DeFi. Everyone who’s a cryptocurrency enthusiast has probably heard of it by now. Decentralized Finance just means peer to peer money applications built on a blockchain. The most popular blockchain for DeFi right now is Ethereum.
Let’s first extoll the benefits of DeFi.
You save time and you are empowered to do things with your money that traditional finance will not allow you to do, like lending money to others even though you aren’t a licensed money lender, and earning interest on top of that.
BUT should everyone jump into DeFi?
There are lots of articles about DeFi right now, enthusiastically gushing about how much they have earned. But I feel obliged to warn people that investing into DeFi may lose you more money than your initial capital.
Why? High gas costs. It’s just not worth it if you are someone who has maybe a few hundred to put into a service like compound.finance. The low interest rates and high gas costs mean you are losing money upfront BEFORE you even put your money into it.
You’ll first have to approve the service ( paying out gas costs ) before depositing your money into compound. ( paying out more gas costs ). At today’s high gas costs, you’ll be losing out at upwards of about 2, 3 dollars per transaction, and that’s just on the conservative side.
Ways to mitigate gas costs:
Use Argent wallet.
A look at the support page of Argent says this:
Image courtesy of Argent
Argent doesn’t help to pay for everything. So even if you want to lend your funds to compound.finance, you would still have to pay gas.
My point is that high gas costs prohibit anyone hoping to earn passive income, even if you aren’t using compound.finance. If you are more savvy, and probably want to put more of your cryptocurrencies to work, you could use Balancer, for example.
Again, high gas costs.
Now, you might argue three other points:
1) ‘ there are other DeFi protocols running on other low cost blockchains! ‘
Yes there are.
KAVA, and Thorchain are promising protocols. But, I would invite you to take a look at DeFipulse.com. Here, I'll do it for you.
Image courtesy of Defipulse
At the time of writing, DeFi protocols running on Ethereum blockchain rule the rankings from 1 to 16, with 17 being Lightning Network on Bitcoin.
So...until such time as we have worthy contenders that can disrupt the dominance of the Ethereum blockchain’s hold over DeFi protocols, we are stuck with high gas costs for a while.
2) ‘ You can do so many other things to generate more passive income, like yield farming, using your cTokens in other DeFi applications, etc
Yup. You can. That is why DeFi is so interesting!
DeFi allows you to put your money to work in so many ways. But all of them require HIGH .GAS. COSTS.
You might be willing to put your funds in there for maybe years to recoup your initial gas costs. Don’t forget to account for the gas costs when trying to take your money OUT of those protocols.
3) ‘You could adjust your gas costs!’
Erm..What do you think I am doing? Take a look at this:
At the time of writing, 0.00496898 COMP is worth 0.796 USD.
So, even with SLOW gas costs, I’ll be paying 7.54 USD to collect 0.796 USD worth of COMP? Is that worth it?
The aim of this article is to sort of provide a real, down to earth view of DeFi. For all the promises that DeFi has, it is simply not worth it for the general public to give DeFi a shot right now.
Unless you are already rich and don’t care about the high gas costs.
Thank you for your attention.
