Crypto Academy / Season 3 / Week 4 - Homework Post for @stream4u - Cefi-Defi-Yield

Good day everyone. Thanks to @stream4u for such a wonderful lecture on Cefi-Defi-Yield. I will be doing the homework from the lecture, so sit back and look for somewhere quite quiet and comfortable as you read through this amazing article I created just for you(😉). Let's get started!!!

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Before the invention of blockchain technology, the world was solely practicing a centralized system of finance, which is also know as CEFI(Centralized Finance). The government financial institution was in total control of our finances, we couldn't make transfers to people without using an intermediary which is the bank. Till this very day, governments of almost every country are still practicing Centralized Finance(CEFI), but why? Isn't Decentralized Finance(DEFI) so much better? Of course, it is! And I will tell why it is, in this article, so tighten your seat beat as I take you through the world of DEFI.

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Question 1: What Is the Importance Of the DeFi System?.

The importance of the DeFi System are quite numerous and are very much needed in our today's financial system. But first thing first, what does DeFi system means. From my understanding, DeFi system is a kind of financial system that is built on blockchain technology, that helps to enable it's users with the ability to make transactions without any third party or intermediary getting involved.

Here are some of the notable importance of the DeFi system;

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• Privacy
• Cost Effective
• Security

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Privacy

Privacy is a thing of choice, and we all should be able to perform transactions with or without doing our KYC verification. DeFi helps users feel as though they are free and not under any radar, whenever they are performing any transaction. Only you and alone you, should know your worth(account balance).

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Cost Effective

DeFi system is cost effective, as it eliminates any third party or intermediary involvement in our transaction. It is not only cost effective but also, very fast as compared to CeFi. Do you know how much it costs and how much time it takes, when you want to send money to someone oversea using CeFi. It could cost you $50 and maybe take a day or two days, sometimes even more days for the money to get to your desired person. But if you use the DeFi system, such transactions may cost less than $5 and takes less than 5 minutes to get to your desired person.

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Security

DeFi system ensures high level of security of your funds. Your funds are in a wallet that is completely controlled and managed by you and you alone. No more issues of your account been hacked, as long as your wallet keys hasn't been exposed, you are 100% certain that your funds will safe and secured, when using Defi system.

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Those are the three main and notable importance of the Defi system in today's world.

Question 2: Flaws in Centralized Finance.

There are so many flaws that can be found in CeFi system, and that gave rise to introduction of the DeFi system. Below are some of the notable flaws in the Centralized Finance system;

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• No Absolute Control
• Intermediary factor
• Security

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No Absolute Control

This is one of the major flaw of the CeFi system. Users, don't have absolute control over their account, as they are different regulations and rules to the way and manner they transact. For instance, we have a daily limit on the amount we can be able to deposit in our account and withdraw from our account. Some months back, Nigerian government, ban us, the citizens from depositing and withdrawing from any cryptocurrency related platform. No absolute control on how we use our very own funds in our account.

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Intermediary Factor

The intermediart factor is also a notable and major flaw of the centralized finance system. The high cost of processing financial transaction is quite alarming. Currenntly, in Nigeria, any time, you receive money you pay a fee, it is quite laughable but it is happening. At the end of month, you get charged text messages fees and some other fees, which are quite laughable too. Sending money from Nigeria to any other country, is a complex issue, as you will be asked for Identity card, pay huge transfer fees and also it takes about 2 or more days for the transaction to be completed.

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Security

This is yet another notable flaw of the centralized finance system. Majority of people are living with fear of their account been hacked. A close friend of mine, has lost over $500 from his account twice and he didn't know how it happened. You may wake up and see your account frozen, and you can't do anything about it. That's why I hardly have funds in my account, because our money is not safe and secured in our bank accounts. Whenever I need funds, I send from my DeFi wallet to my account, using P2P(Peer to Peer) as crypto is banned in Nigeria.

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Those are the three main and notable flaws in Centralized Finance, which majority of us are still facing till this very day.

Question 3: DeFi Products

DeFi system offers varieties of amazing products, but I will taking a look at two very cool DeFi products, which are;

• Wallets
• Asset Management

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Wallets

Wallets are one of the most notable and used DeFi product. I think almost everyone, if not everyone who makes use of the DeFi system, also makes use of wallets. Wallets are highly decentralized products, as only you and you alone have full control over your wallets. You have the ability to send and receive any amount of money without any intermediary getting involved. Your hard earned funds are fully secured and safe, as only you have the key phrase or private keys to your wallet, as long as you don't share your key phrase or private keys, your funds are fully secured. There are numerous Defi Wallets such as;

• TrustWallet
• WalletConnect
• MetaMask
• Argent
• Fortmatic
• MyCrypto
• Authereum and many more

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Metamask

Among all of the amazing outstanding DeFi wallets, Metamask seems to be the best to 'me', as it is the most widely used wallet, hence, the most supported wallet across the DeFi ecosystem, i.e you can easily connect your Metamask wallet to numerous DeFi DApps, making it the absolute best.

