In this post, I will present my homework and gave answers to all questions.
![homewrok poster.jpg](https://cdn.steemitimages.com/DQmRUQY3tCrxjSiuhX9FAeBzLhrb8o3L66a1iyLdqFZsoMu/homewrok%20poster.jpg)
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## What Is the Importance Of the Defi System?
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The abbreviation of DeFi is Decentralize Finance. DeFi is a term given to financial services without having any central authority or someone in charge. DeFi is becoming more and more popular as the main use case for cryptocurrencies. The Defi system relies heavily on Assets, blockchain, and smart contracts, and Dapps that are developed on a blockchain.
Using decentralized money like certain cryptocurrencies, that can be programmed for automated activities, we can build exchanges and many other companies that do not have any owner and are not controlled by anyone.
Decentralize Finance can benefit the huge portion of the population that currently suffers from financial discrimination, high fees, and inefficiencies in managing their funds so the term of Decentralize Finance system aims to change our centralized system into a Decentralized Finance system.
Defi System is the transperant. All transactions are publicly viewable, and smart contract codes can be analyzed online. When the transaction is successfully done then an update is sent to all ledgers within the Defi system, which provides the information of the current status of each transaction that is performed.
Some important features of the Defi system are that as below.
1) Transparency
1) Interoperability
1) Free for all
1) Flexibility
1) Decentralization
Advantages of Defi System:
1) Required Fewer Fees
1) Available twenty-four hours
1) Blockchain transparent
1) No need for KYC.
1) No need for any third person
1) Withdraw at any time.
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## Flaws in Centralized Finance
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The centralized finance systems that the third person involves to access their funds. Users can not access full control of their assets due to the involvement of a third party. It causes limited access to your assets.
For instance, Some centralized exchanges set the rule on transfer amounts of your assets at a time, so users can transfer amounts according to their rule. For example, a rule is set that a user can just transfer 2BTC at a time or in 24 hours.
If we talk about transaction costs in centralized finance, we will face high transaction costs through a centralized finance system compared to the decentralized system. Another Flaw that we face in this system is that It takes more time to complete the transfer process.
We can not use our assets according to our plan/decision under Centralized Finance because the third party has controlled our assets.
Through a centralized finance system, we can not make more money by investing our assets as compared to decentralized fiance.
The last and most dangerous flaw is asset/fund security. Centralized systems have authority over funds. One big mistake can cause us to lose our assets. Due to lack of security management if the system being hacked or delete the record then it will cause us to lose our assets
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## DeFi Products. (Explain any 2 Products in detail).
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The products that I am going to explain are "DAi" and "UniSwap Exchange".
### DAI
Nоw we will tаlk аbоut аnоther fully deсentrаlized stаble соin thаt is DАI. Dаi is the mоst рорulаr deсentrаlized stаble соin by fаr. The Dаi stаbleсоin is а deсentrаlized, unbiаsed, соllаterаl-bасked сryрtосurrenсy, with а stаble vаlue оf 1 US dоllаr. DАI is сreаted when а lоаn is оbtаined оn the MаkerDАО.
MаkerDАО is а deсentrаlized оrgаnizаtiоn built оn Ethereum thаt аllоws сryрtосurrenсy lending withоut the need fоr intermediаries.
The рriсe оf DАI is соntrоlled by аn аutоmаted smаrt соntrасt system. If the рriсe hаs а high fluсtuаtiоn frоm $1, it will аutоmаtiсаlly burn оr сreаte Mаker (MKR) tоkens tо stаbilize DАI's рriсe. If the MаkerDАО's аlgоrithms wоrk аs exрeсted аnd а DАI is equаl tо $1, the MKR hоlders will be benefited, beсаuse the tоtаl suррly оf MKR is reduсed аnd mаkes the MKR rаrer аnd mоre vаluаble.
The Mаker рrоtосоl, аlsо knоwn аs the Multi-Соllаterаl Dаi (MСD) system, wаs the first widely аdорted Deсentrаlized Finаnсe (DeFi) аррliсаtiоn, аnd оne оf the lаrgest DАррs оn the Ethereum blосkсhаin. The рlаtfоrm аllоws аnyоne, аnywhere, tо generаte DАI stаbleсоins bаsed оn сryрtо-bасked аssets. Оthers саn buy DАI thrоugh а brоker оr exсhаnge, оr simрly ассeрt DАI аs раyment. In аdditiоn, beсаuse оf the соmроsаbility оf the рrоtосоl, аnyоne саn build оn tор оf it.
