The Depths of DeFi

Decentralized Finance could potentially change the way we interact with financial services forever and is a total rabbit hole. Here are some of the “levels of depth” that you can get into DeFi and roughly reflects my journey into the DeFi abyss (yes, I will be overusing this analogy!).

I don’t think that most people should move past the shallows unless you’re interested in the underlying technology, are comfortable with the significant risk, and want to follow the impact of DeFi on the financial services ecosystem. 

Dipping your toe in the water

When starting your dive into cryptocurrency and DeFi, the best thing to do is to set up a regular order to buy Ethereum and Bitcoin (e.g. every two weeks) through an exchange like Coinbase to dollar cost average and hold. $BTC and $ETH are ~80% correlated to each other but neither are particularly correlated with the stock market.

BlockFi and Celsius are also great options to hold USD stable coins (USD coins backed by real USD) and make 5-10% in interest that can be paid out in cryptocurrency or stable coins.

Just these two things alone is probably more than 90% of the financial advisors know, which also makes me a little sad given that they are a gateway to investment products.

Wading in the shallows

Once you’re in the water and you have an account on an exchange like Coinbase or Kraken, you may start buying a few more tokens for projects that you’ve heard are interesting like Solana ($SOL), Cardano ($ADA), Polygon ($MATIC), or Polkadot ($DOT). 

Once you’ve bought your cryptocurrency the natural next step is to consider what else you can do with it 🙂 You will create a MetaMask Wallet and install the browser extension to manage your currencies and make your first swap between cryptocurrencies. You’ll send some $ETH to your wallet and maybe buy something like the DeFi Pulse Index ($DPI) which is a collection of some of the most popular DeFi tokens like Uniswap, Sushi and Aave. The BED Index ($BED) is also a pretty solid choice.

You can probably get most of the exposure and benefits of participating in the crypto and DeFi ecosystem by stopping here. You’ll probably also save a ton of money on transaction fees and a lot of unwanted stress. It’s also probably simple enough to do your taxes by just exporting a file from Coinbase and a wallet CSV export.

Feet off the floor

If you’re wondering what’s next, this is when it starts getting more fun. Instead of just holding assets passively your coins start “working for you” and generating yield – much link investing your fiat (USD) you are investing your cryptocurrency.

The main things you’re going to start doing are:

  • Providing liquidity: You’re not just holding tokens for projects that you like but you’re providing liquidity in pools (LPs)  on exchanges like Sushi or UniSwap
  • Staking: You’ve discovered that exchanges or projects will provide extra incentives for providing liquidity (as LP tokens) or with the tokens directly by staking these tokens and locking up your assets for rewards.
  • Reading and learning: You’re reading more frequently and have discovered things like the Finematics Youtube Channel, the Bankless newsletter and podcast, and maybe Kevin Rose’s Modern Finance Podcast. You understand things like impermanent loss, rug pulls, and the difference between proof of work and proof of stake. 
  • Joining the project communities: You may join a few project discords or telegram chats and potentially even participate in the discussions when you’re really excited about the project. 
  • Friends: You probably have a group of like-minded friends that are at the same stage in their journey that you can bounce ideas off. 

Deep waters

When you are in the deep waters you’re comfortable with the basics, you have a clear strategy and you’re switching projects regularly to try and find the best risk-adjusted reward across different chains. I’m here in my DeFi journey. 

  • New Projects: You’re investing in totally new projects, reading whitepapers/announcements, and staying on top of the latest incentives so you can get the best rewards for your tokens. 
  • Degen: You’ve invested in a few degen projects with high volatility – you’ve been burned by impermanent loss a few times and exited too early or too late. 
  • Multiple Chains: You’re investing across multiple chains like Polygon, Terra, and Solana and complaining about the gas fees on Ethereum all the time. You’re scared to look at how much you’ve spent on gas. You go to https://fees.wtf/ and are sad. 
  • Best Price: You’re using tools like Matcha to look up the best exchange rate for your swaps vs. going to UniSwap by default. You feel good when you save money on fees. 
  • Portfolio Construction: You’re starting to think more about portfolio construction, investing discipline, and having some rules for when you invest and when you exit to improve risk/return. 
  • Leverage: You’re starting to get loans on your stable assets and leverage for some stable liquidity pools but still nervous when you do this (and keep collateral around in case it goes sour). 
  • Governance: You are holding governance tokens for some projects that you’ve been supporting for a while and actively voting on the future direction of the project (much like shareholders vote).  
  • Trimming down: You’ve invested in too many things and constantly have to trim back and rebalance because you’ve collected so many useless coins that you don’t know what to do with them. 
  • Portfolio Tracking: You’re using tools like Zapper, Zerion, and Debank for cross-chain — you may even get frustrated that all these tools don’t support all the projects that you’re investing in. You probably have a spreadsheet to calculate all your positions and daily yield because the other tools don’t support it.

This chart shows how other chains like Polygon and BSC have increased the overall trading volume significantly in 2021, due to much lower gas fees (cost per transaction).

https://twitter.com/WuBlockchain/status/1401418884310200320/photo/1 

The Darkness

I honestly have no real idea what lurks in the darkness, and don’t really want to dive here if I can avoid it, but I can only imagine the following things exist:

  • Programmatic trading: Instead of manually moving around your money you’re writing code to programmatically make trades or execute strategies with specific logic.
  • Pre Launch: You’re in all the right communities and know when projects are launching, when exchanges will list tokens, and maybe even have tokens before the general public.
  • Arbitrage: You have a deep understanding of the incentives, risk, and arbitrage across chains and are able to systematically take advantage of these before retail investors (much like traditional finance).
  • Moving markets: You’re pooling assets, taking out flash loans, or in small communities of large investors to take advantage of scale and your trades are actually moving markets. I recently came across a tool called Furcombo which is a no-code tool to let users use flash loans to take advantage of price arbitrage across decentralized exchanges.
  • Stacked Leverage: You’re taking advantage of stacked leverage and incentives which is hard for normal retail investors to understand or access.
  • OTC: You’re not trading using conventional systems because your trades are so large that you can get better rates over the counter 🙂

Here is a similar take from the folks over at Finematics, who produce great content and I’m a supporter of theirs on Patreon.


I hope you enjoy your experiences throughout your journey in DeFi, but unless you want to dedicate a lot of time and mental space to it, wade in and just have fun the shallows and rest safe and easy 🙂