Metamask is crypto wallet that is a browser plugin, hence, making it super accessible. As soon as you enter any DApp that request for a wallet permission, your Metamask is right there with you. It makes it seemless when connecting once wallet to DApp exchanges, games and so on. It is supported on Chrome, Firexfox and Brave browsers. This is one oldest and safest wallet in the crypto world. For it to be one of the oldest and have never suffered any malicious hacks, that says a lot to the security level of the wallet, as it uses Hierarchical deterministic settings which helps back up the wallets of users by providing them with Seed phrases, which can be used to recover once account.

Metamask wallet is simply the best wallet to me, as I have been using for years without any issues. It has an easy to use interface and the accessibility from ones browser is just what makes me like it even more.

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Asset Management

This is another amazing DeFi product, that the DeFi system offers its' users. As many of us, drive into the DeFi system, we try to acquire so many assets and sometimes, we can't keep track of all the assets we have, which is not very good at all. Or you may have so many assets spread across numerous platforms and it becomes difficult to keep track of your balance, profits or losses accrued. With the Asset Management product, you can now adequately keep track of all assets, know your current total balance across all platforms with just a glance. Asset Management, is a must have, for any major investor in the DeFi ecosystem. They are quite a lot of Asset Management DApps, which are;

• Set Protocol
• Curve
• Balancer
• Zapper
• Inspect
• Zerion and many more

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Zerion

Among all the amazing Asset Management DApps, I personally think that Zerion is the best, as it is the sleekest product in the Asset Management ecosystem. Zerion offers its' users the ability to borrow, invest, save and exchange, at it's dashboard. It also offers its' users the ability to keep track of their assets both on their mobile phones and desktops, which is just amazing.

I think Zerion is one of the best DApp in the entire DeFi ecosystem and on the entire blockchain, because it a platfrom where you can easily perform every DeFi related activities. The platform integrated with popular DeFi protocols such as Uniswap, Curve, Aave, Maker, Compound and others, hence, allowing it's users to be able to trade, lend and borrow assets, as well as providing liquidity to various DEX pools, all in single interface. It is completely mind blowing. With all these services it offers it's users, it still does it primary purpose which is managing user's portfolio across multiple wallets and as well as track their assets in real time and also providing live price updates of all assets.

Zerion is an all in one DeFi platform, hence, making it the best DApp platform under the category of Asset Management in DeFi ecosystem.

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Question 4: Risk involved in DeFi

Yeah, the DeFi system is not without risks. I will be letting you in on some of the major risks faced in the DeFi systen. Below are some of the risks involved the DeFi system;

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• Private Keys Issue
• Stability Issues
• Liquidity Issues
• Regulation Issues

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Private Keys Issue

This is a major risk faced by every DeFi users. Our Private keys give us total control over our wallet, and if lost, stolen or forgotten, your wallets and all the funds in it, are gone for good, because it can't be recovered. We have heard of cases where people had some coins, and after some years, the coin pumps massively, they try gain access to their wallet, but can't because they don't know where they stored their private keys. I have experienced this myself, I'm glad I only had $5 worth of BNB back then, as I was a newbie and didn't know the importance of my private keys. I lost it and couldn't have access to my wallet again. I wasn't pained then, because it was only $5, but my $5 then, is now worth $600+, I feel the pained now(😂). This is mighty risk faced in the DeFi system.

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Stability Issue

This is yet another major risk faced in the DeFi system. There is a stability issues which some major platform faces, which is scary and may result to people getting scammed because of nervousness. Early this year, PancakeSwap had an issue, as they were hacked and the hacker displayed a feedback on PancakeSwwap official site, directing users to a page that will result to them submitting their private keys and once they do, their wallets are wiped clean. This is another risk faced in the DeFi system.

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Liquidity Issues

This another risk faced in the DeFi system. Liquidity is provided by the users through farming, staking, etc. So, price of assets traded are depended on users, and users with majority of the stake in the liquidity can easily manipulate the price at his/her will, which is very unhealthy.

