Compounding Interest Rates

Profits, Fees, Interest Rates, and Time

DeFi Strategy Series

On-chain DeFi investments often accrue interest every minute. It may seem like you're making money nonstop, but fees play an important role in investing decisions.

I cashed out of a Uniswap Liquidity Pool position today. The fee was $64.76, paid entirely to Ethereum miners. Fees significantly affect the profitability of trades.

This article will explain how to calculate time in an investment to profit and the interest rate needed to make profit in a certain time frame.

With so many blockchains to choose from, what are the best choices for your money? Whether you're dealing with the high transaction costs of Ethereum or the low costs of Binance Smart Chain, you need to pay extra attention to the four factors of APR/APY based opportunities: Fees, Principal, Time Invested, and Interest Rates.

Step 1: Understand and Calculate Fees.

How much does DeFi cost? It's important to figure that out before you invest. Mining fees make the process much harder to estimate- so I've included a guide here.

This table shows you fees associated with common DeFi investment actions on both chains:

ActionBinance Smart Chain ProjectBSC FeeEthereum FeeEthereum Project
Move TokensBinance Smart Chain0.148.00Ethereum
Approve Token for TradePancakeSwap0.219.00Uniswap
Swap TokensPancakeSwap0.38 70.00 Uniswap
Add Liquidity Pool DepositPancakeSwap0.55 55.00Uniswap
Remove Liquidity Pool DepositPancakeSwap0.80 65.00Uniswap
Approve Token for LendingVenus0.1611.00Compound
Deposit AssetVenus0.6023.00Compound
Enable Collateral Venus0.2224.00Compound
BorrowVenus 1.6480.00Compound
Repay Borrow Venus0.4945.00Compound
Harvest RewardVenus11.00132.00Compound
Stableswap Approve Token for DepositBelt0.2111.00Curve
Stableswap Add DepositBelt8.00216.00Curve
Stableswap Harvest RewardBelt0.2770.00Curve
Deposit into Yield Farm Autofarm3.00190.00Yearn Finance

On Ethereum the transaction fees to enter and exit a position could easily be $200. Many transactions require additional steps like “approvals” or moving money off of an exchange and onto Ethereum. To earn back the $200-$400 transaction fees with interest will take a solid amount of time. Add big players moving money around and flash loan hacks, and this understandably makes people uneasy about investing in Ethereum DeFi.

On Binance Smart Chain, entering and exiting a position may cost $4 to $10 total. You can earn that back in a much shorter time and at lower and much more sustainable interest rates.

Step 2: Transaction Size: Principal, APR, and APY

Principal is the original investment size that you make. If you’re thinking about participating in interest rate strategies, what amount of money does it actually make sense to play with? First off, investing in cryptocurrencies is risking complete loss of principal due to hacking or bugs. Therefore, only invest money that would be okay to lose entirely.

This table shows how much interest rate you need to pay off for $200 of Ethereum transaction fees with various amounts of principal.

PrincipalAPR payoff in 1 weekAPR to payoff in 1 monthAPR to payoff in 3 monthsAPR to payoff in 1 year
1,000963.2% 222.5%74%18.2%
5,000205.1% 47.75%15.9%3.9%
10,000103.4% 24.1%8.0%1.98%
100,00010.4%2.43%0.81% 0.20%
1,000,0001.04%0.24% 0.08% 0.02%

For amounts under $10,000 Ethereum is too inefficient. It takes over 103% of APR to earn back the transaction fee in a week with $10,000 in principal. Eventually, with the launch of Uniswap V3 in May there will also not be much need for liquidity from small wallets, and investors who can afford to migrate to sidechains and layer 2 will be heavily incentivized to do.

To feel truly comfortable on Ethereum, one probably needs 100,000-1,000,000 of principal.

This table shows you how much principal and APR is needed to earn back $5 of Binance Smart Chain transaction fees.

PrincipalAPR payoff in 1 weekAPR to payoff in 1 monthAPR to payoff in 3 monthsAPR to payoff in 1 year
1,00026% 6%2%0.5%
5,000 5.2% 1.2% 0.4%0.1%
10,0002.6% 0.6% 0.2%0.05%
100,000 0.26%0.06% 0.02%0.005%
1,000,000 0.03%0.01% 0.002%0.0005%
On Binance Smart Chain, 6% APR on an investment of $1000 will pay off in 1 month! For $10,000, you can earn the fee back in a week with just 2.6% APR!

Now that we see the results, here's how to calculate it for your own case. To understand how much you will make in the amount of time you have to invest, use the following formula:

Time needed to break even given APR

Amount Earned by Investment

APR and APY are commonly given interest rates. A compounding period is the amount of time between interest payments. This could be once per year, month, week, day, or even continously. Annual Percentage Rate (APR) is the non-compounding interest rate. A 20% APR means each compounding period, you get 20% divided by the number of compounding periods of interest back. Annual Percentage Yield (APY) is the compounding version, which takes into account the growing value of the investment and future yields due to compounding. They are related by the following formula:

Time needed to break even given APR

APY and APR, where n is the number of compounds per year

Step 3: Time Invested

By rearranging the future value equation, we can determine the amount of time needed to earn back your original transaction fees.

Time needed to break even given APR

Break Even Time With Fees and APR

Step 4: Interest Rate Needed

We can also rearrange the equation to determine what interest rates will pay back in your investment timeframe.

Time needed to break even given APR

Break Even Time With Fees and APR

The math really speaks for itself. Ethereum is impractical for small holders, and even for large investors Binance Smart Chain is way more profitable.

DeFi Strategy: Concentrate your resources & stay in stablecoin opportunities as long as possible to minimize transaction fees. The multichain earning opportunity beyond Ethereum grows daily. Tomorrow, DeFi will be happening on even more chains, especially as lending protocols branch out and offer Ethereum assets to newly exploding chains and ecosystems.

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