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The lesson today is based on the Defi platform (Decentralized Finance), clearly stating it's importance, and comparing it with the normal centralized exchanges and showing why it is better.
The lecture was great and extensive and this is my homework post for @stream4u
## WHAT IS THE IMPORTANCE OF DEFI SYSTEM
<center> [source](https://www.coinmama.com/blog/defi-explained/)</center>
The Decentralized Exchange is important in the sense that, it's technology and design, removes intermediaries and middlemen in transaction processes, therefore making buyers and sellers enjoy interaction on a peer to peer network during transactions on a blockchain
The Defi too, is made up of softwares and peer to peer protocols well structured on decentralized blockchains too that do not need ambiguous rights,steps for lending, trading and borrowing of financial instruments
Finally, the Defi system resolves the error that come out at times in centralized exchanges where middlemen performances lead to one error or the other. Instead, the smart contract nature of the Defi, erases mistakes and the non - third party nature of it too reduces the risk of mistakes
## FLAWS IN CENTRALIZED FINANCE
Like the lesson explains, the Defi can be seen as one of the solutions to the various failures of th Centralized exchange.
**These failures /flaws include :**
* **Security failures :**
One of the greatest flaws of the Centralized exchange can be seen as Security, this is due to the huge number of assets listed on the market and most times the inability of users to distinguish legitimate one from scam.
In other words, giving scammers and malicious people chances to scam victims. Records for exchange scams have been recorded mostly for centralized exchanges.
For example we see Coincheck losing about 500 million dollars to a scam network involving user/traders funds. Bitfinex, Mt. Gox, BitGrail and lots more could be seen as other exchanges that have been victims of security failure
* **TOTAL CONTROL**
Another major failure is the fact that users have to relinquish control of their private keys to be able to transact on the network and on relinguishing it, the user doesn't have total control of his funds anymore unlike the Decentralized Finance where users control their funds no matter what
* **Trading fees :**
Fees levied on transactions could be seen as another discouraging factor in the centralized exchange as they are too high since they bear more risk and have heavy control over assets on their platform unlike the decentralized platform that has lesser transaction charges or fees.
## DEFI PRODUCTS. (EXPLAIN ANY 2 PRODUCTS IN DETAIL).
Defi products first could be seen as platforms through which transactions are done using a peer to peer network on a blockchain without the need for third party agents or intermediaries like banks or other financial institutions
These products are the basis through which the decentralized transactions take place on the network
Some examples of the Defi products include :
Lending, Yield, Stable coin, decentralized exchange etc..
**Decentralized Exchange :**
Decentralized exchange(DEX) could be seen as kind of crypto asset exchange that uses a peer to peer network to place transactions and have no want for middlemen or intermediaries in the transaction process.
Basically, transactions are made with the intervention of middlemen like banks and other financial institution but the decentralized system makes system straight and peer to peer and reduces risks associated with the middlemen.
Examples of the Decentralized Exchange include : MDEX 3, MDEX (BSC)4,
Uniswap, Pancake swap.Let's now talk about the
**Uniswap :**
<center> [source](https://medium.datadriveninvestor.com/fundamentally-valuing-uniswap-3dbe991bd398?gi=a789836a0b2d)</center>
The Uniswap could be seen as a decentralized Finance platform meant for the exchange of crypto currencies. We understand here that this protocol, works out digital transactions between crypto assets tokens on the Ethereum blockchain while using a process called a smart contract
This Uniswap also, was seen to have been created November , 2018 and thrived up till 2020 when it suffered a little shut down due to a failed attempt to hack into its website.
The Uniswap finally could be seen as a great platform giving users smart contract opportunities and hereby reducing marginal cost of transactions. The service could be detrimental too since since tokens are easily added to the exchange, there are many malicious and fake coins that are added too in the process, therefore making UNI a bad reputed place use, trade or exchange
The second product of the Defi we'll be dicyssinus discussing is seen as the
**Stable coins :**
The Stable coins could be seen as crypto currencies that re non - volatile and have their values tied to other currencies be it, fiat, crypto, local etc.
These coins we see could be backed either by commodity, fiat currencies , crypto currencies etc and regulating their value in a stable manner. The need for this arose as a result of traders losing huge values in little space moments due to huge volatility in the value of crypto assets.
The Stable coins too are beneficial in the aspect that they reduce the risk of volatile losses in a falling market.
On the other hand, the assets are seen to stagnant when it comes to the creation of new tokens or coins like we see in the case of their biggest coin, tether which has been seen not be able to carry out audits for their reserves.
Examples of the Stable coins include :
Tether (USDT), True USD (TUSD), Paxos Standard (Pax) etc
**Let's see the tether :**
<center> [source](https://twitter.com/tether_to)</center>
The Tether (USDT) could be seen as a blockchain based stable crypto coin with its fiat currency backing as the USD dollar, Euro, Yen etc. They are mainly used by investors to avoid the volatility of other coins like bitcoin to manage their funds and maintain its store of value.
