How to Invest in DeFi?

7 min readJul 18, 2022

In the new world of DeFi, some people are making a lot of money. Others are losing all they own. It’s crucial to understand how DeFi works before investing.

DeFi is simple to invest in, but it is not for everybody. Newbies have such a hard time grasping elementary crypto principles, that DeFi functionalities simply add to their troubles. Now let us remedy that by demonstrating how to invest in DeFi in the most straightforward manner available.

DeFi isn’t simply a fringe that rose to prominence during a particularly tumultuous period in the crypto industry. DeFi is a new stage in the development of crypto-assets that aims to actualize decentralization as a key feature of the blockchain.

There is no rationale for centralized finance to stand anymore, given the technologies we have. As a result, many crypto aficionados have backed the DeFi market’s growth.

Now, what’s the whole excitement over, and how can total newcomers get involved in the new industry? Be careful; you don’t want to overdo it. As you learn how to invest in DeFi, we’ll go over the value of the sector and all the market’s concerns.

What exactly is decentralized finance (DeFi)?

Decentralized finance is a subsegment of the crypto industry that works with decentralized financial products. In DeFi, you’ll find everything from monetary tools to derivatives to investment models, with the main distinction being that they’re decentralized.

Traditional banking is made useless by DeFi, which provides financial services without the use of traditional financial mediators such as brokers and banks. You could be doing things you couldn’t do in everyday life, like take out a loan on a weekend night with no collateral and keep your crypto assets in a private wallet.

With both the aid of smart contracts and the Ethereum network, all of this is feasible. Every activity in DeFi is handled through self-executing contracts, which are completely controlled by the user, with no central entity exerting its will.

Is it safe to invest in DeFi?

The DeFi market bears an uncanny similarity to initial coin offerings (ICOs), a comparable frenzy fueled by the Ethereum network a few years ago. For anybody who was there to see the excitement, it’s clear that investing in coins came dangerously close to being equated with betting.

Every day, new projects are launched, some initiatives achieve brilliance and change the trade landscape forever. Regrettably, such initiatives are few.

The harsh fact is that the majority of DeFi initiatives are complete shams. Unknown users frequently fork existing applications or use an ERC-20 generator to generate a fake coin. These projects lure gullible investors and take their money after employing deceptive marketing techniques.

The foregoing harmful conduct is so common in the DeFi market that it has earned the label “rug pulling” from the community. You invest in a cat-themed token, and the project’s developers yank the rug out from under you and steal all the liquidity for themselves just shortly after it has been listed on Uniswap.

By discussing this phenomenon, we are not attempting to alarm anyone or dissuade you from engaging in the DeFi market. However, we want to demonstrate how difficult it is to participate in a market when everyone’s behaviors are hidden behind anonymity.

After all of this discourse, let’s get down to business and tackle the real question: is DeFi a safe investment? It varies depending on who is asking the question. DeFi is a safe market for experienced cryptocurrency traders who know their way around and are familiar with the industry’s mindset. It may take numerous cycles of experimentation for newcomers to properly figure it out.

Technical Risks & Threats

When it comes to investing in the DeFi market, trust isn’t the only risk factor to consider. It is, without a doubt, the most significant, but other aspects are far more difficult to comprehend.

There is one big danger associated with staking: time-locks. You must lock your assets for a specific period if you want to earn an interest rate by locking up your assets for the safety of a DeFi project. Let’s assume you invest in DeFi tokens for a year at a 40 percent annual percentage yield. You would be unable to access and trade your goods if the market takes a sudden turn and values fall. This is known as impermanent loss.

Users who engage in yield farming run the risk of experiencing a temporary loss. You will experience temporary loss if an asset gets increasingly volatile and loses or acquires too much value in a short period. That means it would’ve been more profitable for you to just hold the assets if they jumped 50–100% in value.

One risk factor that we take for granted is smart contracts. You will risk all of your funds if you are yield farming or lending assets and the smart contracts that store your assets are hacked. Since the exploitability of a smart contract is completely dependent on the programmer who created it, this is the only sort of risk on which you cannot take action.

To be sustainable, outstanding, and highly profitable, investors must be aware of all these dangers. Take these hazards seriously and don’t pretend they’ll never occur to you!