### UniSwap Exchange
The founder UniSwap is Heyden Adams and it is an open-source platform. Uniswap Exchange is a decentralized exchange that is used for staking, yield Farminga, and swapping of Ethereum and ERC-20 tokens, etc. It is the Ethereum based exchange. We can swap ERC-20 tokens through Uniswap Exchange.
The working of UniSwap base on an Automated Marketing Protocol provides liquidity to the platform by lending or staking Tokens. Investors or traders can also swap tokens through Uniswap Exchange. Uniswap no need for any third party to complete any action or process.
It is good the thing that Uniswap does not charge any fee for listing any coin on this exchange.
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## Risk involved in DeFi.
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- The non-negotiable nature of the transaction causes a big risk in case of a wrong transaction made. Because If we talk about the P2P method No Third party is involved in your transaction. But in the CeFi system, everyone needs to complete the KYC step.
- The use of illegal DeFi can make the causes of online crime drug buying/purchasing, Terrorism, child trafficking because in the Defi system no third party is involved in your transaction, No one can ask any question for what is the purpose of your transaction, why and where you are transacting your assets. all these types of illegal dealing can be possible through online way with online payment in terms of Cryptocurrency.
- Smart Contract is another big risk in the Defi system. Smart contracts are just software codes that store the information of your transferring assets. If it is hacked that can become the case of losing your assets which is not safe for the user.
- Price Volatility is also another risk in the Defi system. we can see constant fluctuations in the price of assets. It can become the cause of high profit and high loss so the Defi systems can be affected by the Price volatility.
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## What is Yield Farming?
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Yield Farming allows the investor to earn fixed or variable interest by investing crypto assets in Defi System. Buying Eth is not a Yield Farming, but lending it on Defi to earn extra interest is an example of Yield Farming. so in a simple world, we can say that yield Farming is a decentralized system that allows the crypto investor to deposit and locking their asset and earn more crypto assets from them. Yield farming offer extra income through that your funds to others via lending or staking for a preset period of time on DeFi platforms
For example, I have a wallet in which I have 1000 tethers and I want to earn extra income from it. So for it, I will need to use these assets on the Defi platform like uniswap, etc and by providing the liquidity pool I can earn some extra crypto. but rewards are calculated in terms of APY, and APR depends on the yield Farming type that we selected.
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## How does Yield Farming Work?
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In the DeFi system, Yield Farming works with the help of Liquidity Pools and Liquidity Providers. А liquidity рrоvider is a type of investоrs whо deроsits assests intо the smаrt соntrасt and The liquidity рооl is а smаrt соntrасt that is filled with саsh. Yield Farming provides the opportunity for investors to earn more rewards from depositing and locking their crypto assets in a decentralized exchange.
The yield Farming in crypto is similar to the bank loan system, it means when the bank gave us loans then we pay the loan with interest. Same as it is, we get loan crypto assets from the exchange, and then we pay back yields interests in form of tokens/coins.
The Yield farming works on an Automated Market Maker to creates a Liquidity Pool with the help of smart contracts instead of the traditional order book. it works on the basis of a pre-defined algorithm.
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### What Are the best Yield Farming Platforms and why they are best? (Explain any 2 in detail)
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a) Pancakeswap
PancakeSwap is a decentralized exchange that is used for yield Farming, coin swapping of BEP-20 token, staking, etc. Pancakeswap works on Binance smart chain network that uses Automated Marketing Protocol to manage liquidity pools. Pancakeswap exists in the top decentralized exchange based on Binance smart chain network. we can earn from 8% to 250% APR by staking the assets.
The website link is here. [Site](https://pancakeswap.finance/)
![Capture.JPG](https://cdn.steemitimages.com/DQmWP8i6VyEBYgnaqpZQYBuNnNXG2KMo5j7bWrn72ETyC9y/Capture.JPG)
#### Advantages of PancakeSwap
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1) Fewer Fees.
