Case study of the data availability gap in DeFi.
This case study illustrates the data availability gap problem. Consider a bullish investor about the price of Ethereum is going leveraged long with Maker. He deposits a million dollars worth of ETH collateral in Maker, borrows DAI, and sells the DAI for ETH on Uniswap, and uses that ETH to repeat this process five times. Asymptotically it rounds up to around 3x, 4x, or 5x leverage. Let’s say he bought in around $60 and exited around $200. This is surely a great profit, but it is not clear what the exact PnL was. The process consisted of tens of thousands of transactions over the course of weeks. This is the data availability gap.
Beneath is a list of the DeFi record-keeping nightmare
- Migrated from Metamask to instaDapp.
- Dai to ETH trades is chopped up and filled because of the large transaction. Each fill has a different cost base.
- DEXs can’t download your transactions.
- Shut CDPs are moved to 0x000.0000 address, which the tools don’t index.
- Thousands of trades, many browsers, based tools cannot scale.
- Visibility into hidden taxable events. E.g. in the US and Canada crypto to crypto is taxable. On the large scale, it has to be tracked.
- Classification of taxable events. E.g. staking rewards, transaction fees, airdrops, are all taxed via a different metric.
- The composable nature of DeFi amplifies the data availability gap.
The records are a must to make sure you are compliant. In the USA for example, the IRS can come anytime for an audit and keep you on the hook for underreported tax liabilities and penalties.
Covalent has built a solution, SafeKeep (safekeep.app). Safekeep is the “Download CSV” for DeFi data. It helps to save you from the DeFi record-keeping nightmare discussed earlier. Safekeep supports lots of different DeFi protocols, such as Uniswap, Synthetix, Compound, Marker, Dai, and dydx. The Safekeep API simplifies the experience for the users by ordering the data into clear and readable tables and makes it able to download CSV’s for all activities. All positions, cost basis, and PnL can be easily traced, including closed trades and rebalancing events.
Watch Covalent CEO Ganesh Swami speak on the Data availability gap at ETH Denver 2020.