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+---
+title: >-
+    Adventures In DeFi
+description: >-
+    There and Back Again, a Yield Farmer's Tale.
+---
+
+It's difficult to be remotely interested in crypto and avoid the world of
+decentralized finance (DeFi). Somewhere between the explosion of new projects,
+implausible APY percents, complex tokens schemes, new phrases like "yield
+farming" and "impermanent loss", rug pulls, hacks, and astronomical ethereum
+fees, you simply _must_ have heard of it, even in passing.
+
+In late November of 2020 I decided to jump in and see what would happen. I read
+everything I could find, got as educated as I could, did some (but probably not
+enough) math, and got to work. Almost immediately afterwards a giant bull
+market hit, fees on ethereum shot up to the moon, and my little yield farming
+DeFi ship was effectively out to sea.
+
+For the past 200 days I haven't been able to tweak or withdraw any of the DeFi
+positions I made, for fear of incurring so many ethereum fees that any gains I
+made would be essentially wiped out. But the bull market is finally at a rest,
+fees are down, and I'm interested in what the results of my involuntary
+long-term experiment were. Before getting to the results though, let's start at
+the beginning. I'm going to walk you through all the steps I took, as well as my
+decision making process (as flawed as it surely was) and risk assessments.
+
+## Step 1: The Base Positions
+
+My first step was to set aside some ETH and BTC for this experiment. I was (and
+remain) confident that these assets would acrue in value, and so wanted to hold
+onto them for a long period of time. But while holding onto those assets, why
+not make a little interest on them by putting them to use? That's where DeFi
+comes in.
+
+I started with 2.04 ETH and 0.04 BTC. The ETH existed as normal ETH on the
+ethereum blockchain, while the 0.04 BTC I had to first convert to [renBTC][ren].
+
+renBTC is an ethereum token whose value is pinned to the value of BTC. This is
+accomplished via a decentralized locking mechanism, wherein real BTC is
+transferred to a decentralized network of ren nodes, and they lock it such that
+no individual node has access to the wallet holding the BTC. At the same time
+that the BTC is locked, the nodes print and transfer a corresponding amount of
+renBTC to a wallet specified in the BTC transaction. It's a very interesting
+project, though the exact locking mechanism used was closed-source at the time I
+used it, which concerned me somewhat.
+
+[ren]: https://renproject.io/
+
+### Step 1.5: Collateralization
+
+In Step 2 I deposit my assets into liquidity pools. For my renBTC this was no
+problem, but for my ETH it wasn't so simple. I'll explain what a liquidity pool
+is in the next section, but for now all that needs to be known is that there are
+no worthwhile liquidity pools between ETH and anything ostensibly pinned to ETH
+(e.g.  WETH). So I needed to first convert my ETH into an asset for which there
+are worthwhile liquidity pools, while also not losing my ETH position.
+
+Enter [MakerDAO][makerdao]. MakerDAO runs a decentralized collateralization app,
+wheren a user deposits assets into a contract and is granted an amount of DAI
+tokens relative to the value of the deposited assets. The value of DAI tokens
+are carefully managed via the variable fee structure of the MakerDAO app, such
+that 1 DAI is, generally, equal to 1 USD. If the value of the collateralized
+assets drops below a certain threshold the position is liquidated, meaning the
+user keeps the DAI and MakerDAO keeps the assets. It's not dissimilar to taking
+a loan out, using one's house as collateral, except that the collateral is ETH
+and not a house.
+
+MakerDAO allows you to choose, within some bounds, how much DAI you withdraw on
+your deposited collateral. The more DAI you withdraw, the higher your
+liquidation threshold, and if your assets fall in value and hit that threshold
+you lose them, so a higher threshold entails more risk. In this way the user has
+some say over how risky of a position they want to take out.
+
+In my case I took out a total of 500 DAI on my 2.04 ETH. Even at the time this
+was somewhat conservative, but now that the price of ETH has 5x'd it's almost
+comical. In any case, I now had 500 DAI to work with, and could move on to the
+next step.
+
+[makerdao]: https://makerdao.com/
+
+## Step 2: Liquidity Pools
+
+My assets were ready to get put to work, and the work they got put to was in
+liquidity pools (LPs). The function of an LP is to facilitate the exchange of
+one asset for another between users. They play the same role as a centralized
+exchange like Kraken or Binance, but are able to operate on decentralized chains
+by using a different exchange mechanism.
