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DeFi
6 min

How to Invest in DeFi

Published on
June 22, 2022
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How to Invest in DeFi

It is simple to invest in DeFi, but this is not true for everyone. Beginners have difficulty grasping basic crypto principles that DeFi features add to their woes. Let's change that by demonstrating how to invest in DeFi most straightforwardly.

The only individuals who haven't heard of DeFi are those who have been living under a rock and extreme Bitcoin maximalists. You have most likely seen at least one individual talk about decentralized finance if you have an internet connection and access to Crypto Twitter.

DeFi isn't just a niche that rose to prominence following a particularly tumultuous period in the crypto market. DeFi, on the other hand, is a new phase in the evolution of digital assets that aims to institutionalize a key feature of the blockchain: decentralization.

Given our technology, there is no justification for centralized finance to exist today. As a result, many crypto enthusiasts have backed the DeFi market's growth. After all, who wouldn't want to support a movement that eliminates all bureaucracy and intermediaries?

So, what's all the fuss about, and how can complete newcomers get involved in the new market? Let's take it slowly and carefully. Before we teach you how to invest in DeFi, we'll go over the segment's importance and all of the market's risks.

Decentralized finance is a subsegment of the bitcoin market that deals with decentralized financial instruments, as the name implies. In DeFi, you'll find anything from cash instruments to derivatives to investment vehicles, with the main distinction being that they're decentralized, unlike TradFi.

Traditional finance is obsolete by DeFi, which provides financial services without conventional financial intermediaries such as brokers and banks. You can do things you couldn't do in real life, like taking out a loan on a Sunday night with no collateral and keeping your crypto assets in a personal wallet.

With the help of smart contracts and the Ethereum network, all of this is feasible. Every action in DeFi is conducted through such self-executing contracts, which the user exclusively controls, with no central entity exerting its influence or will.

Is it safe to invest in DeFi?

The DeFi market bears a striking resemblance to initial coin offerings (ICOs), a similar mania fueled by the Ethereum network a few years ago. For anyone there to see the exhilaration, it's clear that investing in cryptocurrencies came dangerously close to being equated with gambling.

We'll be in a similar predicament in 2021. Every day, new projects are launched, and there is an abundance of anonymous coders professing to be Solidity specialists. Some projects achieve brilliance and change the trading landscape forever. Regrettably, such undertakings are few and few between.

The harsh reality is that the majority of DeFi ventures are complete scams. Anonymous users frequently fork other projects or use an ERC-20 generator to produce a phony cryptocurrency. These projects recruit gullible investors and steal their money after employing deceptive marketing techniques.

The aforementioned harmful action is so standard in the DeFi market that it has earned "rug pulling" from the community. You invest in a food-themed token, and the project's designers yank the rug out from under you and take all of the liquidity for themselves just hours after it is listed on Uniswap.

We are not attempting to scare you or discourage you from engaging in the DeFi market by explaining this phenomenon. Instead, we want to demonstrate how difficult it is to participate in a market if everyone's behaviors are hidden behind anonymity.

After this discussion, let's get down to business and tackle the central question: is DeFi a safe investment? It depends on who is asking the question. DeFi is a secure market for experienced cryptocurrency traders who know their way around and are familiar with the industry's culture. It may take numerous rounds of trial and error for newcomers to figure out what works and what doesn't.

Scams aren't the only risks.

Trust isn't the only risk factor to consider when it comes to investing in the DeFi market. It is, without a doubt, the most significant, but other variables are far more challenging to comprehend.

There is one significant danger associated with staking: time-locks. You must lock your assets for a specific period if you want to earn an interest rate by providing your assets for the safety of a DeFi project. Let's imagine you invest in DeFi tokens for a year at a 20 percent annual percentage yield. You will be unable to unlock and sell your assets if the market takes a drastic turn and values begin to fall.

Users who engage in yield farming risk experiencing a temporary loss. You will experience temporary loss if an asset gets increasingly volatile and loses or acquires too much value in a short period. What exactly does this imply? You would have been more profitable if you kept onto the assets if the asset pumped 100% and you were providing liquidity during that time. Consider it an opportunity expense.

Another risk vector that we take for granted is smart contracts. You will lose all of your money if you are yield farming or lending assets and the smart contracts that hold your assets are hacked. Because the exploitability of a smart contract is dependent on the developer who created it, this is the only form of risk on which you cannot take any action.

