In order to get started with DeFi, it is hard not to own some ETH. While there are many platforms/blockchains that boast that they are in DeFi, the truth remains that most the actions are on Ethereum. Hence, if you want to start growing your wealth through DeFi, the best way is still to do it on the Ethereum blockchain.
But how much ETH is required? The beauty of DeFi is that there is no minimum amount that you need to put in to get started. This is unlike traditional banking where there is a minimum balance that you must maintain if not, you might get charged fees for falling below. Hence, to answer how much ETH is required, we just have to make sure that the costs involve are justified by the projected returns. Now, lets take a look at the costs involve...
Fiat to cryptocurrencies conversion fees
I once made a post comparing the various fiat-to-cryptocurrencies exchanges operating in Singapore. If we use it as a gauge, we can see that the fees to convert from fiat-to-cryptocurrencies are at least 0.5% of the amount you put in. This is likely going to vary from country to country.
For the sake of this article, I will use Binance.sg as an example. The conversion fee there is 0.6% and to withdraw ETH to your own wallet it requires 0.003 ETH. So we have a variable conversion fee and a fixed withdrawal fee. I plotted them into a table and here it is.
As you can see, the more you buy, the cheaper the fees get as a percentage of the total amount. For this table, I am using a ETH price of $240 to calculate the withdrawal fees. As you can see, if you convert just $20 (which is the minimum imposed by Binance), you are paying 4.2% of fees. But the "fees curve" starts to flatten as you convert more at one go.
Note that this is just an illustration for you to consider. You have to do your own calculation depending on where you are from and the fees required for you to convert from fiat to ETH. For me, I will want to minimize the percentage fees as much as possible. Understand that when you put your cryptocurrencies into DeFi, it is usually to earn an interest or some other forms of returns and these returns on investment should be denominated in percentages. Basically, the more you save on the percentage fee, the faster you can be profitable.
Gas, Gas, Gas...
The next bulk of DeFi costs are the gas fees that you need to pay when you interact with DeFi dApps on the Ethereum blockchain. Gas fees have been quite elevated recently and that is putting many people off. For example, it now costs about $1-$2 worth of Ether to deposit cryptocurrencies into Aave, a decentralized lending platform.
Let's now assume we take the average of $1.5, how will the table from the previous section look like?
As you can see, the percentage fees have drastically increase if you just converted $20. But wait, that is not all. If we simply put our ETH into the platform, it is not going to yield much interests. In fact, it is just 0.13%. Of course, this is paid in kind and the actual returns in fiat terms may be higher if ETH price increases. But for simplicity sake, let's assume that you do not want to risk losing value in fiat terms. Thus, you will want to convert ETH into a stablecoin, such as TUSD, which gets an 4.1% annualized interest. Highest among the stablecoins.
How much does it cost to swap from ETH to TUSD in a decentralized manner? Let's take a look at KyberSwap, a dApp for you to convert between tokens. It may cost up to 0.022 Ether, which is about $5. Note that the screenshot is the maximum fee, it is usually slightly lower. But in this case, I will say the fees will still be at least $3.5.
How does the table look like now?
Once you did your research and have a similar table like this, you can then make an informed decision as to whether DeFi fits your current investment strategy.
If you are starting to get put off by the fees required to meddle with DeFi, then perhaps the Argent wallet might be able to change your mind. Why? Because the wallet pays for all your gas fees, at least for now. This means that the previous table will look as such if you use Argent wallet,
There are quite a number of dApps available on Argent and I must say this is probably the cheapest way to get yourself started with DeFi.
I hope this article helps you understand the various costs that you might incur when putting your money into DeFi. Your returns and how fast you become profitable depends on how much you have paid for the fees. For example, if you used Argent wallet and you will need more than a year to breakeven as the interest rate on TUSD is only 4.1% and the fees you paid are 4.2%. On the other hand, if you put in $1,000, you can probably breakeven after 2-3 months. Think about it and do some research. Let me know how much it cost to convert fiat to ETH in your country.
I hope this is a good first post to get you interested in DeFi. If you like such articles, do subscribe to DeFi Campus community.
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