+
+I won't go into the details of how LPs work here, as it's not super pertinent.
+There's great explainers, like [this one][lp], that are easy to find. Suffice it
+to say that each LP operates on a set of assets that it allows users to convert
+between, and LP providers can deposit one or more of those assets into the pool
+in order to earn fees on each conversion.
+
+When you deposit an asset into an LP you receive back a corresponding amount of
+tokens representing your position in that LP. Each LP has its own token, and
+each token represents a share of of the pool that the provider owns. The value
+of each token goes up over time as fees are collected, and so acts as the
+mechanism by which the provider ultimately collects their yield.
+
+In addition to the yield one gets from users making conversions via the LP, LP
+providers are often also further incentivized by being granted governance tokens
+in the LPs they provide for, which they can then turn around and sell directly
+or hold onto as an investment. These are usually granted via a staking
+mechanism, where the LP provider stakes (or "locks") their LP tokens into the
+platform, and is able to withdraw the incentive token based on how long and how
+much they've staked.
+
+Some LP projects, such as [Sushi][sushi], have gone further and completely
+gamified the whole experience, and are the cause of the multi thousand percent
+APYs that DeFi has become somewhat famous for. These projects are flashy, but I
+couldn't find myself placing any trust in them.
+
+There is a risk in being an LP provider, and it's called ["impermanent
+loss"][il]. This is another area where it's not worth going into super detail,
+so I'll just say that impermanent loss occurs when the relative value of the
+assets in the pool diverges significantly. For example, if you are a provider in
+a BTC/USDC pool, and the value of BTC relative to USD either tanks or
+skyrockets, you will have ended up losing money.
+
+I wanted to avoid impermanent loss, and so focused on pools where the assets
+have little chance of diverging. These would be pools where the assets are
+ostensibly pinned in value, for example a pool between DAI and USDC, or between
+renBTC and WBTC. These are called stable pools. By choosing such pools my only
+risk was in one of the pooled assets suddenly losing all of its value due to a
+flaw in its mechanism, for example if MakerDAO's smart contract were to be
+hacked. Unfortunately, stable pools don't have as great yields as their volatile
+counterparts, but given that this was all gravy on top of the appreciation of
+the underlying ETH and BTC I didn't mind this as much.
+
+I chose the [Curve][curve] project as my LP project of choice. Curve focuses
+mainly on stable pools, and provides decent yield percents in that area while
+also being a relatively trusted and actively developed project.
+
+I made the following deposits into Curve:
+
+* 200 DAI into the [Y Pool][ypool], receiving back 188 LP tokens.
+* 300 DAI into the [USDN Pool][usdnpool], receiving back 299 LP tokens.
+* 0.04 renBTC into the [tBTC Pool][tbtcpool], receiving back 0.039 LP tokens.
+
+[lp]: https://finematics.com/liquidity-pools-explained/
+[il]: https://finematics.com/impermanent-loss-explained/
+[sushi]: https://www.sushi.com/
+[curve]: https://curve.fi
+[ypool]: https://curve.fi/iearn
+[usdnpool]: https://curve.fi/usdn
+[tbtcpool]: https://curve.fi/tbtc
+
+## Step 3: Yield Farming
+
+At this point I could have taken the next step of staking my LP tokens into the
+Curve platform, and periodically going in and reaping the incentive tokens that
+doing so would earn me. I could then sell these tokens and re-invest the profits
+back into the LP, and then stake the resulting LP tokens back into Curve,
+resulting in a higher yield the next time I reap the incentives, ad neaseaum
+forever.
+
+This is a fine strategy, but it has two major drawbacks:
+
+* I don't have the time, nor the patience, to implement it.
+* ETH transaction fees would make it completely impractical.
+
+Luckily, yield farming platforms exist. Rather than staking your LP tokens
+yourself, you instead deposit them into a yield farming platform. The platform
+aggregates everyone's LP tokens, stakes them, and automatically collects and
+re-invests incentives in large batches. By using a yield farming platform,
+small, humble yield farmers like myself can pool our resources together to take
+advantage of scale we wouldn't normally have.
+
+Of course, yield farming adds yet another gamification layer to the whole
+system, and complicates everything. You'll see what I mean in a moment.
