The Rise of Crypto Mutual Funds

By jer979!! | | 13 Apr 2021

tl;dr: High gas fees lead to crypto financial innovation.

As you get deeper and deeper into DeFi on Ethereum, you run into an obvious, and painful, reality.

The number of transactions required to stay current with your positions, claim the rewards you have earned, and manage the whole portfolio from a P/L and tax positions becomes increasingly difficult and, worse, expensive.

For example, on Synthetix, a decentralized derivates protocol, you are entitled to a portion of trading fees when you stake the native token, SNX.

That’s great, particularly as trade volumes inceases.

What’s not great, however, is that you need to claim these rewards on a weekly basis and, with each claim, you are initiating an Ethereum transaction which costs gas fees.

These days, it’s not uncommon for a fee to be $100 or more.

If you only have $200 of rewards to claim, as many smaller stakers do, it becomes increasingly unprofitable to participate in DeFi, as you lose the benefits of being a network contributor.

Incentivized rewards on Nexus Mutual are the same.

It gets even worse in terms of fees because, as a token holder, you are also entitled to participate in network governance, which is a voting function that enables you to help determine the direction of your investment and the technology.

However, if it costs you $100 to vote and you only have $1000 invested in something, are you going to do it? No.

So, smaller stakers tend to lose out.

xToken and “Set and Forget”

Recently, I learned about a new service, xToken, which has risen up to address this particular need.

I haven’t used it yet, but plan to soon, but the basic idea as I understand it is that you purchase an “x” version of a token, say xSNX and then the smart contract behind it handles (in a pooled fashion) the staking, redeeming, and I suppose governance, associated with the protocol.

So, it’s kind of like buying shares in a mutual fund that invests in a stock versus buying the stock directly…although that analogy, now that I think about it, isn’t quite perfect.

Regardless, having lost out on staking rewards because I either forgot to claim them within a week’s timeframe or because the fees were prohibitive, this type of solution is extremely appealing.

Like I said, I can’t vouch for this one specifically and there’s always the issue of smart contract auditing, verifiability, and security, but conceptually, a smart contract as “managed service provider” for various protocols that is non-custodial makes a lot of sense.

And it’s further evidence of how crypto markets and technologies respond to new friction points with innovation.

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