Hey friends 👋
In my quest to explore DeFi, the first step was to recognize that everything I will do comes with some risk ⚖️ There are different kinds of risks from investing in cryptocurrencies that go nowhere, to being liquidated when you borrow against a volatile asset, to the infamous rug pull 🤦♂️ Now all investing comes with risks, but in such an unregulated space as cryptocurrency, sometimes you’re just gambling.
This post is about how I gambled and lost 🎰
You see, lately I’ve been experimenting with the Ethereum sidechain Polygon — more on that coming soon. This unique project aims to help scale Ethereum by offering a way to bridge from the Ethereum Mainnet onto the sidechain where transactions can cost as little as a thousandth of a penny 😲 You could think of this a bit like Bitcoin’s Lightning Network but with DeFi.
As you’ll recall from my last Crypto Misadventure, I found gas fees on Ethereum (the fees paid to the validators to write the transaction to the block) to be prohibitively expensive for someone like myself with so little capital to invest in this space 😅 For that reason, Polygon was a natural fit for someone like me to learn all about DeFi without hemorrhaging money 💸
Speaking of which, I’ve just set another goal on the blog. When I reach my next $100 of support, I’m going to do a post, video included, all about how you can try out Polygon for yourself. And in that post, I’ll talk about some of the safest ways to explore DeFi including what I’m doing, and mistakes I’ve made 😪 I largely focus on established, secured, and audited projects, with high total value locked (TVL) as these are great for beginners and serious investors alike, but there is also some fun to be had elsewhere, if you’re willing to gamble 🎰
First things first, I want to say that if you are worried that I am gambling away every dollar I have, fret not! Of the around $100 I have invested into Polygon DeFi so far, the vast majority is in safe vehicles 💰 In fact, much of this money was deposited to serve as interest bearing collateral to take loans against, and that loan money was itself deposited into stable investments with high APY (I’ll explain more in the aforementioned bonus post) 🎁 I did however take about $30 of my own money to experiment with high risk, high reward yield farming opportunities 🤑 My thinking was if I could find something that was truly as good as it seemed, I might be willing to invest $100. After all, in a post-pandemic world I could certainly see myself wasting $100 on the occasional night out 🎉
With all that said, let’s get into it.
If you’ve been following for long, you’ll know that I’m a big fan of liquidity mining (sometimes called Yield Farming) 👨🌾 Here’s a quick refresher on what that is:
Basically liquidity mining is a bit like lending. You lend your currency to provide liquidity to the market and you earn a share of the transaction fees. Because decentralized exchanges (or DEXs) use Automated Market Makers (or AMMs) which is just a smart contract that regulates trading, there is no central source of capital for liquidity. For that reason, liquidity providers are incentivized to lend their capital through receiving the trading fees that the end user paid to trade 💸
One thing I didn’t go too much into detail about in that post (since it was already pretty dense) was how impermanent loss works. This post from Binance explains the concept well, but simply put, you provide liquidity in pairs of assets and if one asset in the pair shifts in value, your liquidity rebalances to the maintain equal value. In doing so, you may replace your more valuable asset with the less valuable asset and the potential gain in value could be lost, this is called impermanent loss for reasons that will make sense to stock investors who’ve seen the value of a stock decreasing and decided to hold; this is because the losses are only realized if and when you sell. Only then do they become permanent 🔒 But that doesn’t mean you should never sell…
You see as I mentioned in the quote above, you are incentivized to provide liquidity by receiving a portion of the trading fees for the two assets in your pair. And the idea is that you expect to make far more off those fees — which can easily range from 20% to 2000% APY — than would you stand to lose if your impermanent losses become realized 🧮
Typically when I provide liquidity, I don’t go too wild. Pairs of similar volatility or even pairs of stable coins face very low risk of impermanent loss. And pairs of high demand assets typically pay well enough to negate even large amounts of impermanent loss, provided that the reward is paid in an asset that is worthwhile 🧐 But then again this post is about not about good decisions, this is a Crypto Misadventure…
A lot of people have made good money off of quick and risky investments in what are sometimes called degen (short for degenerate) yield farms 🥴 These farms spring up quickly, offer high rewards to liquidity providers, and often employ ponzi-scheme tokenomics. Essentially, the earliest people into the pool will make the majority of the returns (often paid in the farm token), and will dump their coins on the people who join later, who may continue to make healthy gains, or may see their potential ROI drop to a level that they no longer feel is worthwhile.
