Finance series - DeFi apps - Part 3
My Uniswap experiment with Aragon Network failed
At the beginning of January 1st I added liquidity to the ETH-ANT liquidity pool on Uniswap to earn passive income whilst waiting to deploy ANT tokens to become an Aragon Juror! In this article I share some of my learnings from this experience. I've written previously (here and here) about my experiments with defi (using small amounts!).
Refresher - What is Uniswap?
Uniswap is a DEX (Decentralised Exchange) that allows users to swap between ERC20 tokens (popular examples include BAT, MKR, DAI, REP, etc). It is entirely smart-contract-based and price is determined (Chris Blec published a good explanation for Uniswap pricing on Youtube @ 2:05) by the ratio of the amounts of ETH-ERC20 for tokens pairs in 'liquidity pools'. Anyone can add liquidity. In return, liquidity providers receive a share of the 0.3% fee from each swap transaction. The fees for liquidity providers are the appeal for anyone looking to make some passive income.
What is ANT?
ANT is the utility token for Aragon Network, which is an Ethereum-based project that allows anyone to create a DAO (Decentralised Autonomous Organisation). Lots of interesting projects are using Aragon DAOs for governance, including Decentraland, reddit's ethtrader subreddit, Melon Protocol and Saint Fame.
I remember clearly the day I first read about Aragon - it was August 2017. I had just FOMO-ed into Bitcoin after reading headlines all year about sick gains in its price. The Bitcoin Cash fork had just happened so I took that as my cue to buy a small amount of BTC. Then I wondered, what is the point of all these other cryptocurrencies?? I kind of got Ethereum but was a bit perplexed as to why all these other coins/tokens existed until Sunday August 12th when I had an a-ha moment - people buy these tokens because they think it will be worth more tomorrow and next year and into the future and that they will create value, even if they exist today as just a Whitepaper (as it turned out, most of these were not worth more into the future, did not create value and many were scams!!!). I know, it seems obvious but my n00b self just didn't see it right away! So when I got home after lunch I went home and did some reading. One of the first articles I came across was A Beginner's guide to Ethereum by Linda Xie. In this article she briefly mentioned Aragon. That led me to do further reading about it and I later invested a small amount in ANT. Sadly, in 2018 I had my private keys stolen when my Evernote was hacked and lost my ANT tokens. Sigh. Still, I followed some of the team members on twitter and followed the project subreddit so I maintained a passing interest.
Why did I 'park' ANT on Uniswap?
This summer I've been reading The Sovereign Individual (a few of my thoughts on this book are in this post). This has got me interested in Aragon again. They are also about to launch Aragon Court which has got me pretty excited. This gives anyone staking 10,000 ANJ tokens the opportunity to be selected as a juror to resolve disputes within Aragon DAOs. The ANJ token can currently be purchased through the Aragon Court website - 100 ANT buys 10,000 ANJ. After the pre-activation period ends on February 10, the ANT-ANJ rate will be determined by supply-demand metrics. Jurors earn a subscription fee and additional fees for making the correct (determined by the majority) decision as jurors. Details of these fees are not yet clear. More importantly, we don't know how many disputes there will be and how much time jurors will need to set aside to make their decisions but it sounded exciting so I decided to put some skin in the game. The more ANJ one stakes, the more chance they have to be selected as a juror. I only have the minimum 10,000 ANJ so it will be interesting to see if I ever get selected!
So, with that in mind, on January I thought - I will buy some ANT tokens (101) on Uniswap, add ANT and ETH to the ANT-ETH Uniswap liquidity pool, then withdraw my liquidity as we approach the end of the pre-activation period (in the meantime earning some fees as a liquidity provider), and finally exchange the ANT for ANJ so that I'm able to participate as a juror in Aragon Court.
How did my experiment fail?
The price of Aragon went up (mainly on the back of news that Aragon Court would be launching soon) during the period I had ANT-ETH in the Uniswap liquidity pool. Therefore, the smart contract in which the liquidity was locked, did some crazy math and reduced the number of ANT tokens I had added to balance the ANT-ETH amounts. The overall FIAT value increased, but this is irrelevant because this would have occurred regardless of whether I was simply HODLing ANT or it was sitting in a liquidity pool. When I withdrew liquidity I had about 89 ANT tokens (had put 98.99 in), so I had to swap some ETH to buy more ANT to bring my overall balance back to 100 so I could exchange them for 10,000 ANJ. Generally, I believe the safest way to ensure positive returns from Uniswap liquidity pools is to go in without a specific timeframe in mind for removing liquidity (this was not me!).
What is the moral of the story?
- Only experiment with what you can afford to lose.
- Make sure you understand why the experiment failed - my why was don't have a specific timeframe when providing liquidity to Uniswap pools.
- If you try to be too clever, you will likely fail.
- Learn from your failures.
Regardless of my failure, I - only lost a small amount, enjoyed journeying through several rabbit holes, learnt something and am looking forward to participating in Aragon Court as a juror. Thanks for reading.