I was recently given the opportunity to participate in a ponzi scheme. One of my crypto buddies found an “investment opportunity” that he thought would send his funds to the moon. The problem was that he couldn’t invest as much as he wanted, so he recruited me and 3 other people to participate on his behalf.
Then when the token moons, we want to split the profit (if there is any). Now, this letter isn’t about getting rich off of ponzi schemes, so much as it is a record of my experience using Ethereum to participate in this ponzi. The experience has only solidified my conceptions of Ethereum as a platform that is totally unusable for the average user.
Note on the Ponzi: The ponzi is called TempleDAO. It involves going through a set of complicated steps in order to be able to stake your tokens. This essentially buffers the flow of how many users can enter/exit the ponzi scheme at one time. The actual crypto platform really doesn’t do much, nor does it entitle you to anything special other than 3,600%+ APY on staked tokens.
It’s a ponzi scheme because the platform doesn’t provide any real world tangible benefit. The liquidity provided by later investors pays out whoever wants to sell their tokens. Since I staked yesterday, I will be able to sell my tokens in 6 weeks. As long as more people keep buying into this scheme, I will be able to sell my tokens at a profit 6 weeks from now. This is the messed up logic that is driving this “investment”. I don’t recommend doing this with your own money, I wouldn’t do it with my own money. This experiment is funded 100% by this friend of mine.
I realize this means that there will be “investors” left holding the bag so to speak. The rest of this article explains how/why this ponzi scheme is really only accessible to people who can afford to spend $1,000+ on transaction fees. This is not the retail investor.
Fees, Fees, Fees
Our friend Dan Clarke said it best on his twitter.
If this sounds like Dan is conflating reality and exaggerating the fees on Ethereum, think again. Let me lay out the fees that I paid to Ethereum for participating in this ponzi.
Our friend gave us 7 ETH (~$35,000) each. 6 ETH (~$30k) was for investing, as this was the total amount of money allowed by a single person. Then 1 ETH (~$5,000) was earmarked for fees.
5 Transactions Cost $1000
So in total, I ended up needing to do 5 transactions.
Allow my ETH to be swapped for FRAX, the token I needed in order to participate in the ponzi: 0.024416115172 ETH = ~$100
Try to swap 6.75 ETH for ~30k FRAX. This transaction failed and it cost me: 0.071847669354 ETH = ~$350
I tried the swap again and it succeeded. I swapped 6.5 ETH for ~30k FRAX and it cost me: 0.039977372692 ETH = ~$200
Then I needed to approve the spending/contributing of FRAX on the smart contract: 0.007621404091 ETH = ~$35
Finally, I could actually do the contribution sending FRAX into this contract to receive something called TEMPLE: 0.058940449127 ETH = ~$300.
In total, I spent close to $1,000 to convert ETH into TEMPLE. You can check out the transactions on etherscan below or by looking up my Ethereum address.
Swapping, Sending, and Earning
Okay, so obviously not everyone is going to want to participate in ponzi schemes through Ethereum, so what is the big deal? How much does it cost to swap one token for another, send ETH or some other ERC20 token, or deposit your funds into a lending or farming contract for earning?
Sending ETH: To send ETH it would cost me about 0.004 ETH or around $20.
Sending ERC20: To send any ERC20 token it would cost me about 0.014 ETH or around $70.
Swapping: To swap one token for another, it would cost me about 0.026381 ETH or $125.38.
Earning: To supply liquidity and earn interest on my money, it would cost me 0.029593 ETH or $140.61.
Check out this gas calculator for more details.
ETH2.0 Fixes This
The narrative is that ETH2.0 will fix the issue with high fees. Once proof of stake is fully implemented and the technology that makes up ETH2.0 is deployed, then the fees will come down. My critique on this point is the same as it was earlier this year when I published my detailed analysis of ethereum.
ETH2.0 has been in development for 4 years now, and its launch has continually been pushed back. It doesn’t exactly matter if ETH2.0 comes out eventually, it needs to come out soon. Projects like Cardano, Solana, BSC, and Crypto.org are all capturing DeFi and NFT market share.
Be careful investing in Ethereum
I don’t think the average individual knows that the fees on ethereum are as high as they are. Most of my friends that own ethereum have bought it, and are keeping it on an exchange. For them ETH is entirely an investment. However, I think it is problematic for people to invest in something they don’t understand.
If the utility of ethereum is that you can do all sorts of neat things with money inside of DeFi, then this use case is broken for 95% of the world. Most people cannot afford a $100 transaction fee to lock up their money in exchange for interest. So if the use case for ethereum is broken for most people, why is ethereum consistently hitting new all time highs?
I think it is because there is a strong narrative behind what ethereum is (A decentralized finance platform), and not a narrative on how well or accessible the actual platform and user experience is.
One day people who’ve invested in ether may want to actually do something on the ethereum blockchain. At which point they will send their tokens to a wallet like MetaMask. They will then find that if they want to send their tokens back to an exchange it’ll cost $20. Or, they will find that what they wanted to do within DeFi will cost them much more than they would gain (unless they’re putting in large amounts of money $25k+).
All I really want for people is for them to understand the risks they are undertaking. If they choose to still invest, then the result is on them.
Tokens Stuck on a Wallet
I have a friend that reached out to me recently. He bought some tokens in 2017, and would now like to sell them at a profit. The problem is that the tokens are only tradable on an ethereum DEX . A transaction on here would be something like $300 regardless of how much is being traded. A $50 trade will still cost $300 to make.
As my friend pointed out, the current fees on ethereum are absurdly high, even if you’re trading a large amount of money. It does seem like etheruem is a platform built exclusively for whales.
This friend of mine now is faced with the reality that he cannot sell his tokens. Even though the tokens are worth more than what he paid for them, it would cost much more than what he is willing to spend in order to do the conversion.
Prediction: Ethereum Gradually Loses Market Share
This has been my investment thesis for ethereum for quite some time. As far as I can tell, ethereum is running on the momentum it gained from the first movers advantage. It was the first smart contract platform, and I’m grateful for the development community contributing to, and building out an amazing DeFi ecosystem. That being said, it may be time for ethereum to (involuntarily) pass the mantle to its successors. That is, blockchains that are much more scalable and able to handle a global load of transactions and simultaneously keep fees low.
So you may make money investing in ETH, but keep in mind, once the cat is out of the bag about ethereum being unusable, I expect ether to decrease in value. I don’t see ETH2.0 being launched in any reasonable amount of time to save ethereum itself from losing market share, but I could be wrong about that. Regardless, stay safe out there and make sure you analyze your investments from all angles, not just the price trends!
Regards,
Keegan
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