This tether has it's purpose, to build the connection between fiat currencies and crypto currencies which was a successful as we can submit that it's pegged 1:1 with the US dollar now. Even with respect to the fraud that took place sometime ago in 2017 that claimed tens of millions of dollars of tether, the crypto coin have managed to build a heavy trust with a great store of value these times.
It is however said to be a static and non progressive kind of investment by some people while others love its nature of being a stable coin.
Finally we see these stable coin as a great product of the Defi as it allows, users and investors, obtain yield on their crypto assets /coins and in the same way reduces the risk of volatility in losses
## RISK INVOLVED IN DEFI
There are several risks involved in Defi and they include :
* **An impermanent loss risk :**
This is one of the most important risks to consider In a Defi system and its basic to know that assets locked up in liquidity pool could experience volatile returns and drastically lose value and create an impermanent loss. We see here that the value of assets left in the liquidity pool experience a heavy loss in value
* **Smart contract risk :**
Already we understand the nature of the Decentralized Finance to use a smart contract which uses codes and private keys which could be hacked at any moment.
Therefore users of the platform are at risks of having their /wallets hacked into and stolen
* **Time wastage risk :**
The Decentralized Finance system is seen to be relatively slow compared to centralized systems. This entails that transaction processes are slower and more expensive like we see Ethereum that can perform about 13 transactions in one second unlike other centralized systems that could process thousands in a day
* **Liquidity risk :**
Sometimes, investors. may not be be able to convert their assets to cash, without withdrawing the entire capital and income maybe due to shortage of buyers or a non efficient market
## WHAT IS YIELD FARMING
<center> [source](https://kinesis.money/blog/what-is-yield-farming-in-defi/)</center>
Yield farming could be seen as a system that allows cryptocurrency holders earn interests for their holding in their coins/assets. This implies a cryptocurrency user, depositing his assets into a locked protocol, or we just say it's lent meaning that he doesn't have access to it for that period of time and earns interest at the end.
We can liken this to an example where Samuel needs 150000 Dollars to kick off a poultry farm, and Kelvin is a money lender.
Samuel opts to Kelvin for the money he needs to start and Kelvin states that he would charge 10% interest on his money after 6 months which is the duration Samuel needs the money for.
Finally Kelvin gives to Samuel and at the sixth month he gets 165000 dollars.
Points to take away from here include that :
Samuel couldn't use the 150000 lent to Kelvin throughout the period he lent the funds just like the Yield farming where we can't partake of our funds throughout the locked protocol period
Secondly, here we have Kelvin who got the interest after the period we couldn't use our funds and so it is when our funds are locked :we finally get the interest.
In Yield farming process, we also consider that, there would be a liquidity provider which is the trader who gives away his crypto assets and the liquidity pool which is the Defi platform's smart contract that the assets are deposited into
The Yield farming works also based on a model known as the Automated Market Maker which is renowned on most decentralized exchanges.
## HOW DOES YIELD FARMING WORK?
The Yield farming works based on a system where users give away their liquidity (crypto as sets) into a liquidity pool which is the smart contract ( where the assets are held over a period of time) and works with a model known as the Automated Market Marker which is the technology the decentralized exchanges uses for the transactions on the network. Like I gave an earlier example in the Yield farming definition we could see something like a user holding some tokens in a liquidity pool for a month and getting a ten percent interest on it after the one month, that's something, the Yield farming gives an idea of.
Like in the Uniswap exchange, anyone who wants to keep liquidity in the pool :
*Go to the Uniswap exchange and log on to it
*The right top shows a button reading connect to wallet and we connect to a Metamask wallet or another we can
*When we are done adding the wallet we get to the pool button and click the "add liquidity" shown there
*We select a token and enter the SHR address and approve the SHR and click on the supply button.
Once this is done, we'll be warning new fees for transactions done in the SHR/Eth market
## WHAT ARE THE BEST YIELD FARMING PLATFORMS AND WHY THEY ARE THEY BEST (EXPLAIN ANY 2 IN DETAIL)
The best yield farming platforms I know are the Uniswap and the Pancake swap
Firstly talking about the Uniswap :
**The Uniswap :**
The Uniswap could be seen as a decentralized Finance platform meant for the exchange of crypto currencies. We understand here that this protocol, works out digital transactions between crypto assets tokens on the Ethereum blo blockchain while using a process called a smart contract
This Uniswap also, was seen to have been created November , 2018 and thrived up till 2020 when it suffered a little shut down due to a failed attempt to hack into its website.
The Uniswap finally could be seen as a great platform giving users smart contract opportunities and hereby reducing marginal cost.
