1 Trick to Move Efficiently Around DeFi

If you've used decentralized finance (DeFi) to find unique investment and income opportunities, you’ve no doubt experienced the sinking sensation in your stomach when you realize just how much of your money is being eaten by transaction fees.

It’s hard to see gains you’ve realized stripped away in fluctuating fees. So, how should investors face this challenge? By working smarter, not harder.

So, the name of the game when dealing with DeFi — and of this week’s Weiss Crypto Sunday Special — is how to navigate this new financial system efficiently.

Chris Coney breaks down how these fees work, and one trick to minimize your exposure to them in our most recent Weiss Crypto Sunday Special. You can watch the video …

Or read on for the full transcript ...

Chris Coney:

Hi there, guys. This is Chris Coney speaking, and welcome to this week's edition of the Weiss Crypto Sunday Special. Today, I want to explore how to efficiently route your money around DeFi. I also want to explain a concept I came up with called transaction liquidity, which is part of the overall idea here.

Transaction liquidity is a special kind of liquidity that relates to DeFi. If you've actually used DeFi to even a moderate level, you have no doubt encountered the following problem: You find a nice fat yield over here on some DeFi app, and you decide you want a piece of it. You have dollars or pounds in a bank account over there. Then you have to figure out how to get the money from point A to point B, where you can actually start earning the yield.

The problem is that the very best DeFi yields, they tend to be on the more exotic networks ... which are actually harder to get to. So you're faced with a puzzle you have to solve before you even do anything. And that puzzle is, how do you route your money from point A to point B efficiently?

Sometimes this involves moving your money multiple times, and sometimes it even involves your money crossing multiple networks. That has downsides. It takes time, and it costs money. I personally find myself desperately trying to avoid my money touching the Ethereum (ETH, Tech/Adoption Grade “A”) network these days, simply because of the high fees. Unless the DeFi app that I want to use runs exclusively on Ethereum, I'd rather avoid it if I can.

And this is what I mean when I say efficiently routing your money around the DeFi ecosystem. We want to do this in as few steps as possible and with as few fees as possible.

At the time of recording, if you want to do a simple DeFi transaction on Ethereum right now, the fee is $32 worth of Ethereum. That isn't actually too bad right now, but it very much depends on the amounts that you're dealing with. Even if we consider a minimum transaction value of $1,000, $32 is a 3.2% transaction fee. Of course, that drops as you go up in value. It's 1.6% of a $2,000 transaction.

This is hinting at the concept that I mentioned called transaction liquidity. This is a situation where the value of your assets vs. the transaction fee reduces the viability or even the profitability of that transaction.

If I have a DeFi portfolio that's well diversified, I might have many different positions in many different assets. So when it comes time to close that portfolio and take profits, I have to do a transaction and incur the fee for each one. That might end up costing me hundreds of dollars in fees. Now those are gains that I made but will never see. They’re also gains that I made that I can't now reinvest. If I were moving a larger quantity of a single asset, say $20,000 worth, the $32 fee works out to 0.16% of the transaction value. So when I put it like that, [it] doesn't sound so bad.

But there is more to it.

Even for that $20,000 investor, the second transaction fee problem comes when you want to actually harvest your gains. For example, [my Weiss colleague] Marko [Grujic] just put out a [strategy] for subscribers to Crypto Yield Hunter [for the opportunity to go for] 30% APR [annual percentage rate]. On that $20,000, that would earn you $16.43 per day. Well, if that yield farm is on Ethereum and the fees are $32 per transaction, you can't afford to harvest and compound your gains daily, can you?

So in a 30 day period, you'd earn $493. But again, $32 in fees. That's 6.4%. Although to be fair in this case, that's only 6.4% of the interest you earned in the 30-day period because we're only moving the interest. You're not giving up 6.4% of your balance, because we're not moving the overall capital. So 30% APR is 2.46% every 30 days. So our return after fees ends up being 2.3% instead of 2.46%. Not a huge difference really.

The best-case scenario, though, is when we have a no-compromise solution where we get to keep all the returns that we make.

And this is where the efficient routing comes into play.

This is basically figuring out the most efficient route before you submit any transactions. If you're in the situation I described at the beginning, where you start out with dollars or pounds in a bank account, then using a centralized exchange that allows withdrawals directly to your target DeFi network is the way to go.

That way, you only need to do four transactions: one is from your bank to the exchange; one is to convert your money on the exchange to your desired crypto asset or stable coin; one is to withdraw from the exchange to your DeFi wallet; and then one is to send you money from the DeFi wallet to the yield farm that you actually want to earn the rate on.

To that end actually, Coinbase Global (Nasdaq: COIN) is supposed to be launching support for the Polygon (MATIC, Tech/Adoption Grade “B-”) network. But as far as I can see from inside my own Coinbase account, that still hasn't launched yet. And they said they were going to do this a little while ago. So what we need is an online resource that lists all the various centralized exchanges, and then which networks they each support for direct deposits and withdrawals. That would make our routing job so much easier.

Now I don't know if such a resource exists right now, but I did put out a request for one on Twitter. So if you know of a resource like this, please let me know so I can spread the word about it.

But that's going to do it for this week's edition of the Weiss Crypto Sunday Special. Keep your eye on your inbox for next week's episode. Until then, it's me, Chris Coney, saying bye for now.