My DeFi diary — day 9: diversifying my cryptofolio
This series is a look back at the last few months as I’ve made my way into the crypto space, and particularly into the DEFI space, as a complete newbie. I aim to catalogue the moves I’ve made, the tech I’ve experimented with, and the mistakes I’ve made along the way. I include some details around fees and logistics, hopefully to be useful to others wanting to follow in my footsteps.
2 May 2021 08:11 ETH @ $2,954.22 Gas Price: 24 Gwei
As mentioned in my last diary post, I had moved a small initial amount of capital across on to Polygon, and been impressed with the speed and low cost of transactions. I was now ready to move more of my funds across and start diversifying my investments across a range of the different DeFi protocols available on Polygon.
To start with I had to take some of my money out of the MATIC-ETH liquidity pool that I was in on Uniswap. Remember that this was a two step process to get into — I had first deposited ETH and MATIC into the liquidity pool, and received LP tokens in return. I’d then ‘staked’ those LP tokens and received BAO in return.
So getting out of the pool was a two step process as well. I first had to ‘unstake’ my LP tokens, returning the BAO tokens and getting my LP tokens back. I decided to only unstake and remove 75% of my position. I was penalised for early withdrawal from the BAO staking — something I hadn’t known about in advance, so watch out for this when you’re staking / liquidity mining.
It cost me $34.67 in gas fees to do this unstaking, see here for the transaction. This meant I could now withdraw 75% of my LP position, turning in my LP tokens and getting ETH and MATIC back — this part cost $14.95 in gas fees — remember that these are all transactions on Ethereum still, so they’re costly!
I then converted some of my MATIC into the DAI stablecoin (around $5,000), because I didn’t want to be so exposed to crypto. So let’s pause here for a second and touch on the subject of stablecoins, because I don’t think I’ve mentioned them yet. This is such a key piece of the DeFi puzzle. A lot of the common perception about crypto investments is that one buys BTC, ETH or some other coin, and then hopes for the price to rise. Stablecoins introduce a whole universe of other possibilities. They are coins that are pegged to the US Dollar. USDT is a pegged stablecoin where the owners of the coin are actually holding USD reserves to back it. DAI is algorithmically pegged to the USD and (over) collateralised by a mix of different cryptocurrencies (see here for more detail).
So moving some of my money out of MATIC (a relatively volatile cryptocurrency), and into DAI (a stablecoin pegged to the USD), meant that my total portfolio was far less exposed to big moves in the crypto market. The two transactions (an approval and then the actual swap) cost me $4.44 and $22.21 respectively.
At this point I considered depositing my DAI into AAVE on the Ethereum network- I even got an approval for the deposit, which cost $3.53, but I never actually went ahead with depositing it. I was put off by the high transaction cost of depositing, and when I realised that AAVE also had a Polygon app, I decided to move the DAI across and deposit on that app. In addition, the AAVE app was offering not just interest on the deposit, but an additional reward in terms of MATIC for depositing with them — see article here.
These kinds of rewards get offered quite frequently in the DeFi space when new apps are trying to attract volume as they seek to establish themselves. On Polygon at the moment there are still a lot of new apps offering rewards of this nature, e.g. QuickSwap, SushiSwap, AAVE, Curve, Iron and others.
So I went ahead and moved the DAI across, which I had to get approved (cost $3.53) and then actually move, which cost me $9.14. I also transferred 2.5 Eth across the bridge, which cost $5.25, and transferred 3805 MATIC, which cost $10.69.
There were a couple of mistakes I made here, so let me warn you about them. The first was to make any swaps at all on Ethereum network before moving my money across. I should have just moved it in the currencies I had (ETH and MATIC) and then done all swaps on the Polygon side where transactions are virtually free. Note this won’t always be possible as there are only a limited number of currencies that can be moved across the bridge.
The second mistake I made was not realising that there were actually two forms of bridge — a plasma bridge and a POS bridge. The plasma bridge worked fine for the MATIC, but not for the DAI, as I pointed out at the end of my last post. This was a costly and time-consuming mistake, as I had to bridge the DAI back to the ETH network and then back out again.
Interestingly, I have only done 6 further transactions on the Ethereum network in the 5 weeks since I moved this money across to Polygon (and a couple of those were to move the remainder of my money across). Time will tell whether that turns out to be a good decision, but certainly up till now I’ve been loving the flexibility of being able to try out different DeFi protocols without having to worry too much about the fees of moving stuff around. And on top of that some of the rewards programs on Polygon have really boosted my returns.
More on all of that in my next post as I discuss my exploration of the different protocols. Stay tuned!
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