Trading and investing in digital assets has many pitfalls, but one that most newcomers tend to overlook is the risk of overpaying transaction fees when carrying out on-chain operations.
In a recent incident, an anonymous DeFi user paid $90k to transfer $2,200 worth of ETH; this transaction would have only cost between $5 and $10 given that gas fees on Ethereum have been hovering around 2 and 8 gwei over the past few weeks. A costly ‘fat finger’ error which is not so uncommon in crypto and traditional markets as well.
Other notable instances where crypto users have such mistakes include an NFT purchase where a trader paid $1.6 million instead of $1000 for one NFT. These cases are not unique to the newbies or retail participants, even some of the well established firms in crypto have made similar errors at some point; for example, Crypto.com erroneously sent $7 million to one of its users’ accounts in 2021.
So, how can newbies avoid finding themselves in such situations? For starters, it is imperative for any crypto user to learn how on-chain transactions work or are calculated. But as we can see from the above examples, even the best make mistakes. A more secure approach would be to complement this understanding by using DeFi wallets that have a simulation function like the Ambire self-custody wallet.
The Hidden Complexity of Gas Fees in DeFi
The concept of gas fees on DeFi is not only confusing to newcomers but also a good number of crypto veterans.
On Ethereum, for example, there are many nuances that one has to understand in order to calculate how much they would spend on a single transaction. A case in point is a new user who probably wants to buy some ETH or a different token via the Uniswap exchange.
The calculations are not as straightforward compared to buying through a centralized exchange like Binance or Coinbase where a standard transaction fee is set as a percentage of the total. On uniswap, the gas fees will be calculated as per the EIP-1159 update: Units of gas used * (base fee + priority fee).
Simple, right? Well, there are more nuances that one has to consider, including the possibility of sending the funds to the wrong address, fluctuation in gas fees, and the potential of price slippage during the transaction.
Why Transaction Simulations Are a Game Changer
As mentioned in the introduction, the fat finger error has cost both crypto users and tradfi markets huge fortunes. The answer is not always in sophistication, sometimes a simple action like running a ‘dry run’ before a transaction can go a long way in preventing some of the incidents that have been witnessed in the past.
So, how do on-chain transaction simulations work? To better explain this concept, let’s take the example of Ambire’s simulation feature. This self-custody wallet transforms transaction simulation through the integration of account abstraction and transaction batching. The wallet’s smart contracts are designed to provide a more flexible experience by abstracting complex account details to enhance users’ on-chain operations.
For instance, if one wants to interact with a DApp, Ambire simulates the transaction and shows the user how much will remain in their account once executed. In addition, it also allows DeFi users to simulate the cost of executing transactions in a batch. This can reduce the gas fees by as much as 20% during high network periods.
Of course, there are several benefits of running simulations before executing any on-chain operations;
Reducing Financial Risk
The most important factor is to reduce one’s exposure to risky executions. Instead of signing a smart contract execution with finality, yet blockchain transactions are irreversible, why not run a simulation before pulling the trigger?
This has worked for large investment firms and traditional banks which often run simulation models before allocating any capital. In DeFi, a transaction simulation is even more necessary given the complex nature of on-chain operations.
Better Understanding of Transaction Outcomes
A transaction simulation would also come in handy to help newbies make sense of transaction outcomes. For instance, the traders who have lost ETH as a result of the fat finger error would have probably held back had they seen the implications of the transactions they were about to execute.
Moreover, there are unique instances where a smart contract simulation can play a role in identifying malicious smart contracts. Assuming one runs a simulation, it would be possible to notice potential security breaches; this includes the triggering of unauthorized token transfers and wallet access.
Transaction Cost Estimation
Running a simulation is also important in ensuring that newcomers in crypto do not overpay gas fees. Most of the incidents mentioned in this article and other unfortunate scenarios were a result of lacking the proper estimation tools to see how much gas one would incur. With simulations, it would also be much easier to schedule transactions during low network periods, ultimately reducing the cost of on-chain operations.
Wrap Up
The crypto market is a double edged sword, it cuts both ways. But while we all agree that factors such as volatility catch most participants off guard, it is not worth losing one’s money through transaction errors. So far, simulation seems like one of the strategies that newbies can embrace to prevent silly mistakes that can cost a fortune. Of course, it is also important for one to keep on improving their understanding of the crypto market, and major upgrades that have an effect on how transaction or gas fees are calculated.
