Unlike traditional financial institutions that rely on a central authority to manage and control financial transactions, centralized finance operates with a central authority, whereas DeFi operates on blockchain technology, which ensures transparency, security, and decentralization. The selling point of DeFi is that all projects are transparent and offer fair terms for everyone courtesy of smart contracts that have all the features and specifics written in an immutable form. All these contracts operate within a blockchain network that can be quickly monitored by anyone. The level of transparency is just amazingly enticing for many investors who want to put their money into something that have control over.
Introduction to Decentralized Finance
Decentralized finance, commonly referred to as DeFi, represents a revolutionary shift in the financial landscape. Unlike traditional financial institutions that rely on a central authority to manage and control financial transactions, DeFi operates on blockchain technology, which ensures transparency, security, and decentralization. At its core, DeFi enables people to access a wide range of financial services, such as lending, borrowing, and trading, without the need for intermediaries like banks or brokerage firms.
The backbone of DeFi is the use of smart contracts—self-executing contracts with the terms of the agreement directly written into code. These smart contracts run on decentralized applications (dApps) that facilitate secure and efficient financial transactions. By eliminating the need for a central authority, DeFi provides users with more control and autonomy over their financial activities. This democratization of finance has made DeFi increasingly popular, offering a glimpse into a future where financial services are more accessible and equitable.
Understanding DeFi Concepts
To fully grasp the potential of decentralized finance, it’s essential to understand its foundational concepts: blockchain technology, smart contracts, and decentralized applications (dApps). Blockchain technology is a distributed ledger that records transactions in a secure and transparent manner. Each transaction is verified by a network of computers, ensuring that the data is immutable and tamper-proof.
Smart contracts are the building blocks of DeFi. These are self-executing contracts with the terms of the agreement encoded into the blockchain. They automatically execute transactions when predefined conditions are met, eliminating the need for intermediaries and reducing the risk of human error.
Decentralized applications, or dApps, provide a user-friendly interface for interacting with DeFi protocols. These applications run on blockchain platforms like Ethereum and enable a wide range of financial services, including lending, borrowing, and trading. Investors can participate in DeFi by purchasing digital assets, such as tokens or coins, or by contributing to liquidity pools, which provide the necessary liquidity for various DeFi operations.
Benefits of DeFi
The benefits of decentralized finance are numerous and compelling. One of the most significant advantages is the reduction in fees. Traditional financial institutions often charge high fees for their services, but DeFi platforms operate with much lower costs, making financial services more affordable for everyone. Additionally, DeFi transactions are typically faster than those processed by traditional banks, as they are executed on blockchain networks that operate 24/7.
DeFi also offers increased accessibility. Anyone with an internet connection and a crypto wallet can access DeFi services, regardless of their location or financial status. This inclusivity empowers users to take control of their financial transactions and make informed investment decisions. DeFi platforms provide a range of investment opportunities, such as yield farming and lending, which can generate passive income. However, it’s important to remember that investing in DeFi involves risk. Potential investors should carefully consider their risk tolerance and time horizon before diving in, as the market can be highly volatile and security risks are always present.
How to invest in DeFi
Before we start talking about the process of investment, we need to address several important aspects of it. Why do people want to invest in DeFi?
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Governance is democratic. Multiple surveys indicate that investors do not like investing in organizations and companies that they do not have any control over. However, investing enough capital to become a board member is far from an entry level investment. Often, you will need millions of dollars to have the feeling of having a hand on the steering wheel. DeFi platforms often give token holders voting rights allowing them to choose the direction for the project.
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You can be sure that everything works just right. The idea of smart contracts immediately pulled in many people who were disappointed and disillusioned with the inner workings of the traditional economic system where banks and huge investment organizations manipulate the market while the government often covers for them. Decentralized platforms have many mechanisms preventing such behavior by allowing anyone to audit the ledger at any moment. DeFi platforms also allow users to borrow money by leveraging their crypto holdings as collateral, providing an alternative to traditional loans.
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Investing in DeFi is relatively cheap. Many people who are into crypto investment believe that they are still early adopters, which is true to a certain degree. Some DeFi platforms were taken aback by the Pandemic and the following recession. The moment is right to start investing in cheaper tokens and staking them on various DeFi platforms. Even if these investments won’t work out as intended, the initial cost is quite low.
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DeFi is a great diversification tool. The first rule for any investor is to keep their eggs in multiple baskets instead of betting on a single product or asset. DeFi earns money in a very particular way. You earn by receiving rewards and through asset appreciation. The level of risk is relatively high, but rewards can be extremely generous. Just remember to offset risks by also putting money into reliable investments like safer automated systems, copy trading, and DCA buying.
Other advantages of investing in DeFi come down to supporting your favorite networks, having a wide range of choices, and locking in assets which can be beneficial to some retail traders and crypto investors.
How can a beginner invest in DeFi?
