Finance series - DeFi apps - Part 2

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I joined the ETH-BAT liquidity pool on Uniswap Exchange to earn passive income

Aside 1

I am obsessed with investing, finance, money, markets, saving, etc. Thus, I often have a lot of thoughts racing around in my head relating to these themes. Last week, I decided to consolidate some of these ideas. I made a note on my phone. In this note I had four subheadings, and put various ideas under each. The subheadings were revenue streams, investments, opportunities and saving. I won't go too much into detail, but one of my 'investments' included 'Crypto' and one of my opportunities was 'Further crypto research'. I was doing a bit of research - also known as 'reading' - last night, and I came across an article (unfortunately I can't remember what the article was) that mentioned Uniswap. I've known about Uniswap since it came out but never paid it much attention. I thought it was just another DEX (Decentralised exchange). But somewhere in the article it said something about 'passive income', and that really piqued my interest. After all, that's considered the holy grail for investors, right? Because I never paid Uniswap any attention before I had no idea that there was any way to make money from it. The secret is providing liquidity to liquidity pools. I had a lot of trouble getting my head around this idea. I read five or six articles about it but it wasn't making much sense. More on this later ... the point is 'Further crypto research' led me to discover this potential revenue stream so it really emphasised the value of research, particularly in crypto where there are new opportunities popping up all the time.

Aside 2

Today, since I'm on holidays and I couldn't stop thinking about Uniswap (I had an itch to scratch!), I decided to give it a go. It's important to note that, just like my original post on DeFi apps, I only use small amounts of money to experiment with these tools. Small enough that I'm not going to be worried if I lose it. These are speculative investments and investors should know this when they get involved and act accordingly. Speaking of small amounts ... through Coinbase EARN, you can earn small amounts of DAI, ZCash, Stellar, EOS and BAT. They did have ZRX but it's currently not available, which brings me to my PRO TIP - since most DeFi apps are on the Ethereum blockchain, you can use the DAI and BAT earned through Coinbase EARN to play around with some of these apps. Here's the link to Coinbase EARN. This is NOT a referral link, although I may update this post after the payout period to a referral.

What is Uniswap?

Uniswap is a DEX, but it works differently to most exchanges. With most exchanges, there's a buyer and a seller. The buyers and sellers determine the prices for the assets that are exchanged. With Uniswap, a smart contract determines the price based on the liquidity reserve for a particular ETH-ERC20 token trading pair (for example, ETH-DAI or ETH-REP, etc). Anyone can provide liquidity to these reserves. The smart contract for the Uniswap protocol charges users of the exhange a 0.3% fee, and this fee is divided proportionately to liquidity providers according to how much liquidity they have provided. For example, if the ETH-DAI reserve is equivalent to the value of $1000,000 and I have contributed just $10 to this pool, that is 0.001% (if my maths is correct), so I will collect 0.001% of the 0.3% fee for each ETH-DAI trade on the exchange. Smart contracts determine the price that users pay for the assets on the exchange. The example given in this article is for a DAI-ETH trade:

a DAI/ETH reserve initially set up with 150,000 DAI and 1,000 ETH creates a price point of 150 DAI/ETH
and here is an explanation of how supply and demand can move the price of assets on the exchange:
If a user intends to buy 10,000 DAI from the DAI/ETH reserve, they are increasing the quantity of ETH in the reserve and removing DAI from it — thus, placing downward pressure on the DAI/ETH ratio and increasing the price of DAI.

To provide liquidity to a reserve, you need to add equivalent amounts of ETH and the trading pair. So, with the above scenario, the Uniswap smart-contract determines the price of ETH to be 150 DAI. If I wanted to add 75 DAI, I would also need to add 0.5 ETH. When I want to exit the liquidity reserve I should get my 75 DAI and 0.5 ETH back along with my earnings in fees for providing liquidity.

If you're still reading this, you're probably thinking this sounds complicated (amiright?)! I know the feeling but the best way to get your head around this technology and understand how it all works is to have a play around with it yourself (with small amounts of money).

How did I do it?

In my first DeFi post, I used Instadapp as the interface to create a MakerDAO CDP and Compound to earn interest on the DAI I minted from the CDP. I was hoping to use Instadapp again for this, but I couldn't figure out how to use it. I again went to the Coinbase wallet for iOS and clicked on the 'Dapps' tab. This tab is essentially a mobile web browser ... I then went directly to the Uniswap exchange website within the Coinbase wallet. I already had the BAT I'd earned from Coinbase EARN in the wallet, so I figured I could provide liquidity to the ETH-BAT pool. From there I went to Pool > Add liquidity. On this screen you see an amount of ETH to type in and below that you select a token (I selected BAT) and then I entered the maximum amount (there is no 'MAX' button that calculates your maximum amount after fees so I had to just trial and error and get as close as I could) of BAT. It then auto-fills in the amount of ETH to match this amount (of course that ETH needs to be in your wallet as well!). Then click 'Add liquidity'. That's it! It takes a while for the transaction to clear. Then it's just a waiting game. This website calculates the ROI for your liquidity. You can check the ROI by entering the public address of your wallet. I have checked a few times, but I think it will take some time (maybe a week?) before I will see any significant return. I'm excited to see how this pans out.

Update from my first post

I mentioned in my first post that I expected to not make any money on my experiment because the stability fees for MakerDAO are currently very high. They have actually gone up since I created the CDP so when I pay back the debt I will also have to pay the fee. The way to profit from this is to leverage your position by buying more ETH with the minted DAI. Of course, this increases the risk but again .... I'm using small amounts so I thought 'what the hey ...'. I added a bit more collateral (ETH) and leveraged the position. I just need to keep an eye on the price of ETH and when it gets too risky add a bit more or exit my position.

What's next?

I've heard great things about Set Protocol so I'm keen to try it out. However, as the name suggests, I think this is just a more 'set and forget' option as the smart contracts in the protocol trade in and out of assets algorithmically for you.

Posted using Partiko iOS