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.
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?
- 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.
- 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.
- Investing in DeFi is relatively cheap. Many people who are into crypto 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.
- 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. 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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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!
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. 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:
- 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.
- 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.
As the biggest DeFi platform in the world, MakerDAO is positioned as one of the first stable coins pegged by the US dollar. 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.
New-age financiers focused on working with various digital assets should be interested in working with Synthetix. 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.
Some experts believe that Aave is a revolutionary platform that offers its users a wide range of investment opportunities by providing debt to investors. 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.
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. 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.
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.
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.
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. 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.
Should you start investing in DeFi?
Decentralized finance companies are a good alternative to many other forms of investments in the crypto industry. 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.