The fast-paced adoption of decentralized finance (DeFi) technology resulted in the proliferation of blockchain-based services. Such developments led to enhanced accessibility of digital assets. Peer to peer transactions (P2P) simplify the process of purchasing products using cryptocurrencies and streamline other operations. Borrowing and lending money is now easier than before due to the introduction of automated protocols. Investors choose between the most result-yielding strategies depending on their willingness to face risks. In this guide, we will consider how to invest in DeFi and what approaches bring about the most positive outcomes.
DeFi vs. Crypto
Market participants often miss the important difference between DeFi and cryptocurrency. While the former refers to the existence of a parallel economy on decentralized exchanges, the latter is used to describe virtualized money. The DeFi crypto difference is easier to comprehend if one considers tokens as blockchain assets that can be sold without intermediaries on specific platforms.
The term DeFi describes the network where virtual assets are used as a medium during financial transactions. When utilizing a decentralized application (dApp), users get incentives and participate in voting.
There are staking, borrowing, exchange, and derivative dApps. Within a single ecosystem, tokens allow participants to perform all sorts of operations without relying on banks and other institutions.
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DeFi Investment Strategies
The recently emerged financial environment offered a wealth of opportunities for holders to increase their earnings. The exposure to newly formed financial markets led to the development of various approaches, helping investors to capitalize on technological trends. Below, we have outlined the most common strategies for those who want to know how to invest in decentralized finance:
- Purchasing tokens: After learning about the most potentially profitable offerings on the markets, traders purchase tokens based on DeFi protocols. Well-known examples of such assets include Uniswap. Those who want to diversify their portfolios and learn how to invest in DeFi choose specific coins to get exposure to edgy ecosystems.
- Investing in index tokens: As it may take a while to find an asset worthy of attention, traders are looking for any chance to counter the threat of volatile prices. When conducting operations in an environment where information constantly changes, the usage of index tokens facilitates investing funds without monitoring the development of specific protocols. The Pulse Index was created for those who want to learn about the recent advancements in the most widely used networks. After purchasing such assets, investors can entrust the actual allocation of money to the seasoned managers, allowing them to get a broader portfolio.
- Lending: This approach is preferred by those who are interested in DeFi investing and want to lend their assets to earn passive income. After becoming a liquidity provider, everyone can earn rewards for putting their assets into a common pool. Such services as Compound Finance allow users to participate in P2P lending operations protected by the power of smart contracts. The lending platforms rely on powerful algorithms safeguarding participants from losses. Interest rates are calculated automatically depending on the market situation.
- Yield farming: This method requires investors to put their tokens into a liquidity pool of specific DeFi protocols to earn tokens as rewards. The approach remains popular among those who are interested in percentage yields and lower transaction fees.
Regardless of the strategy adopted by investors, they should strive to increase gains without exposing portfolios to risks. It’s essential to conduct in-depth research of the market’s fundamentals to reliable assets that can become potentially valuable.
How to Invest in DeFi: A Step-by-Step Guide
Purchasing the most promising assets and holding them for a prolonged period without reacting to fluctuating prices is challenging. A person without any experience should follow a well-thought-out strategy to succeed. The common recommendations include the following:
- Choose a secure wallet: Hot and cold storage options allow investors to protect their assets from unauthorized access and facilitate trading operations.
- Buy coins: Using web-based services, anyone can purchase popular tokens.
- Find suitable protocols: Various platforms offer different investment options. Connecting a wallet to such services is a streamlined process.
- Monitor your investments: Experienced traders understand the significance of keeping an eye on a portfolio using dedicated tools. Modern services enable anyone to track transactions and assess the overall performance.
Before adopting DeFi investment strategies, one should consider the possible obstacles and learn how to circumvent the issues that may arise.
Pros and Cons of Investing in DeFi
Earning profits on DeFi markets requires considering the potential upsides and downsides of buying such tokens. The most common advantages include:
- Substantial gains: Some coins increase in value rapidly, allowing investors to earn significant amounts of money.
- Extensive accessibility: Users do not have to adhere to strict KYC regulations to access DeFi products. Participating in liquidity pools requires a person to have a wallet with digital holdings.
- Portfolio diversification: The purchase of index tokens allows holders to reduce risks.
Crypto markets are known for their high volatility and price swings. Besides, smart contracts may be targeted by malicious users who seek to explore their potential vulnerabilities. Some prior technical knowledge is also necessary to better grasp market developments and differences between protocols.
Everyone can earn substantial returns after discovering how to invest in DeFi and protect assets from scammers. Recognizing the cyclical nature of crypto markets is also necessary to avoid buying coins where prices are about to go lower. Adopting the right strategy and taking the steps needed to secure tokens are the first steps an investor should take to build a strong portfolio.