While many people feel intimidated by the necessity to learn some new technical skills, it is quite easy to become a DeFi-focused investor. The technological complexity and the steep learning curve are the things of the past. Early projects relied on imperfect blockchain technology, mediocre user experience, and other issues which made working with DeFi annoying.
Contemporary DeFi platforms cater to a much wider audience by offering a simpler way to get started. Users can deposit funds into their crypto wallets to start investing in various DeFi platforms. Interfaces became intuitive and reminiscent of what a modern internet user might expect from any online service. The interoperability across the crypto industry improved allowing users to seamlessly transition from one platform to another.
Learning how to invest in decentralized finance is not as hard as it seems at the first glance. While technicalities may change from one DeFi project to another, you will, likely, follow the same step-by-step process:
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Create a crypto wallet supporting Ethereum and its ERC-20 tokens. The best choice is MetaMask because it is integrated with a diverse catalog of different products already established in the crypto market. MetaMask can be securely used as a browser extension for Chrome or Firefox.
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Purchase tokens and add them to your crypto wallet. Note that you need actual tokens on your wallet balance. They cannot be used if they are held on an exchange. Some CEX platforms allow their users to invest in DeFi platforms without withdrawing assets, but this is a suboptimal solution for many investors interested in working in the DeFi space.
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Select a protocol that you want to invest in. The crypto industry has a wide range of different platforms to offer. Some focus on providing specific financial services. Some lend money or offer unique investment opportunities. Use MetaMask to start staking or investing in these projects.
It is important to keep an eye on what is happening to your portfolio. The best way is to use specialized crypto portfolio management applications that allow you to track how different assets perform.
How to safely invest in DeFi?
The very process of investing in a DeFi platform is quite easy. It does not take much time. However, you still need to remember about certain risks associated with decentralized finance. We will briefly talk about some important risks that you must consider.
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Depreciation of assets. One of the biggest issues with DeFi is that their tokens often become speculative assets despite providing intrinsic value in form of financial utility. Speculative assets can depreciate quickly. If you are invested in a DeFi platform that requires you to lock in assets for a certain period, it can be detrimental to your portfolio.
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Smart contracts can fail. Despite the complexity and utility of smart contracts being the main focus of discussion for any crypto enthusiast, one should never forget that these tiny applications can have bugs and unintended vulnerabilities. Critical mistakes made during the development process may lead to loss of funds.
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Scammers and fraudsters. The sheer size of the crypto industry and the DeFi space make it hard for a newcomer to distinguish a good investment opportunity from a scam. Don’t ever try to learn how to buy DeFi tokens from social media or messengers. Go directly to platforms that catch your attention and check them too!
Unlike traditional banks that are insured by the Federal Deposit Insurance Corporation (FDIC), DeFi platforms typically lack such protections, making it crucial for investors to be aware of the risks.
One of the biggest problems with the DeFi industry is that some companies that push very specific marketing messages try to appear like something that has blockchain features. For example, Smart Mining is a notorious DeFi platform that used its deceiving marketing and posing as a community mining pool to extract money from their investors.
Being very careful when trying to find a good investment opportunity in the DeFi space is imperative if you want to build a solid portfolio capable of outperforming the market.
Identifying the best DeFi projects to invest in
DeFi returns depend on a large variety of factors. It is impossible to predict which projects will take off. DeFi projects often leverage blockchain based solutions to offer innovative financial services beyond traditional banking. However, you can still find something that suits your particular needs. There are two main approaches to choosing the right type of a DeFi platform:
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You focus on utility. Many platforms offer unique perks and benefits to token holders. For example, you may find a company that facilitates quick trading between blockchain networks. While investing in their service may be a mediocre financial decision, the value that you will receive by holding their tokens to receive discounts on transactions can outweigh the negatives of investing in them. Utility is a very important aspect of any DeFi platform.
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You focus on monetary gains. Some platforms offer better terms than others. If you are interested in making DeFi money, you should be looking at projects that have high yields and stable market positions. Investing in a coin that does not appreciate while receiving 100% annual return is a worse idea than putting money into something with 6.5% but with a token that appreciates over time.
Any investor interested in earning money in the crypto industry must also learn how to trade DeFi coins. The vast majority of retail traders often miss out on valuable opportunities by only focusing on holding or trading their tokens. Some experts believe that trading tokens with intervals used to stake or hold is a better strategy in the long run.
Combine various approaches to managing your DeFi assets to achieve good results and earn money consistently. The main priority of any crypto investor should be on achieving long-term success and reliability. Think about using tokens for DeFi mining pools or other forms of DeFi investing before selling them on the market for profit.
Let’s talk about some of the most interesting projects to invest in for DeFi-oriented retail traders and investors.
MakerDAO
As the biggest DeFi platform in the world, MakerDAO is positioned as one of the first stable coins pegged by the US dollar. The MakerDAO team continues to develop smart contracts that enhance the platform's functionality and security. By facilitating trading and offering its users a wide range of different ways to utilize USD-pegged tokens, this platform generates profits and focuses on improving the utility.
