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Mar 20, 2023

How to invest in DeFi

The field of decentralized finance is one of the most attractive to investors and a fast-growing part of the cryptocurrency market. It attracts many people with the prospect of potentially high returns at relatively low risk. A few years ago, skeptics predicted that the decentralized finance bubble would burst due to its rapid growth, but on the contrary, this sector has seen even more growth.

The rise of decentralized finance is also due to the popularity of cryptocurrencies, and their gradual acceptance by society and the state. New DeFi platforms are emerging almost daily, and leading international venture capital funds are actively investing in them. If the momentum continues and the cryptocurrency market continues to grow in 2023, we can expect the decentralized finance sphere to become even more developed and offer more opportunities.

So if you don’t know how to invest in DeFi, be sure to read this material. We will tell you what opportunities this field offers to investors and how to avoid risks.

How to invest in DeFi projects?

So, decentralized finance consists of an ecosystem of DEX, DeFi applications, stablecoins, DeFi tokens, and other financial tools based on blockchain (most DeFi platforms use the ETH network). These networks operate autonomously and cannot be controlled by any governing body. The financial services offered by the DeFi platforms are almost identical to the ones provided by traditional financial authorities.

But the most important advantage of DeFi applications is that anyone can make money with them. Of course, the industry is categorized as technically complex, so people encountering it for the first time may be intimidated. But, despite the newness of the infrastructure, the decentralized finance area is open to people who want to learn how to make a profit from it. Now, investing in DeFi projects can be done in a few different ways:

  • Direct DeFi investment. You can invest directly in some projects by purchasing DeFi tokens or coins through a DEX such as Uniswap or Sushiswap. You’ll need to have a digital wallet that supports the specific DeFi token or coin you wish to purchase.
  • DeFi funds. You can also invest in DeFi funds, which are managed portfolios of various projects. These funds are typically managed by a professional investment manager and offer diversification across multiple platforms. 
  • Staking. How to stake tokens? Staking is the process of holding and keeping a crypto in a digital wallet to support the security and operation of a particular project. In exchange, investors receive rewards in the form of additional DeFi tokens or coins. 
  • Yield Farming. This is the process of lending your crypto to a project in exchange for rewards. Yield farming can be a high-risk, high-reward strategy, and it is important to thoroughly research the DeFi protocol and understand the risks before participating. 

Interactions in DeFi are based on smart contracts — special algorithms that ensure that parties abide by the terms of the contract. Today, smart contracts are used in a wide range of DeFi applications, including exchanges, DeFi lending platforms, stablecoins, prediction markets, insurance, and more. 

It is important to do your analysis and understand the possible dangers of DeFi investing before making any decision. It is also recommended to start with small DeFi investments and gradually increase your holdings as you become more familiar with this ecosystem. 

So, If you have no idea how to invest in DeFi and want to choose the most suitable option, you should sort out all the available solutions. We’ll look at both the DeFi investments listed above and a few new options.

DeFi tokens and projects investments

Investing in DeFi tokens is a way to buy assets in anticipation of their growth. The appeal of this DeFi investment approach is that a DeFi token has the potential to appreciate rapidly, sometimes by thousands of percent within hours of its release. 

However, the high volatility of new crypto tokens presents a challenge. While it is possible to make significant profits quickly, the risk of loss is also very high. It is important to be aware of this danger and to carefully consider your strategy before you invest in DeFi tokens.

DeFi funds

These funds typically invest in a range of DeFi protocols, including those that offer DeFi lending, borrowing, DEXes, and other financial services. By investing in a diversified portfolio of projects, funds can help investors manage risk.

Stake crypto tokens or coins

You may have already searched for info on how to stake cryptocurrency. So, if you need passive income from cryptocurrency, staking is a great option. This means that assets are locked in a crypto wallet and all participants create a staking pool so that the network gets quality operational support. Also, the number of tokens in circulation is reduced, so the rate doesn’t decrease and the risk of inflation is minimized.

Staking is possible with ETH, BNB, and some other tokens of the network. To benefit from staking, you need to keep the funds in a crypto wallet. Rewards are paid by the network, so you don’t have to rely on third-party intermediaries. But DeFi involves other people using your tokens (not for free, but for interest).

Yield farming DeFi protocol

This is a popular DeFi protocol that allows investors to earn a return on their cryptocurrency holdings. In yield farming, people lend or provide liquidity to a DeFi protocol in exchange for interest or rewards. The strengths of this type of DeFi investment include:

  • The possibility of getting a good extra income.
  • You can influence the DeFi protocol by shaping it according to your needs.
  • High chances to invest in a promising token and earn a lot.

Farming became popular after the Compound DeFi protocol appeared. It distributed COMP tokens to those users who contributed funds to the platform or took decentralized credits. People get additional rewards, and the crypto project grows faster by encouraging participants to be active.

P2P lending

In decentralized lending, lenders and borrowers interact via blockchains. One person borrows in cryptocurrency at interest, leaving collateral in crypto as well. The investor, on the other hand, puts his assets into the liquidity pool and earns a profit. This is beneficial not only for the person who needs a loan but also for the owner of the cryptocurrency, who has free tokens and can lend them at a good interest rate.

Trading on the DEX

This is a way of trading on the exchange using borrowed funds. Leverage allows the trader to use many times the number of funds available. The trader borrows assets from lending DeFi protocols. Investments can be made by lending their unused cryptocurrency to people at interest. The risks of losing funds are controlled by smart contracts. Today, centralized exchanges are typically regulated by a central authority, while DEXes operate without intermediaries.

How much money do you need to use the DeFi protocol?

The amount of money required to use DeFi protocols can vary depending on the specific platform and intended case. Let’s look a little more closely:

  • For example, many platforms allow users to borrow or lend small amounts of cryptocurrency. People can deposit as little as $10 worth of crypto to begin earning interest or borrowing funds.
  • However, some protocols may require a minimum investment of cryptocurrency from your wallet to participate in certain features or earn rewards.
  • Additionally, it’s important to consider associated transaction fees, especially during periods of high network congestion on the underlying blockchain.

In general, many platforms have no minimum requirements for people who want to invest in DeFi, allowing users to start with small amounts of cryptocurrency. Don’t forget that you need a wallet to store your funds before you can invest in a specific project. Make sure you choose a wallet that supports the token or coin you want to use for the DeFi investing strategy. It is very important to review the features of the wallet and pay attention to its security mechanisms.

Choosing the right strategy to invest in DeFi

The strategy you choose determines how much/how long you invest and the list of assets in your portfolio. There are three main options: conservative, moderate, and aggressive. Next, you can select the assets: 

  • Growth expects to grow for some reason, so you can sell in time to lock in profits in a short-term or long-term perspective.
  • Yielding generates passive income (when you stake tokens) or provides a stable option, such as stablecoins.

Given the main risks, a conservative strategy would be to invest in known projects using stablecoins. With an aggressive option, the person invests in growth assets and new projects with the expectation of high returns.

When choosing projects to stake digital assets or make investments, you must understand the market situation. You also need a special wallet to work with crypto (be sure to read about how to choose the best wallet). And in general, every investor should understand that this market remains volatile and risky.

This is a rapidly evolving field because new DeFi applications and projects are emerging all the time. Stay up to date on the latest developments in DeFi financial services by reading news articles, following social media accounts, and participating in online communities.

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