DeFi, which stands for decentralized finance, is growing in popularity as more and more investors are joining this space. With Web3 development progressing at a rapid rate, this is an exciting space that has huge potential. There is around $55 billion locked in DeFi and at its peak in 2021 this number was around $105 billion.
DeFi takes the control out of banks and financial institutions’ hands and gives it to investors. There are many different ways we can invest in DeFi and here we will discuss the most famous and profitable ways to invest in it.
“DeFi is the future of finance.” – Vitalik Buterin
DeFi is a decentralized financial system that operates on blockchain technology. This financial system performs similar functions to normal banks. Here you can borrow and lend money, earn interest, and so on. The difference is that with DeFi you don’t need any third-party involvement and everything is done outside the traditional banking systems and financial institutions.
This gives investors more opportunities and freedom. They can lend out as much money as they want and become banks themselves, with this they can earn higher interest rates and increase their income. These blockchain transactions are executed faster than traditional bank transfers. Also, here everything is done without using third parties, so there is no need to pay service fees to banks.
“DeFi could eventually represent a larger shift in how financial services are organized and operated than the internet itself.” – Mike Novogratz
Before we discuss different ways to invest in DeFi, there are some things investors need to prepare beforehand.
The first step before investing in DeFi is to create a crypto wallet. This should not be a crypto exchange-provided crypto wallet as these exchanges are centralized and don’t follow some of the most important DeFi protocols.
These crypto wallets can be of two different types:
Cold wallets are hardware wallets that are disconnected from the internet. They can be in the form of USBs and hard drives. If you are investing large amounts of money and want full security then using cold wallets is a better option, but they are not as practical as our next wallet.
Hot wallets are crypto wallets that are connected to the internet and come in software form. These wallets are not as secure as cold wallets but still, it requires an unimaginable effort to hack into them. If you are not making a huge investment and want a more comfortable wallet, hot wallets will fit you better.
Most DeFi projects are built on the Ethereum network, so make sure your wallet supports this network. If you want to use cryptos that are not on Ethereum like Bitcoin, you will be able to invest in Bitcoin that has been transferred to the Ethereum network, like Wrapped Bitcoin.
Once we have our wallet we are ready to start investing in DeFi.
There are different ways we can invest in DeFi. Each investment strategy will fit different investors, as there are different risks associated with each style. Each of them has different returns and some even require you to lock your crypto away for some time.
One of the most popular and simplest ways to invest in DeFi is to buy DeFi tokens. By investing in these DeFi tokens you will be investing in the company that provides this token. These tokens can be found on regular crypto exchanges. For example, CAKE is one of those DeFi tokens which is a native token of the decentralized exchange PancakeSwap. On PancakeSwap, investors can exchange one crypto with almost any other cryptocurrency. When someone uses an exchange, they pay a small fee, and then this fee is split between CAKE holders and liquidity providers. So by holding CAKE you receive interest for them.
You can purchase CAKE on different exchanges, such as PancakeSwap itself, Binance, and many more.
DeFi staking is another common method traders use to invest in DeFi. When staking, you are locking your crypto away for a certain period of time and receiving interest for it. When your crypto is locked away, you can not access it and if you unstake them it might take a few days for you to be able to access them.
There are several ways we can stake these tokens. One of the most common ways is to join a staking pool and receive interest from that. You can join staking pools for those tokens that use the proof-of-stake protocol only. One downside of this is that these staking pools are run by centralized exchanges or other third-party services. This means that some of the features that decentralized finances provide won't be available. You can always create your own pool and run it, but you would need a really big investment for it to succeed.
Another option is to provide liquidity. We mentioned how PancakeSwap is a decentralized exchange where you can swap cryptos easily. For this to work, they need liquidity and receive it from liquidity providers. You can provide liquidity for these exchanges by locking your crypto on their exchange. These tokens are then used as liquidity, and you receive interest-rate payments on your staked tokens. This interest rate comes from fees traders pay. We mentioned earlier that fees are split and a portion of it goes to CAKE holders. The remaining fees are then distributed to these liquidity providers.
If you are interested in investing in DeFi but don’t want to deal with cryptocurrencies, investing in DeFi stocks is a great alternative. Here you are investing in companies that are somewhat involved in the DeFi ecosystem.
By investing in stocks you won’t need to worry about cryptocurrencies, different exchanges, and crypto-wallets. You simply need to open an account with a regulated stock exchange and purchase the stocks of your choosing. These companies can be blockchain development companies, companies that develop necessary hardware and software for DeFi ecosystems, and many others.
