DeFi can definitely become a word of the year in terms of crypto space. For the first time, decentralized exchanges have bypassed centralized exchanges in popularity. Decentralized finance has attracted an incredible number of new investors willing to invest their assets in liquidity pools to make a fortune.
However, investors should not forget that the cryptocurrency market is very volatile. We have prepared 5 tips for investors that you can follow to survive in the world of DeFi.
When you decide to invest in the DeFi token market, do your own research on the project you are interested in. This is a fairly common piece of advice, but in the world of DeFi it is crucial. We have already written everything about the DeFi market and new technologies in this area. Take a look at the selection below:
- Decentralized Finance (DeFi) in Crypto Explained
- Guide on Yield Farming of DeFi Tokens
- Why DeFi Is Going to Fail: Solution and Consequences
Follow the Communities
As soon as you have decided on a platform and studied the documentation, find user communities on social networks. There are many forums and social networks such as Reddit, Twitter, Telegram and other DeFi communities. Each project can have its own topic on any cryptocurrency forum, such as BitcoinTalk. By tracking the successes and failures of a particular project, you can easily decide when is the right time to invest or withdraw money.
Social networks and blogs can provide valuable information. Check if there is a project on sites like DeFi Prime, DeFi Pulse, DeFi Market Cap. Only authoritative protocols go there.
Look Out for Risks
Risk management is an integral part of everything related to money and decision making. In the world of DeFi, there is even a certain classification of risks that can overtake an illiterate investor. Since the DeFi market is decentralized, there is a regulatory risk. Every project shows its own requirements and laws so that it can change the level of decentralization.
Since there are many projects that offer cryptocurrency lending and borrowing, there are volatility and collateralization risks. Sometimes platforms use excessive collateral to reduce the risk of volatility. If the value of the collateral falls sharply, then this will incur consequences.
Most DeFi protocols run on smart contracts. It is a complex technology that requires extensive testing and analyst expertise to ensure that it’s secure and successful. It is necessary to wait sometime after the project’s launch and not invest money in it not to lose everything.
Keep Track of Gas Prices
Most of the DeFi projects are based on the Ethereum blockchain. Accordingly, any transactions require gas, which is so much more expensive, given the popularity of the sector. The right strategy can help you avoid high commission prices. By the way, we have already talked about the principles of gas operation. If this is unfamiliar to you, feel free to read this article.
Follow the DeFi Investor Checklist
- Make sure that the project is not fraudulent, and that it has been verified by well-known auditing companies (e.g., Quantstamp and OpenZeppelin) and there are no critical vulnerabilities or bugs. If you understand smart contracts, then you can look through them by yourself – honest projects always upload open-source code. Also, make sure that the contract is on Etherscan or another blockchain explorer.
- Don’t invest more than you can afford to lose. This is the investor’s main rule, not only in relation to DeFi but absolutely to any asset. Do not take out loans for these purposes, do not make purchases with a credit card, and do not go into debt.
- Remember to diversify your investment portfolio. Do not make your portfolio only DeFi-oriented. In case the whole DeFi market will drop, the mastodons in your portfolio will stay alive.
It is not easy to find a protocol that fully meets all the selection criteria. The field of DeFi and investing in it is still in its infancy. There are many experiments and innovative ideas in it. Some are destined to achieve universal acceptance, and some will not stand the test of time. If you want to invest in DeFi, pay attention to studying different types of projects, and do not invest more than you can afford to lose.