In this article, I will disclose my first and only experience of DeFi that involves, becoming a liquidity provider, staking Uniswap tokens, farming for protocol tokens and then selling it when the entire crypto market crashed.
The other day I wrote an article on how I used almost all of my crypto holding into experimenting with one DeFi protocol which was announced just 2 days back. I was early and hence I thought it was a good time. I can kind of say – this is part 2 of that article. So feel free to read it first and then continue here.
My goal with this article is to share my learnings, so you don’t make the same mistake that I made. But before I do that, let us quickly look at what I did.
- 1 DeFi is Easy but Expensive
- 2 The most important lessons in DeFi transactions
- 3 DeFi is High Risk High Reward
DeFi is Easy but Expensive
The protocol I participated in was Bitbns exchange’s newly launched bns.finance DeFi protocol. It is always advisable to look at the contract and also understand the fundamentals, but then again, DeFi is the new hype, so I thought, let’s just wing it.
And it is also very “easy” to participate.
All I did was buy some ETH > swapped half to USDC > added the tokens to the USDC/ETH pool on Uniswap > Connected the wallet with bns.finance > staked the Uniswap LP tokens to start farming > repeated the same steps for three more pools ETH/BNS, BNSD/ETH, and BNS/USDT > noticed that ETH/USDC isn’t giving good rewards > removed the liquidity > converted it to other tokens > added more liquidity on other pools > Unstaked all the LPs on all the pools > Removed liquidity from the pools > Converted the farmed BNSD token into Ethereum > created a massive excel sheet of transactions to make sense of what I just did > locked in 16% profit in 48 hours.
See, very easy. Very, very easy (insert sarcasm.gif)
I found myself investing roughly Rs. 340000 ($4650 USD) within a span of 10 hours. It looked lucrative and promising. And it is. Had I not closed my position, I’d be sitting on top of a profit of 30000 USD, which is 500% return. But well, I closed it too soon at a mere 16% profit.
I paid over 1 ETH in fees for all the transactions. Hence, DeFi is expensive.
Here’s a summarized overview of my trades. A detailed trade breakdown can be found here.
|Total Farmed BNSD (36 Hours)||126553||Variable (price changes)|
|Total Fees Paid in ETH||1.011||NA|
|INR received after Sell out||NA||315563|
|Total unsold ETH||2.3056||62251 (Price at Press Time)|
|Total Unsold USDT||341||26939 (Price at Press Time)|
|Profit in INR||NA||58173.7|
The most important lessons in DeFi transactions
Since this was my first ever DeFi experience, I was flabbergasted to see the transaction cost in the beginning and eventually just accepted it as a norm. I paid gas at the rate of 100 gwei for some transactions and over 400 gwei for few more.
But all in all, I learnt a lot from this all the mistakes I made, and hence I want to share them with you. But I do know that some of you are way smarter than me, so you must already know this. In this case, share the article and tell the others.
#1 – Choose your Liquidity pool wisely:
Liquidity pools are used by Decentralized exchanges like Uniswap to provide Swap liquidity for traders. This liquidity is sourced from users like you and me. By depositing our tokens in these pools, we get rewarded a share of the fees that traders pay when they trade/swap these tokens. When users deposit their tokens, they receive LP tokens, these represent your share in the liquidity pool.
Some DeFi protocols allow you to stake these LP tokens and in return give you interest/reward of their own protocol token.
For projects such as bns.finance, you can choose from multiple pools to participate in. Each pool has a different reward ratio. The rewards are received in BNSD token, and the process is called farming.
I personally got tempted to participate in all of them. What I did not realize is that it would cost around $50 at the current GAS prices to be able to.
Hence I repeated this process for four different pools:
- Connect with Uniswap
- Add both tokens to the pool
- Connect with bns.finance
- Stake the uniswap pool token
Hence it is advisable to pick a pool that suits you the best and go for it.
#2 – Do not claim the farmed tokens unnecessarily:
Farming in DeFi means getting rewarded by protocol tokens for participating in an activity on it. In the case of bns.finance, based on the staked Uniswap LP tokens, users receive BNSD generated per block of Ethereum.
Obviously when there are less people in the ecosystem, users get more quantities of BNSD and vice versa. These tokens get accrued in the smart contract. To sell or swap these tokens, users need to “claim” them. This transaction can cost anywhere between 5-20 USD on ethereum.
Hence, unless you have a solid plan to use the farmed tokens, do not claim them and save on fees.
#3 – Do not Sell the farmed tokens too early:
This was the biggest mistake that I made. I sold my farmed BNSD tokens at $0.01 when at press time, the price of BNSD token is $0.19. Bitbns decided to list the token on the exchange, and that may have been a pumping factor.
It is a simple advise, do not sell all your farmed tokens hastily. They are earned.
#4 – Yield Farming is not for small amounts:
I paid 1.011 ETH only in fees. Yield farming and DeFi are not very friendly to users with small amounts to invest. There is a chance you will lose a lot more than you can earn from the platform. Hence, be very vigilant when investing.
#5 – Don’t Buy Farming Tokens
As a thumb rule, avoid buying farming tokens. In this case BNSD is the token that is farmed. In a certain sense, these tokens are actually given out to you for staking other cryptocurrencies. Hence, initially it will have more supply than demand. Users tend to buy these tokens at the early stage but may not be able to hold on to it if the price plummets. Of course, my advise is do not buy the token. Add liquidity with other tokens and then farm it.
DeFi is High Risk High Reward
There you go, these are my top five tips for Yield Farming or DeFi in general. Don’t be like me. Try not to panic sell and book small profits. Also, always know that the risks associated with DeFi are too damn high. Take Sushi for example, the creator decided to cash out and sold all of the farmed Sushi. The price crashed from $8 to less than a dollar.
Some may call DeFi like the ICO bubble of 2017-18, the ones making money aren’t complaining.
Coin Crunch has witnessed a 100% increase in traffic and it is all on DeFi related articles. So believe it or not DeFi is turning heads and if you’re going to participate, you need to know what not to do!
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