Hacking Money PH
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Hacking Money PH

Easy Liquidity Pools with DeFiZap

If you own ETH and you wanted to exchange it for another token on the Ethereum network, you could use Uniswap. Since it’s decentralized, there’s no signup required, which I love. Who wants to sign up for yet another exchange?

Unlike regular exchanges, where there’s a buyer and a supplier, Uniswap instead has a liquidity pool. If I want to exchange my ETH for some DAI, the USD stablecoin, I don’t need to wait for my order to be filled by someone else. I’ll be exchanging with the pool.

The incentive for contributing to Uniswap’s liquidity supply is that you can get a piece of the 0.3% trading fee. If you’re contributing 50% to a liquidity pool, you get 50% of that 0.3% fee.

So say you’re interested in contributing now to the ETH and DAI pool. Unfortunately, though, you would need to own an equivalent amount of ETH and DAI to contribute liquidity.

What if you own only one part of the equation? Enter DeFiZap.

What does DeFiZap do?

Say I got 1 ETH. To contribute to the ETH — DAI liquidity pool, I’d have to convert 0.5ETH to DAI. You have to spend some gas to say you want to join the pool, and sending the tokens over requires gas again, adding up to 3 transactions that took some gas.

DeFiZap makes it easy to do it all with just one zap. If I zap in with 1 ETH, it will convert half my ETH into the correct token, and voila, I’m in the pool! And if you want to exit, you can withdraw just ETH.😲

I’ve been interested in liquidity pools for the potential to earn from increased trading activity during volatile times, and I did my research about the risks (read about the risk of impermanent loss and profitability). I was still interested, so finding this option was amazing.

So, I wanted to test things. I was going to put 0.1 ETH on April 8, 2020, and see my returns after a week.

Tutorial

Requirements: Metamask or another compatible wallet, an understanding of Ethereum and gas, and an understanding of the token of your choice
Investment: The more value you provide, the more you earn from the fees
Risks: Variable due to impermanent loss, and potential safety risks of a project in beta
Time needed: 5 minutes or less

To start, you can take their survey for pools that fit your risk appetite and predictions for ETH. I answered that I was a conservative beginner whose strategy was to buy and hold, and I’m not sure about the price of ETH.

The following were my options. Each pool has a specific tutorial for it in “Learn More,” so do take a look at those.

I chose the cDAI pool. cDAI comes from Compound, and you can read more about it here. Basically, the interest is in the form of the value of Compound’s cDAI increasing in value. If 50 cDAI is currently worth 1 DAI, that 50 cDAI can someday be exchanged for 1.1 DAI.

I had 0.1 ETH ready, and an extra 0.001 for the transaction fee. Just click the green “Zap in” button for the pool of your choice. It will ask you to sign in with your wallet.

Once you’ve signed in, you can then see a screen like this.

There’s a variety of other tokens you can use as input, but I’m using 0.1 ETH. I can choose between Uniswap and 1inch for processing the exchange, and at the time, 1inch was giving me a little more cDAI, so I chose that option.

I stuck with the Average speed option, and clicked the Zap In button. I confirmed with Metamask, and voila! It was done.

Checking fee returns

I used the portfolio tracker from DeFi Prime because they actually show how much you earned from the trading fees. This was my status roughly 24 hours after I did the zap, on April 9th.

Just sign in with your wallet, and it will pull in all that information. As you can see, I already earned $0.0012!

And shoutout for DeFi Prime! I mean, I just link my wallet and I get access to all this info and that beautiful chart? WORK.

One week later

So here is what I earned in fees a week later.

Would I have been better off leaving the ETH in Celsius Network?

I was originally holding the ETH in Celsius Network, and they reliably pay me interest on crypto every week. Since this experiment was also a week’s timeline, it seemed like a good comparison.

Celsius announced an interest rate increase just the week after I started this experiment. Putting 0.1 ETH in Celsius in the previous week would have earned $0.4, but the increase brought it to $0.59 a year.

So since they calculate interest from Friday to Friday, here’s the calculations assuming I deposit on a Wednesday and withdraw on Wednesday.

( 0.4 / 365 ) * 3 = 0.00328767123 and ( 0.59 / 365 ) * 4 = 0.00646575342

So, I would have earned about $0.006 worth of interest in Celsius.

I earned $0.02 in fees, according to DeFi Prime, which is double Celsius’s interest. But I also had transaction fees. Since I’m getting returns in cents, the 0.0042 ETH / $0.72 transaction fee meant I lost money.

And this was my mistake. I didn’t do proper research into 1inch. They’re help avoid price slippage by distributing the transaction over a variety of exchanges, so they’ve got a higher transaction fee than using Uniswap outright.

1inch is a great option if you want to contribute over 5 ETH, but you don’t use 1inch for 0.1 ETH.

And let’s be real here, it’s not the most grievous loss. We’re talking cents. But for the sake of this experiment, I am currently at a loss from earning through fees.

Options for using DeFiZap

Still, though, I’m really enthused by the potential of this. It’s little work on my part, and I get to profit from volatile days in the market. Also, it’s fun. I get to analyze things!

For example, I was studying what I could get if I withdrew during different times of the week, and I noticed that I could get more ETH if the value of ETH dropped. Which makes sense, my cDAI could purchase more ETH if the price dropped.

So, as you can see, I can withdraw 0.1020 ETH, but I could have withdrawn 0.01041 at some other point in the week. I had an imbalance of more ETH than cDAI, and I could have converted that cDAI for more ETH to withdraw.

A I love how there are a lot of withdrawal options. I can choose withdraw in ETH, I can choose to withdraw in cDAI, I can choose to withdraw in DAI.

So here are my potential options:

  • If the price of ETH plummets, I could choose to withdraw a little more ETH.
  • If the price of ETH rises, I could choose to withdraw in cDAI or DAI.
  • If I’m satisfied with the split between my ETH, I can withdraw ETH and cDAI.

For the moment, I’m leaving it to earn fees for a little longer. From this experiment, I want to approach liquidity pools where I’m ambivalent about gaining more ETH or of the other token. And I actually did enter another liquidity pool before this week’s experiment was over! 😂

They’re riskier than just holding them to earn interest, but they’re an interesting part of my portfolio that’s making profit from volatility.

This is not investment advice. Please do your own research, and always invest what you can afford to lose.

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