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----
-title: >-
-    Adventures In DeFi
-description: >-
-    There and Back Again, a Yield Farmer's Tale.
----
-
-It's difficult to be remotely interested in crypto and avoid the world of
-decentralized finance (DeFi). Somewhere between the explosion of new projects,
-implausible APY percents, complex tokens schemes, new phrases like "yield
-farming" and "impermanent loss", rug pulls, hacks, and astronomical ethereum
-fees, you simply _must_ have heard of it, even in passing.
-
-In late November of 2020 I decided to jump in and see what would happen. I read
-everything I could find, got as educated as I could, did some (but probably not
-enough) math, and got to work. Almost immediately afterwards a giant bull
-market hit, fees on ethereum shot up to the moon, and my little yield farming
-DeFi ship was effectively out to sea.
-
-For the past 200 days I haven't been able to tweak or withdraw any of the DeFi
-positions I made, for fear of incurring so many ethereum fees that any gains I
-made would be essentially wiped out. But the bull market is finally at a rest,
-fees are down, and I'm interested in what the results of my involuntary
-long-term experiment were. Before getting to the results though, let's start at
-the beginning. I'm going to walk you through all the steps I took, as well as my
-decision making process (as flawed as it surely was) and risk assessments.
-
-## Step 1: The Base Positions
-
-My first step was to set aside some ETH and BTC for this experiment. I was (and
-remain) confident that these assets would acrue in value, and so wanted to hold
-onto them for a long period of time. But while holding onto those assets, why
-not make a little interest on them by putting them to use? That's where DeFi
-comes in.
-
-I started with 2.04 ETH and 0.04 BTC. The ETH existed as normal ETH on the
-ethereum blockchain, while the 0.04 BTC I had to first convert to [renBTC][ren].
-
-renBTC is an ethereum token whose value is pinned to the value of BTC. This is
-accomplished via a decentralized locking mechanism, wherein real BTC is
-transferred to a decentralized network of ren nodes, and they lock it such that
-no individual node has access to the wallet holding the BTC. At the same time
-that the BTC is locked, the nodes print and transfer a corresponding amount of
-renBTC to a wallet specified in the BTC transaction. It's a very interesting
-project, though the exact locking mechanism used was closed-source at the time I
-used it, which concerned me somewhat.
-
-[ren]: https://renproject.io/
-
-### Step 1.5: Collateralization
-
-In Step 2 I deposit my assets into liquidity pools. For my renBTC this was no
-problem, but for my ETH it wasn't so simple. I'll explain what a liquidity pool
-is in the next section, but for now all that needs to be known is that there are
-no worthwhile liquidity pools between ETH and anything ostensibly pinned to ETH
-(e.g.  WETH). So I needed to first convert my ETH into an asset for which there
-are worthwhile liquidity pools, while also not losing my ETH position.
-
-Enter [MakerDAO][makerdao]. MakerDAO runs a decentralized collateralization app,
-wheren a user deposits assets into a contract and is granted an amount of DAI
-tokens relative to the value of the deposited assets. The value of DAI tokens
-are carefully managed via the variable fee structure of the MakerDAO app, such
-that 1 DAI is, generally, equal to 1 USD. If the value of the collateralized
-assets drops below a certain threshold the position is liquidated, meaning the
-user keeps the DAI and MakerDAO keeps the assets. It's not dissimilar to taking
-a loan out, using one's house as collateral, except that the collateral is ETH
-and not a house.
-
-MakerDAO allows you to choose, within some bounds, how much DAI you withdraw on
-your deposited collateral. The more DAI you withdraw, the higher your
-liquidation threshold, and if your assets fall in value and hit that threshold
-you lose them, so a higher threshold entails more risk. In this way the user has
-some say over how risky of a position they want to take out.
-
-In my case I took out a total of 500 DAI on my 2.04 ETH. Even at the time this
-was somewhat conservative, but now that the price of ETH has 5x'd it's almost
-comical. In any case, I now had 500 DAI to work with, and could move on to the
-next step.
-
-[makerdao]: https://makerdao.com/
-
-## Step 2: Liquidity Pools
-
-My assets were ready to get put to work, and the work they got put to was in
-liquidity pools (LPs). The function of an LP is to facilitate the exchange of
-one asset for another between users. They play the same role as a centralized
-exchange like Kraken or Binance, but are able to operate on decentralized chains
-by using a different exchange mechanism.