I don’t have much interest in degen yield farming as I’m still pretty early in my journey towards financial independence and try not to expose myself to so much risk, but I do like to try things, and you can’t always tell if a yield farm is truly too-good-to-be-true, until it’s too late. If you reap your rewards and sell them on the way up, you’ll make good money, if you vest them, you provide a lot of security to the long term value of the farm token and you’re rewarded with a reasonable APY. All that said, when people start dumping their coins, the value will fall 📉 So you have to make a calculation of whether or not the returns will remain worthwhile since more of a token that’s decreasing in value, could still be less money 🧮
For this reason, I would consider every dollar invested in high return yield farms to be 100% gambling 🎰 Now with that said, I know that some of you are out here investing in Gamestop, AMC, Dogecoin, and whatever penny stock or altcoin is expected to rocket up 600% the next couple months so there is a place for this kind of thing. Just promise me you won’t take out a line of credit against your mortgage and put it all into degen farming 🙏
Alright so let me tell you exactly what happened…
I was experimenting with a yield farm called DFYN where for about a week, I had invested $28 in the USDC/DFYN liquidity pool, earning around 500% APY 🔥 In a very short time, I already earned more interest than I would have made in a year in a standard bank savings account. Again, we’re talking tens of cents, but it’s all relative right?
DFYN, still appears to be a very stable and trustworthy project, but this week the talk of the town was Iron Finance 🤩
Iron had this idea to create an algorithmic stable coin called IRON that was pegged to 75% USDC and 25% TITAN (Iron’s farm token). Iron is created by depositing USDC and burning TITAN. And when the user redeems IRON, they receive back their USDC and the required amount of TITAN is minted. The idea was so interesting that many people, including Mark Cuban decided to become Liquidity Providers of TITAN 😲
On Tuesday, I spotted the TITAN/USDC pool paying out over 900% APY and decided to take the money I had in my DFYN/USDC pair and throw it into there. Why not? As far as gambling goes, this felt like it would be pretty good odds, even if I get out in a few weeks, I’d have already made 30% or so on my investment 🙌
The next day I spotted the ETH/TITAN pair at over 2000% and once again, I said “why not?” 🤷♂️ I was gambling the same money for 500% as I was for 900% as I was for 2000% 🚀
So I put the $28 into the pool and went to work. At around 5pm, I saw on twitter that TITAN was plummeting in value and I quickly removed my liquidity 😰 By that point, I had realized a loss of the majority of my Ether in the pool. $14 had gone to around $2. Worse still, with no liquidity in the pools and rapid devaluation of the token, I could not swap my TITAN 😖
Those of you familiar with stock trading can think of this like trying to find a buyer when your ask price well above any bid (which keeps getting lower and lower in this case). Essentially in a supply and demand market, it became all supply and no demand 😑
This situation led to a funny screenshot that I posted on twitter where Zapper shows the value of my TITAN at $25.62 but the trade estimates its value at $0.51 USDC 🤫 Needless to say, I have no choice now but to go long TITAN…
Now this illustrates exactly why you need to be real with yourself about high return investments 💸 The higher the return, the higher the risk. As I’ve already written, the reasonable returns in DeFi (largely because of the elimination of middlemen) are well above the reasonable returns in regular finance. Low risk endeavours can pay 10x the interest as a high interest savings account, and high risk endeavours can make Gamestop look like an index fund 🚀
With that said, I’ve learned my lesson and I’ll be doubling down on safer investments through my next round of experiments 🤓
I did however put about $0.25 back into a TITAN pool… I had to 👇
If you’re looking at that photo and thinking you should throw $100 or so in… re-read this post… 😆 Even though, Coindesk believes this was not a rug pull, it was still an absolute hot mess. I will probably lose that $0.25 too but hey, in for a penny, in for a pound.
I hope you found this story entertaining. If so, I can consider that lost money to be an investment into this blog. I’ll try to make sure that not every post is about losing money, but no promises 😅
Until next time 👋
Thanks for reading! 🙌 If you have any questions, feel free to comment below or tweet at me. If you liked what you read, considering tipping to thumbsupfinance.eth or thumbsupfinance.crypto. I’ve done a thread about how to do this 💖
Rug by anggun from the Noun Project