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How to Invest in DeFi – A Quick Guide

May 12, 2023

There are only two kinds of people who haven’t yet heard of decentralized finance or DeFi; those who live under a rock and all hardcore Bitcoin supporters. If you have an internet connection and use social media platforms, then you have probably heard of people talking about decentralized finance. DeFi is not simply a niche that rose to fame in the crypto market after a critical time. Instead, it is actually another step in the overall evolution of digital assets that aim to institutionalize a vital cornerstone of the blockchain industry; decentralization. 

Considering the technology that can be found these days, there is absolutely no need for centralized finance to actually exist. Therefore, there are a number of crypto enthusiasts who have supported the growth of the DeFi market. After all, who wouldn’t want to lend their support to a movement that completely removes intermediaries and bureaucracy? But, you need to understand what the hype is about and then figure out how to join the new market. Let’s get started:

What is Decentralized Finance (DeFi)? 

A subdivision of the crypto industry, decentralized finance (DeFi) deals with decentralized financial instruments, as apparent from its name. This market comprises of anything from derivatives instruments and cash instruments to investment vehicles, with the primary difference being that they are decentralized in nature as opposed to traditional finance. Due to DeFi, traditional finance is rendered obsolete because it offers financial services without involving any intermediaries that you would usually use, such as banks and brokers. 

In real life, you can do everything possible, such as trading on an exchange or taking a loan on Sunday night with zero collateral, while still having crypto assets in your personal wallet. All of this has become a possibility with the help of the Ethereum network and smart contracts. In the world of decentralized finance, every action is conducted through self-executing smart contracts that are solely commanded by the user and with no central entity being able to impose its will or influence. 

How to Invest in Decentralized Finance (DeFi)? 

The world of decentralized finance (DeFi) has gained a great deal of popularity in a very short amount of time and this is because it offers people a number of ways for making money. Rather than opting for just one method and forgetting the rest of them, people have the freedom of experimenting with all of them. This can help them in identifying the strategy that is in accordance with their personality type and psychology. The top three methods that can be used for making money in the DeFi space are:

  • Trading DeFi assets

The top method in the decentralized finance market according to overall profitability is none other than making an investment in DeFi assets. People have the option of trading on non-custodial decentralized exchanges, such as Bancor, Sushiswap, and Uniswap, for either short-term or long-term holding. The most common strategy that you can use here is buying low and selling high if you can see clear market conditions and identify such an opportunity. As their market capitalization is on the low side, it is possible for DeFi assets to double or even triple their value in a short span of time. This makes them an excellent option for multiplying your portfolio drastically. 

Some users prefer to get in early on a project that has been recently launched. If you have an understanding of smart contracts, it will be easy for you to determine whether a project is legitimate or not by just reading the contracts. You can even make a living by distinguishing good projects from scam ones. The rewards can be a lot bigger in this case, as investors buy tokens at presale prices and once they are listed, their prices can go up by 5 to 10 times. 

There are also day traders who are constantly purchasing and selling tokens at the slightest profit margins. These people are happy with a price increase of 20% because they want to replicate their success a couple of times throughout the day. You can consider these trading styles when you decide to trade DeFi assets and opt for one that suits you best.

  • Yield Farming 

Do you want to earn passive income? There are lots of people out there who prefer to earn money without having to do anything. Yield farming is the ideal opportunity for such people in the world of decentralized finance. If you become a yield farmer, you will have to provide liquidity to a decentralized exchange in the form of crypto assets. This liquidity is used by the DEX for executing orders created by people swapping tokens, who pay the fees. Yield farmers can earn a portion of the fee, depending on their contribution. 

The aim of a yield farmer is to participate in a liquidity pool that offers the highest yield. They are known to hop from one liquidity protocol to the next in order to get the best possible rates. 

  • Earning interest on a Lending Protocol

Decentralized loan platforms where depositors and borrowers interact with each other are known as lending protocols. One group provides liquidity for the sole purpose of earning interest rates, while the other takes advantage of the liquidity in the form of a loan and pays the interest. You can find both fixed and variable interest rates on lending platforms, such as Aave. The former will remain the same, regardless of the market conditions, whereas the latter will change constantly, depending on the demand of the asset. Variable interest rates are usually used by people in bull markets for maximizing their profits. You can stabilize your income by switching to fixed interest rates when the market turns bearish. 

No matter which option you decide to use for investing in DeFi, it is important to remember that this space is a tricky one. It is possible to make a ton of cash overnight, but you may also end up liquidating your whole portfolio in a second. 

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