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If you have actually used DeFi to a moderate level you will have no doubt encountered the following problem…
You find a nice fat yield over on some DeFi app and decide you want a piece of it
You have dollars or pounds in your bank account
You have to figure out how to get the money from A to B where it can start earning some money
The problem is that the very best DeFi yields tend to be on the more exotic networks which are harder to get to.
So you are faced with a puzzle you have to solve before you even do anything. And the puzzle is, how to route your money from A to B efficiently.
Sometimes this involves moving your money multiple times and moving it across multiple networks.
That has down downsides
It takes time
It costs money
I personally find myself desperately trying to avoid my money touching the Ethereum network these days, simply because of the high fees.
Unless the DeFi app I want to use runs exclusively on Ethereum, I’d rather avoid it.
So this is what I mean when I say “Efficiently” routine your money around DeFi.
We want to do it in as few steps as possible, and with as few fees as possible.
At time of recording, if I want to do a simple transaction on Ethereum right now the fee is $32 worth of ETH.
That isn’t actually too bad right now, but it very much depends on the amounts you are 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 we go up in value, it’s 1.6% of a $2,000 transaction
This is hinting at that concept I mentioned called transaction liquidity.
That is a situation where the value of your assets vs the transaction fee reduces the viability (or profitability) of that transaction
If I have a DeFi portfolio that is well diversified, I might have many different positions in many different assets
When it comes time to close that portfolio and take profit, I have to do a transaction (and incur the fee for each one)
That might end up costing me hundreds of dollars in fees. Those are gains I made but will never see. They are also gains I can’t re-invest.
If I were moving a larger quantity of a single asset, say $20,000 worth, the $32 fee I mentioned works out to 0.16% of the transaction value
So when I put it like that it doesn't sound so bad, but there’s more to it, even for the $20,000 investor
The second transaction fee problem comes when you want to harvest your gains
For example, Marko just put out a recommendation to Crypto Yield Hunter subscribers that pays 30% APR.
On $20,000 that earns you $16.43 cents per day
Well if that yield farm were on Ethereum, and fees were $32 per transaction, you can’t afford to harvest and compound your gains daily can you?
In 30 days you’d earn $493, but again at $32 fees that’s 6.4%
Although to be fair, that’s you only giving up 6.4% of the interest you earned in 30 days. You’re not giving up 6.4% of your balance
30% APR is 2.46% every 30 days, so our return after fees ends up being 2.3%, not a huge difference really.
The best case scenario though is when we have a no compromise solution in which we get to keep all the returns we make
This is where smart routing comes into play
This is basically figuring out the most efficient route before you submit any transactions
If you are in a situation that I described at the beginning where you start out with dollars or pounds, then using an exchange that allows withdrawals to your target DeFi network is the way to go
That way you only do 4 transactions.
One from your bank to the exchange
One to convert your money into your desired crypto asset or stablecoin
One to withdraw your crypto assets or stablecoins to your DeFi wallet
And then finally one transaction to deposit your money with the yield farm that pay you the rate
To that end, Coinbase are supposed to be launching support for the Polygon network but as far as I can see from within my own Coinbase account, that still hasn’t officially launched.
[start winding down]
What we need is an online resource that lists all the various centralised exchanges and which networks each one supports for deposits and withdrawals.
That would make our routing job so much easier.
I don’t know if such a resource exists right now but I put out a request for one on Twitter, so if you know of one, please let me know so I can spread the word about it
▶️ 3Speak