To stay solvent, great and lucrative investors must be aware of these risks. Take these risks seriously and don't believe they'll never happen to you.

Crypto vs. DeFi

Should you invest your money into DeFi, or should you remain with traditional crypto altcoins? There is life outside of the Ethereum ecosystem; thus, it should come as no surprise that there are many other investment options than decentralized finance. But let's see if DeFi is a better option than crypto.

Decentralized finance currently has $35 billion in collateralized assets, according to market statistics from DeFi Pulse. This is a strange fact for most people, considering that this specialized market was originally only worth $1 billion. Is it possible that the industry has altered so much in a year?

There is no doubt that crypto is a market that moves quickly and changes patterns every month. However, those characteristics bring with them their own set of issues. How can we distinguish between long-term trends and fads when new trends appear frequently?

We've previously mentioned how DeFi is similar to initial coin offerings (ICOs). However, we want to emphasize that DeFi has endured the test of time and has lasted considerably longer than anyone anticipated.

Three common ways to invest in DeFi

In DeFi, there are a variety of ways to make money. Rather than picking one strategy and forgetting about the others, we propose that you try all three. That way, you'll be able to see for yourself if there's a specific technique that fits your psychology and personality.

1. Trading DeFi assets

Trading or investing in DeFi assets is the most profitable way in this market, depending on total profitability. Users can trade for long-term or short-term holds on non-custodial decentralized exchanges like Uniswap, SushiSwap, and Bancor.

When such an opportunity emerges and market circumstances are apparent, most people invest by buying low and selling high. DeFi assets frequently double or treble in value in a short period due to their low market capitalization. As a result, they're ideal assets for significantly increasing the size of your portfolio.

Others desire to be among the first to participate in a newly established project. Those who understand how smart contracts function and can tell whether a project is legitimate or not simply by reading them can make a fortune separating excellent projects from scams. Because investors pay presale prices for tokens that will climb 5 to 10 times after they are published on Uniswap, the payout is much higher in this situation.

Finally, we have day traders who continually buy and sell tokens at the smallest profit margins. A 20% price rise is sufficient for these people because they want to repeat their achievement at least a few times throughout the day.

Trading DeFi assets, as you can see, is far more complicated than simply buying and selling a token. There are numerous trading styles available, and it is up to you to determine which one is ideal for you.

2. Yield farming

Do you like the idea of earning money without having to work? There is nothing better than making money without having to do anything for some people. In the universe of DeFi, yield farming is the simplest way to have that fun.

Yield farmers make a living by supplying liquidity to a decentralized exchange in the form of cryptocurrencies. The DEX uses this liquidity to fulfill orders placed by fee-paying token swappers. Yield growers receive a percentage of these fees based on their contribution.

A yield farmer's goal is to join the liquidity pool with the highest yield. They frequently switch from one liquidity protocol to the next in search of the best prices. You may want to hunt for the finest techniques to optimize your profits, but money is still to be made simply by depositing your assets in a Uniswap LP and forgetting about them.

3. Earn interest on a lending protocol

Borrowers and depositors interact using lending protocols, which are decentralized loan platforms. While one group provides liquidity in exchange for interest, the other group receives liquidity in a loan and pays interest.

Variable and fixed interest rates are available on lending platforms like Aave. Variable interest rates fluctuate depending on the demand for the item. On the other hand, fixed interest rates remain constant regardless of market conditions.

Here's a tip: fluctuating interest rates on Aave can help you optimize your gains in a bull market. Switch to fixed interest rates and stabilize your income as the market enters a gloomy period.

The Bottom Line: Should You Invest in DeFi?

Decentralized finance is a complex world to navigate. Users can make a lot of money in a short period, but they can also liquidate their entire portfolio at the same time. Although the danger is significant, the quantity of opportunities is far greater.

DeFi, being a new market, still needs to establish itself and carve out a distinct niche. Will it be a safe and secure environment for decentralized initiatives, or will it continue to be a haven for malevolent actors like scammers and hackers?

No one else but the community will make the decision. At this pace, DeFi will most certainly remain in the wild west of crypto, much like ICOs did in 2017. However, after ecstatic investors fade out and realize that 1000 percent APY returns are unsustainable, the niche market will mature over the next few years.

Finally, should you invest money into DeFi? We are unable to respond to that inquiry in your place. Given the segment's massive array of options and new characteristics, it would be silly not to promote it. Nonetheless, we advise you to follow our warning: do not put your trust in everyone, and think twice before investing in a project - it could be your last.