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Regulation Issues

This another major risk faced in the DeFi system. Since, there's no central authority controlling and regulating the operations carried out in the DeFi system, there are some people who are abusing it greatly for their selfish gains. Criminals can easily perform money laundering as no one needs KYC before transactions can be carried out. Also, there are many phishing websites and platforms which wants to get you to believing they are the official website, by so doing, gain access to your wallets, if you fall into their traps. No one confirms nor checks the identity of users in the DeFi system and that's why we are still facing this issue till this very day.

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Question 5: What is Yield Farming?

Yield farming is the process of locking your assets in a pool over a period of time and earn rewards for doing so. Assets locked in pools are liquidity of the projects, so in order to inspire investors to lock their assets, investors are rewarded in tokens for providing liquidity to the project.

Yield farming is one of the most lucrative business in 2021, as investors earn over 40% of their investment, sometimes even over 100% of their investment. Instead of just hodling your assets in your wallets, provide liquidity and earn cool passive income. Rewards are distributed to providers based on the APY or APR of the the pool which they invest in.

Question 6: How does Yield Farming Work?

Knowing how Yield farming works is quite simple. Projects needs liquidity and users will be reluctant to provide liquidity with nothing in return, so projects thought of a wiser means to lure investors into providing liquidity for their projects, by rewarding them based on the liquidity they provide. Automated Market Maker (AMM) was created to help determine the price of assets in the pool.

The liquidity provided by users can be used to provide loans to borrowers who will then have to pay back with interest. The interest which is paid back by the borrowers will be distributed to liquidity providers. Liquidity providers also earn a certain percentage of all trades in the pool in which they provided liquidity to, based on the proportion of their share in the liquidity pool.

Below is an image of PancakeSwap liquidity page.

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Question 7: What Are the best Yield Farming Platforms and why they are best.

There are many good and very lucrative Yield Farming platforms in the world today, because it is becoming one of the best investment for investors right now, as over a whopping $50 billion worth of crypto tokens are locked in various platforms. Instead of earning less than 1% annuanlly from your deposits in banks, you could be making over 40 - 200% annually from Yield Farming.

Different platforms provides different APR, and as an investor, you only look out for three things before investing into a Yield Farming platforms, their APR rates, Probability of Impermanent Loss and Stability. Based on these three factors, here are my two top Yield Farming platforms right now;

• Venus
• dForce

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Venus

Venus is a decentralized lending and borrowing platform built on Binance Smart Chain. Venus is currently ranked as the largest protocols on Binance Smart Chain, as it offers a superb lending and borrowing solution to it's users who borrow against collaterals and also lend their tokens in order to earn rewards.

Venus offers very fast and speedy transactions, very low cost on transactions fees, and as well as, a huge pool of wrapped tokens and liquidity. Users can easily lend their assets and earn cool interest and can then use their interest earned as collateral to borrow other assets.

Venus is truly an amazing platform, as it is known to be very stable and secured from hackers. It's liquidity pool are known to never be risky i.e there's zero chances of suffering impermanent loss. Lastly, it offers good APR rates with it's highest APR rate to be 22.95% and it's second highest to be 14.62%. It is quite rare to have platform that ensures little or no chance of suffering Impermanent loss to have this amazing high APR rates.

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dForce

dForce is a decentralized lending and borrowing platform that is built on both Ethereum Chain and Binance Smart Chain. dForce lost it's credibility a while back, when it was hacked of around $25 million. But I believe the best platforms are the ones that have suffered before because they won't want to repeat same mistake ever again, making them stronger and more reliable. The team behind this platform is just out of this world. The team is a combination of crypto veterans and professionals from Standard Chartered Bank, CitiBank, Goldman Sachs and others. It is also backed by notable investors from China Merchants Bank International (CMBI), Multicoin Capital, as well as Huobi Capital.

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dForce offers it's users it's native token, dForce whenever they provide liquidity. The token seems to have a very bright future, so it is a very awesome way to earn dForce tokens by providing liquidity on the platform. The platform assures no impermanent loss risks, as it doesn't feature any AMMs. The platform offers a wide variety of assets such as multicurrency stablecoins, synthetic assets, USDx, GOLDx and others.

dForce is a lending and borrowing platform with a great potential. There's no worries of suffering Impermanent Losses. It has amazing APY rates with it's highest APY rate to be 23.06% and it's second highest to be 20.56%. Very impressive, I must say. This is a platform to look out for.