Crypto vs. DeFi

Should you put your money into DeFi or should you continue with traditional crypto altcoins? There is life outside of the Ethereum ecosystem, therefore it should come as no surprise that there are a plethora of alternative investment options outside decentralized finance. But let’s see if DeFi is a better option than crypto.

Decentralized finance now has $78 billion in leveraged assets, as per market statistics from DeFi Pulse. This is a surprising fact for most people, given that this specialized industry was originally only worth $1 billion. Is it possible that the industry has altered so much in a year?

There is no question that crypto is a market that moves quickly and changes patterns every month. However, such characteristics bring with them their own set of issues. How can we tell the difference between long-term trends and fads when new trends appear so routinely?

We’ve previously mentioned how DeFi is comparable to initial coin offerings (ICOs). However, we want to emphasize that DeFi has weathered the test of time and has lasted considerably longer than anyone anticipated.

Three common strategies for investing in DeFi

In DeFi, there are a variety of methods to generate money. Rather than picking one approach and forgetting about the others, we propose that you try all three. That way, you’ll be able to see for yourself if there’s a certain method that fits your mentality and style.

1. Buy & Sell DeFi Assets

Trading or investing in DeFi assets is the most profitable strategy in this market, depending on total profitability. Non-custodial decentralized exchanges like Uniswap, EmiSwap, and Bancor allow users to trade for long-term or short-term holdings.

When such a change occurs and market circumstances are apparent, most individuals invest by buying low and selling high. DeFi assets frequently quadruple in value in a short period because of their low market capitalization. As a result, they’re ideal assets for significantly increasing the size of your portfolio.

Others like to be among the first to participate in a newly established initiative. Those who understand how smart contracts function and can tell if a project is legitimate or not just by reading them may earn a livelihood separating excellent projects from frauds. Because investors pay presale prices for tokens that will grow 5 to 10 times after they are on Uniswap, the payoff is much higher in this scenario.

Finally, you have a group of day traders that are continuously buying and selling tokens at the smallest profit margins. For these folks, a 20% price rise is sufficient because they are already profitable.

Trading DeFi assets, as you can see, is far more complicated than simply buying and selling a token. There are several trading styles available, and it is up to you to determine which one is ideal for you.

2. Yield Farming

There is nothing better than making money without having to do anything for some people. In the universe of DeFi, yield farming is the simplest method to have that.

Yield farmers earn a profit by supplying liquidity to a decentralized exchange in the form of cryptocurrencies. The DEX leverages this liquidity to fulfill orders placed by fee-paying token swappers. Yield farmers receive a share of these fees according to their contribution.

A yield farmer’s objective is to join the liquidity pool with the best return. They frequently switch from one liquidity protocol to the next in search of the greatest prices. You may wish to seek the finest ways to optimize your earnings, but there is still profit to be gained just by placing your holdings in Uniswap LP and forgetting about them. EmiSwap also allows farming with reasonable but high APR!

3. Earn Interest from a Lending Protocol

Borrowers and depositors engage using lending protocols, which are decentralized loan systems. While one group provides liquidity in exchange for interest, the other group receives liquidity in the form of a loan and pays interest.

Variable and fixed interest rates are available on lending sites like Aave. Variable interest rates fluctuate depending on the demand for the item. Fixed interest rates, on the other hand, remain constant regardless of market fluctuations.

Here’s a piece of advice: in a bull market, fluctuating interest rates on Aave can help you optimize your earnings. Shift to fixed interest rates and stabilize your income if the market enters a negative.

Should I Invest in Defi?

Decentralized finance is a difficult world to navigate. Users can gain a lot of money in a short period, but they can also sell their whole portfolio at the same time. Although the danger is considerable, the number of opportunities is far greater.

DeFi, being a new market, still has to establish itself and carve out a segment of the market. Will it be a secure and safe environment for decentralized initiatives, or will it continue to house bad actors like fraudsters and cybercriminals?

No one else except the community will make the decision. At this pace, DeFi will most certainly remain in the wilderness of crypto, just like ICOs did in 2017. However, as exuberant investors fade out, the market segment will settle over the next few years.

SO, should you put money into DeFi? The truth is that we can’t answer on your behalf. Given the segment’s enormous array of potential and unique characteristics, it would be crazy not to promote it. Nonetheless, we encourage you to not put your confidence in everyone, and research thoroughly before investing in a project.




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