Smart contracts issued by the MakerDAO project account for over $5 billion in locked in funds providing massive liquidity and flexibility to everyone involved. If you want to invest in something safe and reliable, MakerDAO should be on your list of priorities.
Synthetix
New-age financiers focused on working with various digital assets should be interested in working with Synthetix. Synthetix also facilitates securities trading by allowing users to trade synthetic assets that mirror the value of real-world financial instruments. This innovative platform allows all users to trade synthetic digital assets that are based on the price action of real financial assets traded on various international and national exchanges. You may find digital analogs for all types of valuables in the real world including commodities, other digital coins, national currencies, and more.
The main utility of the SNX token is paying for fees accrued by trading digital assets with other participants of the network. You can also use SNX to mint new digital assets that can also be immediately released to the market.
Aave
Some experts believe that Aave is a revolutionary platform that offers its users a wide range of investment opportunities by providing debt to investors. Users can lend crypto on the Aave platform to earn interest on their holdings. If you are interested in making large investments and need financial help, Aave is here to help you out by lending you funds against your current crypto holdings as collateral.
The native token LEND has platform-specific utility which is paying transaction fees for your credit line. Investors interested in passive income may think about staking their tokens to provide additional liquidity to the platform.
Pancake Swap
As one of the most valuable services for thousands of retail traders, this decentralized exchange focuses on allowing users to swap their Binance Smart Chain BEP-20 tokens for other types of digital assets. Pancake Swap operates as one of the leading decentralized apps (dApps) on the Binance Smart Chain. The service is quite popular as it works directly with the biggest CEX platform in the world Binance controlling over 17% of the global market.
The CAKE token has been consistently gaining value since the big bump in popularity caused by the FTX debacle when many retail traders and investors decided to switch to working with decentralized exchange services.
Uniswap
Another hugely popular decentralized exchange that operates on the Ethereum network is also on our list of the best DeFi investment options for 2023. If you are looking for the best DeFi coins to invest in, this platform should be on your radar. It is a good place to start your DeFi journey as it allows users to buy a large variety of ERC-20 tokens.
Uniswap is a cornerstone of decentralized finance (DeFi), providing a platform for trading a wide range of ERC-20 tokens. The main mission of the Uniswap platform is to facilitate active trading in the crypto industry by focusing on the power of individual traders who don’t need the services of centralized entities to swap assets.
0X
The list of decentralized exchanges that allow users to trade without working with centralized organizations would not have been complete without 0x, one of the most popular projects in the recent times. Developers write smart contracts for the 0X platform to ensure secure and efficient trading without intermediaries. You don’t need to learn how to buy DeFi coins if you plan to work with this DEX service that offers unique features that are easy to grasp and start using efficiently.
Currently, smart contracts have over $1 billion in locked value which is an impressive achievement for any decentralized platform.
DeFi Investment Strategies
Investing in decentralized finance requires a solid understanding of the underlying concepts and a well-thought-out strategy. Here’s a step-by-step guide to help you get started:
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Prepare a Wallet: The first step is to create a crypto wallet that supports Ethereum and its ERC-20 tokens. MetaMask is a popular choice due to its integration with a wide range of DeFi products. It can be used as a browser extension for Chrome or Firefox, providing a secure and convenient way to manage your digital assets.
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Purchase Crypto Coins: Once your wallet is set up, you’ll need to purchase some crypto coins. These can be bought on various exchanges and then transferred to your wallet. It’s important to have actual tokens in your wallet balance, as they cannot be used if held on an exchange.
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Get Started with DeFi Protocols: With your wallet funded, you can start exploring different DeFi protocols. These platforms offer a variety of financial services, from lending and borrowing to trading and staking. Choose a protocol that aligns with your investment goals and risk tolerance.
Developing a comprehensive investment strategy is crucial. Consider your risk tolerance, time horizon, and investment goals when making decisions. Diversifying your portfolio by investing in different DeFi platforms and protocols can help mitigate risks. For example, you can trade DeFi coins, participate in liquidity pools, or invest in DeFi-related stocks and funds.
While DeFi offers numerous benefits, such as lower fees, faster transactions, and increased accessibility, it’s essential to be aware of the potential risks. Market volatility and security risks are inherent in the DeFi space, so take steps to protect your investments. By staying informed and making strategic decisions, you can potentially earn higher returns and build a robust DeFi portfolio.
Should you start investing in DeFi?
Decentralized finance companies are a good alternative to many other forms of investments in the crypto trading industry. The term DeFi refers to decentralized finance, which offers an alternative to traditional financial systems. DeFi has a tendency to move independently from the rest of the market in some scenarios making it a great diversification tool. The infamous FTX crash allowed many DEX platforms to quickly gain new users and significantly improve their cash flows propelling their native tokens to new highs.
DeFi can be a good destination for any investor, but many use various DeFi platforms to hedge against risks associated with being overly exposed to mainstream tokens like Bitcoin. You should also learn more about technical analysis to predict price changes ahead of locking in your assets.
