A Wallet Transaction Simulation Can Prevent Costly Mistakes in DeFi Trading
Decentralized Finance (DeFi) has undoubtedly changed the way crypto natives view modern-day finance since the debut of the first protocols in the summer of 2020. However, despite being around for four years, most DeFi applications suffer from being overly complex, and as a result, have contributed to several users overpaying gas fees.
The situation is worse in DeFi ecosystems that run on the Ethereum blockchain, where gas fee calculation can be a bit technical for a new crypto user. Further complicating issues, most of the non-custodial wallets that currently exist do not have a very friendly user interface, which has also been a cause of several DeFi and NFT fee-attributed losses.
In one instance, a Bored Ape NFT owner listed the digital asset for 0.75 ETH instead of 75 ETH, resulting in a loss of close to $300,000. According to the owner, the error was mainly caused by lack of attention, and of course the irreversible nature of on-chain transactions.
How can new crypto users avoid similar pitfalls? The first step is by understanding the transaction intricacies of smart contract blockchains, most notably Ethereum where users pay gas fees for their transactions to be validated.
What is Gas Fees in DeFi?
In layman's terms, gas is essentially the 'fuel' that powers operations on the Ethereum network. This unit of measurement is used to determine how much computational work is required for a specific transaction on Ethereum, after which a fee is factored in, and a user then pays the 'gas fee' for the transaction to go through.
The on-chain fees are paid in ETH but denominated in gwei, a smaller ETH unit. Each gwei is equivalent to 0.000000001 ETH or 10-9 ETH or one-billionth of an ETH.
Before the implementation of EIP 1559 in August 2021, DeFi natives would bid a random figure to pay for a given transaction. This competitive bidding process triggered gas fees on Ethereum to skyrocket, especially during high network activity periods. Some transactions during the DeFi summer attracted as high as 1500 gwei in fees.
However, the EIP 1559 introduced a more standardized pricing model made up of two components, base fee and a tip. The former is the minimum amount one is required to pay for their DeFi transaction to be considered valid. It is usually determined by the protocol. Meanwhile, the tip is a priority fee that one can pay for their transactions to be prioritized.
Sounds simple, right? Of course, calculating the gas fees may be a seamless endeavor for DeFi veterans, save for outlier incidents as was the case with DeversiFi, a crypto asset trading platform that paid out a $24 million fee. Luckily, in this instance, the recipient returned the money after a few days.
But what if you’re just starting out? Naturally, you would be better off taking additional measures, including carrying out transaction simulations before pressing the green or red button.
DeFi Transaction Simulation
Like most traditional forex trading platforms that offer demo trading accounts, DeFi applications ought to provide simulation ecosystems. This way, new users will have a better and more lenient opportunity to learn about the ecosystem without putting their funds at risk.
More importantly, there is also a need for transaction simulation interfaces such as the one featured on Ambire’s Web3 wallet. Unlike typical DeFi wallets where one can only account for how much a transaction costs after it has fully gone through, this non-custodial wallet allows DeFi and NFT users to run a transaction simulation to know how much a transaction will cost even before signing it.
To add to this, Ambire features a prepayment gas fee model, thanks to its gas tank feature. Both DeFi natives and new crypto users can leverage this infrastructure to pay for gas fees in any stablecoin or other native digital assets, including ETH and MATIC.
Once you get the hang of calculating gas fees and running transaction simulations, you can go a notch higher to employ more sophisticated mechanisms such as setting gas limits or switching blockchain networks, depending on which one offers the best rates or cross-chain functionality.
As it stands, Ethereum is still the most expensive DeFi blockchain, which explains why more DeFi users are migrating to other Layer 1 alternatives like Solana and Ethereum rollups such as Optimism and Arbitrum. Fortunately, most of the existing non-custodial wallets, including Metamask and Ambire, support multiple DeFi environments.
Conclusion
DeFi innovations have grown into a $91 billion ecosystem in terms of total value locked (TVL), according to DeFi Llama metrics. Although impressive, this figure could be much higher if the onboarding journey were made simpler. Currently, even calculating gas fees is still a hurdle, which is part of the reason we choose this topic. On the brighter side, however, novel solutions such as transaction simulation could play a significant role in guiding both veterans and new users as to how much they should budget for every specific transaction.
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