There are many levels of knowledge and investment in the crypto universe. If you’re just staring out, buying and holding some of the main assets like Bitcoin, Ethereum, Solana, Polkadot is a legitimate way of going about it. But there is so much more to do in crypto, lets explore one of those things you can do when you are ready to dive a little deeper.
Uniswap is a program that runs on the Ethereum blockchain. It allows people to trade one coin (that resides on the Ethereum blockchain) into another for a small fee. This protocol trades almost $2 billion a day. The way this system works is that other people need to put up assets and place them in pools so that anyone can trade against them. So for example there is a pool for Ethereum and USDC (a dollar coin that is run by Coinbase and Circle). That pool always consists of 50% Ethereum and 50% USDC. Any person can go to this pool and trade Ethereum for USDC, or USDC for Ethereum, and pay a .3% fee for that. The people who have contributed to that pool earn that .3% fee on their assets.
Putting money into one of these pools is an interesting intermediate level investment you can make in crypto. The ETH/USDC pool is one of my favorites in this category, let me explain the benefits and potential issues with this investment…
- Less Volatile Asset – By depositing into the pool 50% USDC and 50% ETH you now have a new synthetic asset that has about half the volatility of Ethereum which is very volatile but also less upside.
- Auto Rebalance – As the price of Ethereum goes up or down, the requirement that the pool hold 50% of each asset remains which means that as the price of ETH goes down you are automatically buying more and when it goes up you are automatically selling. It is a continuously rebalanced portfolio!
- Fee Revenue – Over the last 2 years or so that I have followed this pair, the fees have averaged about 15-20% a year. These fees get automatically added to your position tax free until you redeem from the pool.
- You can Borrow Against – You can use this position as collateral for a loan on MakerDAO, that currently carries an interest rate of 2%. https://oasis.app/ You can borrow up to about 80% of the value… but you need to be careful because if you fall below the minimum you could face a stiff penalty (13% of your assets).
- Bugs – As with all blockchain related stuff, there is tech risk here. These contracts have been operating with literally billions of dollars in them for years now but there is always a chance a bug is discovered, or some change to Ethereum causes an issue.
- Impermanent Loss – There is something call Impermanent loss by participating in these pools that people talk a lot about. Basically the idea is that if you held each of the assets on their own, and one goes up or down a whole lot you would do better than having them in the pool (not considering the fees). That is a mathematically correct statement, but what I like about these pools is that it automatically sells and buys, something that you might have done anyways, and if you did, would have faced the same theoretical loss anyways. But if you have a super strong conviction in an asset, I would not put it in one of these pools.
- Gas prices – sadly right now gas prices are crazy! and so unless you are adding $5000+ to a pool its probably not worth messing around with this until Ethereum is upgraded to the point that costs are not as high. That being said there are very similar pools else where in crypto land that offer the same ideas without the huge transaction costs, but that is a post for another day. I highlighted Uniswap because it is the biggest and highest volume venue.
- Taxes – When you contribute to one of these pools its like you are selling your assets and receiving a new one in return. So this could be a taxable event, both on your way in and on your way out. For all tax matters of course check with a CPA that knows your particular situation.
From my perspective, if I knew Ethereum was going to win the blockchain wars I’d put way more money into these types of pools. The crypto ecosystem is always in massive flux and I don’t have strong conviction on the long-term winners here. But it is an interesting option for a crypto portfolio.
Side note – I have linked to and have been discussing Uniswap V2, there is a Uniswap V3 that actually operates in a different fashion, and one that is a bit more complicated than what I related above. My link were to V2 but if you search Uniswap you will be taken to V3 automatically just as an FYI, but you can simply switch over to the other versions when you get there. Also I mentioned MakerDAO and linked to it. There are certain rules about how loans operate from this group and with all things mentioned here do more work to understand it fully so you are not caught unawares by a nuance that you had no clue about.