Lessons in DeFi

The Crypto Bull Market of 2021 led to continued evolution, development, and adoption of more use cases for Blockchain technology. One such beneficiary has been the Decentralized Finance (DeFi) space as total value locked in various ecosystem have grown dramatically and have even garnered the attention of the industries it is competing with, the financial system and its banks. However, we all continue to learn that it is still early in the space as exploits and hacks have impacted users.

While DeFi still does not compete with traditional finance in terms of assets, it continues to be attractive considering how Central Banks around the world have been forced to keep interest rates too low, too long. Now that inflation is “turning its ugly head,” real returns are even harder to come by. Fortunately, that has not been the case in DeFi as returns continue to outpace the traditional markets. However, returns come with risks.

Learning from experience is the hardest but probably the most valuable. In my case, I have seen the good and not so good but have avoided the bad. I have no experienced an exploit or hack which is the great news but have learned from some challenges. First, the cost of gas fees have been certainly brutal on the Ethereum Network. I often saw that they almost always completely offset any short term arbitrage opportunities. I had a number of Liquidity Pools on Uniswap that performed very well in 2021. I held until 2022 but when the withdrawal came, I lost a good portion of the fees accrued. However, the net earnings was still much better than anything in the traditional markets.

Lastly, I held on to my pool of staking DAI on Oasis for a long time. I was trying to avoid gas fees when the significant decrease in earnings rate was announced. You may recall that it went all the way down to 0.01% given the issue with collateral in the collapse of 2020. I considered pulling out but the GAS fee was higher than the earnings inception to date. Unfortunately, it did not get better as the savings rate never increased again. Therefore, I still ended up losing a portion of my principal with GAS fees paid when I ultimately pulled the liquidity.

This is a brave new world that comes with risk and rewards. Despite the amount of diligence we can each do individually and/or as a community, there will always be lessons that will continually evolve and develop the DeFi markets. I still feel it is exciting and the path forward to the future of finance as fiat continues to be the higher of the risks. All options should be on the table when looking for ways to battle inflation, the hidden tax!

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