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Why Are They My Best 2 Yield Farming Platform

It is quite simple, I'm a person who likes to reduce my risks, and also earn good reward. These two platforms offer me that. There is assurance that I won't suffer Impermanent Loss, and for such kind of platform to have an APR/APY of over 20% is just mind blowing. I did thorough research on other Yield Farming platforms such PancakeSwap, UniSwap, Curve, Sushi and Aave, but I chose those two because, I feel they met my criteria and they are really good.

Question 8: The Calculation method in Yield Farming Returns

There are two ways in which our returns from yield farming can be calculated and they are;

• APR
• APY

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APR

Annual Percentage Rate(APR) is the annual returns on investment without the inclusion of compounding interest. I will use an example to illustrate how it can be calculated.

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Example: I staked some of my BAKE which was worth about $200 with an APR of 40%. How much will I get after one year from my investment?

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Initial Investment = $200
APR = 40%

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My profit will be = 40% X $200

Profit = $80

Total Returns after a year = Initial Investment($200) + Profit($80)

Total Returns to be withdrawn after a year = $280

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APY

Annual Percentage Yield(APY) is the annual returns on investment with the inclusion of compounding interest. I will use the same example from above to illustrate how it can be calculated.

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Example: I staked some of my BAKE which was worth about $200 with an APR of 40%. How much will I get after one year from my investment?

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Initial Investment = $200
APR = 40%

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Profit = ((1 + r/n)ⁿ - 1) X Investment .
Where r = compounding period - i.e (40%)
n = number of days - i.e (365 days)
Investment = $200

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((1 + 0.4/365)³⁶⁵ - 1) X $200

((1 + 0.001096)³⁶⁵ - 1) X $200

((1.001096)³⁶⁵ - 1) X $200

((1.492) - 1) X $200

(0.492) X $200

Profit = $98.4

Total Returns after a year = Initial Investment($200) + Profit($98.4)

Total Returns to be withdrawn after a year = $298.4

Question 9: Advantages & Disadvantages Of Yield Farming

Advantages Of Yield Farming

There are quite various advantages of yield farming, but I will be only explaining my top 3 advantages of yield farming, which are;

• Higher Profits
• Earning New Tokens
• Passive Income

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• Higher Returns: Yield farming provides it's users massive returns on their investment which is mind blowing. I doubt if any traditional investment such as real estate, stocks, bank deposits interest, and others, could generate as much returns on investment as yield farming does.

• Earning New Tokens: Earning new tokens through yield farming, is yet another wonder of yield farming. Can you imagine earning huge returns on your investment, as well as acquiring new tokens which could be worth more than your investment in years to come.

• Passive Income: Yield farming has made it possible to live the dream life, which is, not working but still making money. Instead of your tokens to be sitting idle in wallets, it could be making you huge passive income, without you stepping out of your door or breaking a sweat at all. It is really amazing.

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Disadvantages Of Yield Farming

There are quite few disadvantages of yield farming, but I will be only explaining my top 2 disadvantages of yield farming, which are;

• Highly Risky
• Liquidity Risk

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• Highly Risky: Yield farming is highly risky as it is run on smart contracts which are just codes that are stored on the blockchain and can be tempered with by a malicious hacker, which may result to a massive loss of funds. Last year, a bug in the smart contract of Yam finance affected the price of Yam token, which saw the price dropped from $167.66 to $0.97.

• Liquidity Risk: Liquidity risk could make users of yield farming loss a huge chunk of their money. We all know that the price of cryptocurrency is very volatile. Before a borrower gets a loan, he/she provides a collateral, if there's a drop in price of the collateral provided, and the drop goes beyond the price of the loan in which the borrower requested for, his/her collateral will be liquidated immediately, resulting to a huge loss for the borrower.

Question 10: Conclusion on DeFi & Yield Farming.

Decentralized Finance(DeFi) has really improved the way and manner we make our transactions. We now have more privacy on transactions we carry out, as well as our worth, in terms of assets(account balance). We can now easily send money from the comfort of our home to anyone in the other side of the world within minutes and at a very little cost. Lastly, we are in total control of our wallet, so we feel safer and more secured of our assets. DeFi is the future, this is just the beginning.

Yield Farming is an unbelievable milestone for the DeFi system, as it has enable users generate higher returns from their investment, returns that they can't possibly make with the traditional investment channels(real estate, stocks, etc). Huge passive income can be made easily through yield farming. This is truly a welcomed development in the DeFi world and the entire cryptocurrency world.

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Special thanks to you, @stream4u, for organizing this amazing class and giving this nice assignment, as it has helped me increase my understanding on both DeFi and Yield Farming.