The effect of fees, interest rate and time on profit in DEFI

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Avatar for aniruddhasen
3 years ago

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Defi is the current buzz word in crypto. The total value locked under defi has increased exponentially in a year and is now in billions. Almost every week we are seeing new defi projects launching. Defi is like the Disney world of crypto. The lure and opportunity of making a handsome profit is too good to resist. So today I am going to dig deeper and see how fees, APR/APY and time affects your profitability.

First it is important to understand the cost aspect of investing in defi as this will eat away some of your profit. I will compare some of the Binance smart chain projects and the Ethereum projects as approximate fees charged by them. The rates of ethereum fluctuate quite wildly but this will at least give you a comparison between the two chains.

Action                                                    BSC project                         fee         fee   Ether project

Move token                                            BSC                                        0.15        15           Ethereum

Approve Token for Trade                PancakeSwap                    0.20        10.00     Uniswap

Swap Tokens                                         PancakeSwap                    0.40        75.00     Uniswap

Add Liquidity Pool Deposit              PancakeSwap                    0.60        60.00     Uniswap

Remove Liquidity Pool Deposit      PancakeSwap                    0.80        65.00     Uniswap

Approve Token for Lending              Venus                                   0.15        15.00     Compound

Deposit Asset                                           Venus                                   0.60        25.00     Compound

Enable Collateral                                    Venus                                   0.20        24.00     Compound

Borrow                                                        Venus                                   1.65        80.00     Compound

Repay Borrow                                           Venus                                   0.5          45.00     Compound

Harvest Reward                                       Venus                                   11.00     130.00   Compound

Stable swap Approve Token Deposit- Belt                                   0.20        15.00     Curve

Stable swap Add Deposit                          Belt                                    8.00        215.00   Curve

Stable swap Harvest Reward                   Belt                                   0.3          75.00     Curve

Deposit into Yield Farm              Autofarm                            3.00        185.00   Yearn Fin

We know that the cost of entering and exiting an ethereum based defi can reach up to 200 dollars easily in volatile times. So suppose you need to pay a fee of 200 dollars for entering a project and withdraw back to your wallet, then you should have sufficient principal to make profit even after deducting the fees or else it will be a loss making investment. On BSC this cost may come to between 3-8 dollars. Also remember if you are compounding your profit or harvesting your profit that will also incur you transaction fees.

The above comparison brings out two facts. First you can recoup your expenses at a lower APR/APY in BSC than in Ethereum projects. Secondly you can recoup your expenses in a shorter time frame in BSC.

Next we will compare the APR that will be required to recoup the 200 dollar fees in an ethereum based project with different principal amounts.

Principal   APR payoff in 1 week                 in 1 month    in 3 months              in 1 year

1,000                     964%                                     222%                     75%                        18%

5,000                     205%                                     48%                        16%                        4%

10,000                   103.5%                                  24%                        8.0%                      2%

100,000 10.5%                                   2.45%                    0.80%                    0.20%

1,000,000             1.05%                                    0.25%                    0.08%                    0.02%

As per the above table you will need to earn 18 percent APR for 1 year with a principal of 1000 dollars to recoup your transaction fee of 200 dollars and not making a loss. With 10000 dollars you will need 2% APR for 1 year for the same thing. If you want to recoup the 200 dollars expense in 3 months then you will need to get an APR of 8 percent for a 10000 dollar investment. We know that APR in ethereum based defi is generally low, so anyone participating in it with less than 10000 dollars will have to be invested for a long time. Also APR keeps varying with time. The ideal investment range would be a 100000 dollar as principal to make the most out of it.

Now let us see the same with a 5 dollar fee in BSC based project.

Principal               APR payoff in 1 week     in 1 month          in 3 months        in 1 year

1,000                     25%                                        6%                          2%                          0.6%

5,000                     5.3%                                      1.2%                      0.5%                      0.12%

10,000                   2.4%                                      0.65%                    0.2%                      0.06%

100,000 0.27%                                    0.06%                    0.023%                 0.005%

1,000,000             0.03%                                    0.014%                  0.003%                0.0005%

So here we see that to recoup the 5 dollar fee in 3 months we will need 2 percent APR with a 1000 dollar investment. It is clear now that the timeframe as well as the APR is drastically reduced to recoup our expenses. Whereas to recoup a 200 dollar fees I will require 5000 dollar investment for 3 months at 16 percent APR in ethereum chain, in Binance smart chain to recoup a 5 dollar fee with 5000 dollar investment I will need a 0.5 percent APR for 3 months.

There is no doubt that ethereum is a reputed network and the best projects are on it. But as fees are high and not all investors are able to cough up big amount of money so projects on BSC are flourishing at the moment. If Ethereum network succeeds in reducing the fees drastically which it is working on hard then surely money will again flow into ethereum chain from the other chains.

One lacunae of BSC is that it accepts any type of projects even those which seem to be dubious in nature, therefore one has to be careful in which projects one is investing. Every market cycle brings in new investors and most are drawn to crypto fuelled by greed, these are the people who generally get scammed and fooled by high yield projects and lose money. Even with high fees Ethereum network is still the boss in the defi  cryptoverse and is likely to continue.  

This was just to give you a comparison so that it helps you in making your investment decision and profitability keeping in mind the expenses you are likely to incur and the time factor.

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Avatar for aniruddhasen
3 years ago

Comments

Thank you Telesfor sir.

$ 0.00
3 years ago

And soon SmartBCH will come with very low fees.

$ 0.00
3 years ago

I am waiting for it. I have added smart BCH in metamask.

$ 0.00
3 years ago

I assume you have added the testnet to Metamask. Or do you already have access data for the mainnet?

$ 0.00
3 years ago

So it is expected that with smart BCH, projects will come due to low fees as many small players left eth network due to high fees.

$ 0.00
3 years ago

I got this - RPC url -https://smartbch.ba.net, chain ID- 10001, block explorer url- https://smartbch-explorer.web.app. I dont know if it is correct or not.

$ 0.00
3 years ago

It's right. It's testnet. I am currently writing a betting game for Euro2020. It will work on the SmartBCH testnet. Everyone will bet on a win, a draw or a defeat. Everything will be calculated and paid out by smart contracts. I think I will be ready in time before the start of Euro2020.

$ 0.00
3 years ago

Wow sir you are truly talented.

$ 0.00
3 years ago