DeFi Lending Experiment Saw Me Spend $378 to Earn $4

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  • DeFi lending platforms are ten a penny right now
  • Many promise decent rates of return for deposited crypto
  • I tried one for two months to see how easy, and profitable, it is

DeFi lending platforms are all the rage. There are loads out there now, some working independently, some operating as part of bigger DeFi offerings, and some attached to exchanges. With the potential to change the face of borrowing, I decided it was high time to test one to see a) what all the fuss is about and b) how easy they are for the non-crypto native to use. The experience was not one that filled me with joy.

That’s a Wrap

Having cast my net around for platforms to test, I opted for Compound.Finance, mainly because it was one that I already knew about and trusted more than some of the shadier offerings. Looking at the options available for deposit I opted for BTC due to the fact that I wanted to make the most of what I believed was an imminent Bitcoin price rise – I could earn on my bitcoin while it was going up! Brilliant!

Sadly, BTC had, and still has, one of the lower interest rates on the site at 0.33%, but I wanted to make the most of Bitcoin’s promising price action and so I plumped for this. I started by wrapping my BTC, which I did on SushiSwap, where I was met with a fee of $80.58. So far, so down. I now needed to take my freshly wrapped BTC to Compound.Finance to start lending.

My cWBTC Gets to ‘Work’

To add to the wBTC lending pool I had to convert it to cWBTC (Compound.Finance’s proprietary version of wBTC), which took two separate transactions and came out at a total cost of $99.91. With no way of knowing up front what sort of fees you’re likely to have to pay, I realized that few first timers would even get past this stage without balking and probably giving up.

Finally though, after what is a pleasingly simple if expensive process on Compound.Finance, I was finally able to get my cWBTC to work. I checked back after a few days and noticed that I had made a fraction of a COMP token, about $0.20. Hurrah – my first earning, and meanwhile the price of Bitcoin was going up too. Double hurrah! I checked back every day or so for about a week, then the novelty wore off and I resolved to come back at the end of the experiment in two months’ time.

Out of Hibernation and In for a Shock

Two months later and I’m heading back to Compound.Finance platform, just as Bitcoin has completed its retracement back to where it was when I deposited my funds, stripping away any earnings I’ve made on that front. Still, there’s the interest on my loaned cWBTC to think about.

I log in, go to my account, and see that I have earned a grand total of 0.00778926 COMP tokens, equivalent to…four dollars. Of course I was prepared for it to be low given the interest rate, but still. Four dollars? I had deposited a five figure sum, and at a cost of $180! At this rate I would have to stake my cWBTC for seven and a half years to earn back what it cost to deposit. Not something that is going to attract your average punter.

Anyway, at least I can get my bitcoin back…at a price. The process of withdrawing by cWBTC from the platform and converting it into ETH that I can send off somewhere else essentially involves the depositing process in reverse with all the resultant fees, landing me with a bill of $198.15.

All in all then, lending a five-figure sum of BTC on Compound.Finance earned me a little over $4 and cost me a total of $378.15 – just shy of ten times what I got back. Of course, the weight of blame lies almost entirely with the Ethereum fees, although I do wonder if there’s something that platforms like Compound.Finance can do in order to reduce the number of transactions needed.

The issue of the paltry interest rate is down to the desirability of users to borrow the asset you are providing, and clearly there isn’t much demand for wBTC, which is fair enough, but it throws the cost/earning disparity into sharp relief.

DeFi Lending at Risk

The main purpose of my experiment was to see how the average person might get on with lending money through a DeFi lending platform. In terms of usability I can’t fault Compound.Finance – it was a pretty easy process for a first time user, although I am a crypto native so I knew instinctively what to look for. First time users would find the depositing and withdrawing process pretty easy once they get to grips with the different wrapping processes involved, something that has not always been the case with crypto.

Unfortunately, a smooth UI is irrelevant when the fees are as exorbitant as they are. Ethereum may have the benefit of decentralization, but it can’t be ignored that were Compound.Finance to run on, say, Binance Smart Chain, I would certainly not be paying over $375 to earn $4. Ethereum wants to be the home of DeFi lending, and DeFi as a whole, as indeed I believe it should. However, this experiment of mine, run over two months remember, illustrates that the fees currently being levied have the potential to stop the entire movement in its tracks, or force it to look elsewhere.

Ethereum 2.0 is being hailed as the magic bullet to bring Ethereum fees back in line. As I have just demonstrated, this has to work for Ethereum to stay relevant.