-
-I won't go into the details of how LPs work here, as it's not super pertinent.
-There's great explainers, like [this one][lp], that are easy to find. Suffice it
-to say that each LP operates on a set of assets that it allows users to convert
-between, and LP providers can deposit one or more of those assets into the pool
-in order to earn fees on each conversion.
-
-When you deposit an asset into an LP you receive back a corresponding amount of
-tokens representing your position in that LP. Each LP has its own token, and
-each token represents a share of of the pool that the provider owns. The value
-of each token goes up over time as fees are collected, and so acts as the
-mechanism by which the provider ultimately collects their yield.
-
-In addition to the yield one gets from users making conversions via the LP, LP
-providers are often also further incentivized by being granted governance tokens
-in the LPs they provide for, which they can then turn around and sell directly
-or hold onto as an investment. These are usually granted via a staking
-mechanism, where the LP provider stakes (or "locks") their LP tokens into the
-platform, and is able to withdraw the incentive token based on how long and how
-much they've staked.
-
-Some LP projects, such as [Sushi][sushi], have gone further and completely
-gamified the whole experience, and are the cause of the multi thousand percent
-APYs that DeFi has become somewhat famous for. These projects are flashy, but I
-couldn't find myself placing any trust in them.
-
-There is a risk in being an LP provider, and it's called ["impermanent
-loss"][il]. This is another area where it's not worth going into super detail,
-so I'll just say that impermanent loss occurs when the relative value of the
-assets in the pool diverges significantly. For example, if you are a provider in
-a BTC/USDC pool, and the value of BTC relative to USD either tanks or
-skyrockets, you will have ended up losing money.
-
-I wanted to avoid impermanent loss, and so focused on pools where the assets
-have little chance of diverging. These would be pools where the assets are
-ostensibly pinned in value, for example a pool between DAI and USDC, or between
-renBTC and WBTC. These are called stable pools. By choosing such pools my only
-risk was in one of the pooled assets suddenly losing all of its value due to a
-flaw in its mechanism, for example if MakerDAO's smart contract were to be
-hacked. Unfortunately, stable pools don't have as great yields as their volatile
-counterparts, but given that this was all gravy on top of the appreciation of
-the underlying ETH and BTC I didn't mind this as much.
-
-I chose the [Curve][curve] project as my LP project of choice. Curve focuses
-mainly on stable pools, and provides decent yield percents in that area while
-also being a relatively trusted and actively developed project.
-
-I made the following deposits into Curve:
-
-* 200 DAI into the [Y Pool][ypool], receiving back 188 LP tokens.
-* 300 DAI into the [USDN Pool][usdnpool], receiving back 299 LP tokens.
-* 0.04 renBTC into the [tBTC Pool][tbtcpool], receiving back 0.039 LP tokens.
-
-[lp]: https://finematics.com/liquidity-pools-explained/
-[il]: https://finematics.com/impermanent-loss-explained/
-[sushi]: https://www.sushi.com/
-[curve]: https://curve.fi
-[ypool]: https://curve.fi/iearn
-[usdnpool]: https://curve.fi/usdn
-[tbtcpool]: https://curve.fi/tbtc
-
-## Step 3: Yield Farming
-
-At this point I could have taken the next step of staking my LP tokens into the
-Curve platform, and periodically going in and reaping the incentive tokens that
-doing so would earn me. I could then sell these tokens and re-invest the profits
-back into the LP, and then stake the resulting LP tokens back into Curve,
-resulting in a higher yield the next time I reap the incentives, ad neaseaum
-forever.
-
-This is a fine strategy, but it has two major drawbacks:
-
-* I don't have the time, nor the patience, to implement it.
-* ETH transaction fees would make it completely impractical.
-
-Luckily, yield farming platforms exist. Rather than staking your LP tokens
-yourself, you instead deposit them into a yield farming platform. The platform
-aggregates everyone's LP tokens, stakes them, and automatically collects and
-re-invests incentives in large batches. By using a yield farming platform,
-small, humble yield farmers like myself can pool our resources together to take
-advantage of scale we wouldn't normally have.
-
-Of course, yield farming adds yet another gamification layer to the whole
-system, and complicates everything. You'll see what I mean in a moment.