+
+The yield farming platform I chose was [Harvest][harvest]. Overall
+Harvest had the best advertised APYs (though those can obviously change on a
+dime), a large number of farmed pools that gets updated regularly, as well as a
+simple interface that I could sort of understand. The project is a _bit_ of a
+mess, and there's probably better options now, but it was what I had at the
+time.
+
+For each of the 3 kinds of LP tokens I had collected in Step 2 I deposited them
+into the corresponding farming pool on Harvest. As with the LPs, for each
+farming pool you deposit into you receive back a corresponding amount of farming
+pool tokens which you can then stake back into Harvest. Based on how much you
+stake into Harvest you can collect a certain amount of FARM tokens periodically,
+which you can then sell, yada yada yada. It's farming all the way down. I didn't
+bother much with this.
+
+[harvest]: https://harvest.finance
+
+## Step 4: Wait
+
+At this point the market picked up, ethereum transactions shot up from 20 to 200
+gwei, and I was no longer able to play with my DeFi money without incurring huge
+losses. So I mostly forgot about it, and only now am coming back to it to see
+the damage.
+
+## Step 5: Reap What I've Sown
+
+It's 200 days later, fees are down again, and enough time has passed that I
+could plausibly evaluate my strategy, I've gone through the trouble of undoing
+all my positions in order to arrive back at my base assets, ETC and BTC. While
+it's tempting to just keep the DeFi ship floating on, I think I need to redo it
+in a way that I won't be paralyzed during the next market turn, and I'd like to
+evaluate other chains besides ethereum.
+
+First, I've unrolled my Harvest positions, collecting the original LP tokens
+back plus whatever yield the farming was able to generate. The results of that
+step are:
+
+* 194 Y Pool tokens (originally 188).
+* 336 USDN Pool tokens (originally 299).
+* 0.0405 tBTC Pool tokens (originally 0.039).
+
+Second, I've burned those LP tokens to collect back the original assets from the
+LPs, resulting in:
+
+* 215.83 DAI from the Y Pool (originally 200).
+* 346.45 DAI from the USDN Pool (originally 300).
+* 0.0405 renBTC from the tBTC Pool (originally 0.04).
+
+For a total DAI of 562.28.
+
+Finally, I've re-deposited the DAI back into MakerDAO to reclaim my original
+ETH. I had originally withdrawn 500 DAI, but due to interest I now owed 511
+DAI. So after reclaiming my full 2.04 ETH I have ~51 DAI leftover.
+
+## Insane Profits
+
+Calculating actual APY for the BTC investment is straightforward: it came out to
+about 4.20% APY. Not too bad, considering the position is fairly immune to price
+movements.
+
+Calculating for ETH is a bit trickier, since in the end I ended up with the same
+ETH as I started with (2.04) plus 51 DAI. If I were to purchase ETH with that
+DAI now, it would get me ~0.02 further ETH. Not a whole heck of a lot. And that
+doesn't even account for ethereum fees! I made 22 ethereum transactions
+throughout this whole process, resulting in ~0.098 ETH spent on transaction
+fees.
+
+So in the end, I lost 0.078 ETH, but gained 0.0005 BTC. If I were to
+convert the BTC gain to ETH now it would give me a net total profit of:
+
+**-0.071 ETH**
+
+A net loss, how fun!
+
+## Conclusions
+
+There were a lot of takeaways from this experiment:
+
+* ETH fees will get ya, even in the good times. I would need to be working with
+  at least an order of magnitude higher base position in order for this to work
+  out in my favor.
+
+* I should have put all my DAI in the Curve USDN pool, and not bothered with the
+  Y pool. It had almost double the percent return in the end.
+
+* Borrowing DAI on my ETH was fun, but it really cuts down on how much of my ETH
+  value I'm able to take advantage of. My BTC was able to be fully invested,
+  whereas at most half of my ETH value was.
+
+* If I have a large USD position I want to sit on, the USDN pool on its own is
+  not the worst place to park it. The APY on it was about 30%!
+
+I _will_ be trying this again, albeit with a bigger budget and more knowledge. I
+want to check out other chains besides ethereum, so as to avoid the fees, as
+well as other yield mechanisms besides LPs, and other yield farming platforms
+besides Harvest.
+
+Until then!