Finally, this Uniswap is my preferred platform since it leaves its users with interest fees of every transaction done on the Platform with the Ethereum pair once our liquidity has been pooled in and reduces the cost of transactions too with its smart contract nature
**The Pancake Swap :**
<center> [source](https://twitter.com/pancakeswap)</center>
One of the listed decentralized finances on the Binance smart chain network could be seen as the Pancake swap which is a decentralized exchange that uses no middleman communication but allows for users maximization of their tokens and less charges on transactions.
We see it to use the same protocol as used in the Yield farming which is the Automated Market Making system and see itse similar code base with the Sushiswap.
Basically, I love the Pancake swap for Yield farming since they share the same AMM system making the transactions easier and their relative cheap transaction fees and fast platform growth
## THE CALCULATION METHOD IN YIELD FARMING RETURNS
Here we'll be seeing the calculating method in Yield farm returns and its as simple as :
The first way of calculating the Yield Farm returns is seen as the Annual Percentage Rate :
The annual percentage rate could be seen as a
fixed rate of profit imposed on the liquidity collectors and meant to be given to the liquidity providers. And a basic difference between this APR and the APY is the fact that in this APR, the interest, is not compounded instead, a fixed value, has an interest placed on it and after the accepted period, you have your liquidity back with interest.
For example an APR that entails a 50% profit for the year, would earn a liquid investor of $2000, exactly $3000 after one year, $4000 after two years and so on.
The second kind of calculation is seen as the APY ( Annual percentage yield).
In this pattern or earning, the invested liquidity has interest acted on its new value everyday and is calculated like that.
This means that the value of the liquidity when it has interest on it, is what is remains for the next day and interest too acts on it and the next day too, interest does like that and so on making the interest earned in this a compound one.
After considering that, the amount locked in the pool, is the basis of the interest generation, we can deduce that in calculating APY, we can use :APY=(1+r/n) n-1
Where, the R =nominal interest rate
N =Number of compounding periods yearly
And APY is the Annual Percentage Yield
So using an example where someone invest $10000 and the APY is 50% and the compounding period is monthly ie 365 days in a year
We can draw the APY by :
(1+50/365) 365-1
=(1+0.137)365 - 1
(Note that the 365 after the bracket is an index and not a multiplying figure)
=(1 + 0.137) 365 - 1
=2.252-1
=1.252
To get the APY then we, do 1.252×10000
= 12,520
Therefore we get the total returns of the Yield farming over the full year as
The interest (12,520)+ the initial amount (10000)
=$22520
## ADVANTAGES & DISADVANTAGES OF YIELD FARMING
Here we'll be considering the advantages and disadvantages of the Yield Farming and they are as follows. :
**Advantages of Yield Farming**
* **Increased Profits :**
Yield farming produces profits over the period that the tokens are in the liquidity pool even more than various other traditional exchanges that bring lesser interests and profits
* **Stress-free earnings :**
Most times, users of crypto service and coins,, leave their coin in their wallets idle, but the concept of Yield farming brings benefits to the usual holdings since they earn profit and interest even while we are not trading them or even stressing our selves
* **Unrestricted participations in the Benefit activities :**
Everyone could earn and join in Yield farming without rigorous processes involved unlike some online processes that works just In a particular place and involved too much verifications to complete eg KFC etc
* **Users Profit**
The Yield farming, minimizes risk and maximizes profit in the sense that it brings users profit at the end of the Yield farming and reduces the risk of just holding the coins with no gains
**There are also disadvantages of this Yield farming including :**
* Excess and uncontrolled gas fees are one of the demerits of the Yield farming since, the increase in the Yield farming brings more increase to activities done on the Ethereum platform for example we see Uniswap, and their gas fees getting to over a hundred percent during the highest part of the Defi period and making the Yield farming less authentic for average investors.
Though there are few movements geared at providing solutions to it like the Ethereum 2.0
* **Pool Strategy Risks :**
The several strategies involved in Yield farming including lending, loaning etc. But with the changing nature of things done on the Platform makes thing that work today not t work the next time for example loan pools maybe be blown up due to low liquidity and arbitrary trading may not be possible if the relative volatility is low,therefore leaving users with no definition of strategies to take
* **Vulnerability :**
Sometimes, the rush of people wanting to make the best of profits from Yield farming, makes the copy codes from previous farmers most times without testing and sometimes might make it prone to malicious and hacking personallities
## CONCLUSION ON DEFI & YIELD FARMING
The Lesson brings exposition to the Decentralized Finance which involves the smart contract in execution of financial transactions on a decentralized peer to peer network. and a part of it which is Yield farming. We see Defi products too which show more levels to the Defi. The Yield farming we also understand to be a very lucrative and beneficial aspect of Crypto holdings, it's advantages and disadvantages too.
I also look forward to participating in more of these crypto activities very soon
Cc
@stream4u
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