1) Fast Transactions.
1) Very Secure.
b) Uniswap
Uniswap is also an exchange that also runs on the decentralized method. It is used for staking, yield Farminga and swapping of Ethereum and ERC-20 tokens, etc. It runs on the Ethereum blockchain that uses Automated Marketing Protocol to manage liquidity pools. Uniswap no need for any third party to complete any action or process. Uniswap has over $5B locked in its smart contracts. Investors can earn from 20% to 50% APR on staked assets.
The website link is here. [Site](https://uniswap.org/)
![Capture.JPG](https://cdn.steemitimages.com/DQmSdtuv6oyU83uqk5EXL9w8LtTGMQq6GkJYCp1bESrfaEJ/Capture.JPG)
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### The Calculation Method in Yield Farming Returns.
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There are two calculation methods for profits earned in Yield Farming.
(a) APR [Annual Percentage Rate]
(b) APY [Annual Percentage Yield]
### Annual Percentage Rate (APR)
APR (Annual Percentage Rate) is the key tool for comparing different loan offers and understanding the total cost of borrowing over the duration of a loan. APR does not include the compound interest.
Example No 1, I have 1000$ in my account with a 10% APR. I'll be charged 100$ in interest over the course of a year. That means the interest I am charged one day becomes the part of balance accruing interest.
Calculation formulas are
Interest formula: A = (P(1+RT)
APR = ((Interest + Fees / Loan amount) / Number of days in loan term)) x 365 x 100
### APY [Annual Percentage Yield]
Annual Percentage Yield is based on compound interest as each yield is automatically reinvested. Basically, The annual percentage yield is taken from the borrowers in the Liquidity pools. The formula that we will use for this calculation is there. (1+r/n)^n-1.
For example, Investors invest $100 with an APR of 80%.
1) (1+ 80%/365)^365-1
1) (1+0.8/365)^365-1
1) (1.00211917)^365-1
APY = 1.22 x 100 = $122
Initial Investment + APY:
100 + 122 = $222
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## Advantages & Disadvantages Of Yield Farming.
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### Advantage of yield farming
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The primary advantage of Yield farming is simple, to increase the profit. Its means that we can earn more income through Yield Farming by storing assets in the pool. Yield Farming gives us higher benefits and rewards.
Being early in the project and farm its token to then see that token increase immensely in value does provide a very high possible return.
Another big advantage of Yield farming is that we can partake in something that we believe by funding it early for a potential reward, making it a more inclusive way to seek. however, it is also important to remember that higher returns are almost always associated with higher risk.
### Disadvantage of yield farming.
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The biggest disadvantage of Yield farming is the gas fees that every user pays to complete a transaction in the Ethereum blockchain that is quite high.
Smart Contract is the big risk and disadvantage of Yield farming. DeFi systems work on smart contracts, smart contracts are codes stored on the blockchain. if it is haked by a malicious hacker then we will lose all of our crypto assets.
Lending a small number of assets will not give a higher profit. So for high profit, we need to lending a high amount of assets. But If we have a small number of assets and use it in Yield farming, then we can not earn a higher profit.
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## Conclusion.
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Decentralized finance is a great and complex financial system that provides impressive services and products. Defi systems have not any third party that examines and operate the overall ecosystem and process. in this lecture I learned that Defi projects provide great incentive but also provide high risks. It brings the opportunity to confirm any transaction by completing any KYC step.
Yield farming is a modern definition project with exciting benefits. These benefits help a lot to boost the world of crypto. I also learn about how we can take profit and how we can calculate it in Yield farming. we can get yearly profits in yield farming that are calculated by APY and APR. Yield Farming has huge economic potentials such as easy loans, high-interest rates.
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🅡🅔🅢🅟🅔🅒🅣🅔🅓 🅟🅡🅞🅕🅔🅢🅢🅞🅡`
@sapwood
B̳̿͟͞e̳̿͟͞s̳̿͟͞t̳̿͟͞ ̳̿͟͞R̳̿͟͞e̳̿͟͞g̳̿͟͞a̳̿͟͞r̳̿͟͞d̳̿͟͞s̳̿͟͞
@bountyking5
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