-
-The yield farming platform I chose was [Harvest][harvest]. Overall
-Harvest had the best advertised APYs (though those can obviously change on a
-dime), a large number of farmed pools that gets updated regularly, as well as a
-simple interface that I could sort of understand. The project is a _bit_ of a
-mess, and there's probably better options now, but it was what I had at the
-time.
-
-For each of the 3 kinds of LP tokens I had collected in Step 2 I deposited them
-into the corresponding farming pool on Harvest. As with the LPs, for each
-farming pool you deposit into you receive back a corresponding amount of farming
-pool tokens which you can then stake back into Harvest. Based on how much you
-stake into Harvest you can collect a certain amount of FARM tokens periodically,
-which you can then sell, yada yada yada. It's farming all the way down. I didn't
-bother much with this.
-
-[harvest]: https://harvest.finance
-
-## Step 4: Wait
-
-At this point the market picked up, ethereum transactions shot up from 20 to 200
-gwei, and I was no longer able to play with my DeFi money without incurring huge
-losses. So I mostly forgot about it, and only now am coming back to it to see
-the damage.
-
-## Step 5: Reap What I've Sown
-
-It's 200 days later, fees are down again, and enough time has passed that I
-could plausibly evaluate my strategy, I've gone through the trouble of undoing
-all my positions in order to arrive back at my base assets, ETC and BTC. While
-it's tempting to just keep the DeFi ship floating on, I think I need to redo it
-in a way that I won't be paralyzed during the next market turn, and I'd like to
-evaluate other chains besides ethereum.
-
-First, I've unrolled my Harvest positions, collecting the original LP tokens
-back plus whatever yield the farming was able to generate. The results of that
-step are:
-
-* 194 Y Pool tokens (originally 188).
-* 336 USDN Pool tokens (originally 299).
-* 0.0405 tBTC Pool tokens (originally 0.039).
-
-Second, I've burned those LP tokens to collect back the original assets from the
-LPs, resulting in:
-
-* 215.83 DAI from the Y Pool (originally 200).
-* 346.45 DAI from the USDN Pool (originally 300).
-* 0.0405 renBTC from the tBTC Pool (originally 0.04).
-
-For a total DAI of 562.28.
-
-Finally, I've re-deposited the DAI back into MakerDAO to reclaim my original
-ETH. I had originally withdrawn 500 DAI, but due to interest I now owed 511
-DAI. So after reclaiming my full 2.04 ETH I have ~51 DAI leftover.
-
-## Insane Profits
-
-Calculating actual APY for the BTC investment is straightforward: it came out to
-about 4.20% APY. Not too bad, considering the position is fairly immune to price
-movements.
-
-Calculating for ETH is a bit trickier, since in the end I ended up with the same
-ETH as I started with (2.04) plus 51 DAI. If I were to purchase ETH with that
-DAI now, it would get me ~0.02 further ETH. Not a whole heck of a lot. And that
-doesn't even account for ethereum fees! I made 22 ethereum transactions
-throughout this whole process, resulting in ~0.098 ETH spent on transaction
-fees.
-
-So in the end, I lost 0.078 ETH, but gained 0.0005 BTC. If I were to
-convert the BTC gain to ETH now it would give me a net total profit of:
-
-**-0.071 ETH**
-
-A net loss, how fun!
-
-## Conclusions
-
-There were a lot of takeaways from this experiment:
-
-* ETH fees will get ya, even in the good times. I would need to be working with
-  at least an order of magnitude higher base position in order for this to work
-  out in my favor.
-
-* I should have put all my DAI in the Curve USDN pool, and not bothered with the
-  Y pool. It had almost double the percent return in the end.
-
-* Borrowing DAI on my ETH was fun, but it really cuts down on how much of my ETH
-  value I'm able to take advantage of. My BTC was able to be fully invested,
-  whereas at most half of my ETH value was.
-
-* If I have a large USD position I want to sit on, the USDN pool on its own is
-  not the worst place to park it. The APY on it was about 30%!
-
-I _will_ be trying this again, albeit with a bigger budget and more knowledge. I
-want to check out other chains besides ethereum, so as to avoid the fees, as
-well as other yield mechanisms besides LPs, and other yield farming platforms
-besides Harvest.
-
-Until then!