One of the best places to purchase these stocks is eToro. What makes eToro the best choice for this investment is that eToro is both a stock and crypto exchange. With this, it will be easier for you to move your capital from one asset to another. So if you want to take out money from stocks and put it in crypto and vice versa you can do it on one platform.
NFTs have become another popular way to invest in DeFi. These NFTs can be any digital asset. What makes them one of the fastest-growing DeFi segments is that you are the sole owner of the asset, and it is securely stored in your wallet.
Another fast-growing NFT segment is Play-2-Earn (P2E) games. In this DeFi ecosystem, you are investing in NFTs and other digital assets which, alongside having their own value, will generate income for different tasks performed in different games. NFTs are also closely associated with another DeFi ecosystem; the metaverse. The idea of the metaverse is developing at pace and a lot of projects in this space involve NFTs. These NFTs can hold different functions, from simply giving you access to the platform to being whole land plots that give you the ability to build whatever you want and even rent it out.
If you are afraid of crypto volatility which has the ability to both earn you good returns or make you lose your whole investment quicker than you can click sell, investing in stablecoins is the best option to take. If you want to minimize the risks, investing in stablecoins is the most common investment strategy as they always keep the $1 mark.
For example, DAI is a famous DeFi stablecoin that has a $6 billion market capitalization. 1 DAI is always worth 1 USD. We can put those tokens in DeFi interest accounts. Here you are paid interest just like normal banks give out. But this is not a 100% risk-free investment as there have been instances where stablecoins lost their value for different reasons. The most recent case was US Terra which became worthless in a span of a few days and now trades for just $0.05.
There are countless advantages that come with investing in DeFi. Different DeFi projects have different advantages, and we have to choose which ones we prioritize more and find more value in.
“DeFi is one of the most exciting developments in crypto and has the potential to revolutionize the financial system as we know it.” – Brian Armstrong
Blockchain is notorious for its security. Traditional financial systems are built using regular coding and are easier targets for malicious hackers. On the blockchain, hacking is pretty much impossible. Most famous crypto hack cases happened when centralized crypto exchanges were hacked and not the blockchain itself. Of course, there have been instances where blockchains were hacked and funds taken out, but usually, that was caused by developers leaving weak points in the code.
When we want to transfer money using regular financial institutions such as banks, transactions might take a really long time. Usually, these transactions involve a huge amount of money, and since it goes through third-party services it needs many different verifications which usually take a long time to process.
On the other hand, when transferring crypto on the blockchain, these transactions are validated swiftly and fast. Validators who are validating blockchain transactions make it their priority to verify the transactions as fast as possible since the amount of reward they receive depends on how fast they completed the transaction.
You are not limited as to how much you can invest, and in general, cryptos have higher interest rates than traditional investments. Since blockchain allows peer-to-peer transactions, we can lend out cryptos much more easily and receive higher returns. Cryptos give us the opportunity to stake our assets, provide liquidity, and put assets in saving accounts. These investments usually have high return rates and can generate interest from different sources, thus increasing your income even more.
DeFi is not a safe haven for investors, and with the advantages it brings, there are also some risks that come with investing in DeFi. This is a new sector that is still in the process of finding its identity and fine-tuning its operations.
Navigating your way through the world of DeFi is a complex endeavor and is not suited for beginners. There are many different components in DeFi, such as decentralized exchanges, crypto wallets, countless tokens, and, and, and. There are also endless projects which make the DeFi industry crowded and it can be hard to find projects which are investment-worthy.
We mentioned that DeFi has really fast transaction speeds and operates faster than traditional banks. But with this speed comes high transaction costs. If the DeFi system operates on a proof-of-work protocol, these transactions need what's called gas fees. These fees are dependent on how fast you want your transaction to go through. But with high demand and people willing to pay big money for their transactions to go through, those who don’t wish to pay high gas fees are usually left waiting for days for their transactions to complete, or they are just canceled.
But with recent developments, this won’t be a major problem in the future. More projects are starting to use proof-of-stake protocols which lower transaction costs and make transactions even faster. Ethereum, one of the biggest blockchains, recently got rid of the proof-of-work protocol entirely and its network has fully migrated to proof-of-stake.
As we know, DeFi is not very beginner-friendly. This complexity gives scammers opportunities to prey on those who are unfamiliar with the system. There are many projects which craft themselves to look legitimate and investment-worthy, but in reality, they exist just to scam people out of their money. These projects usually fall into one of two categories.
One where they just advertise false information and after gathering investments they just disappear. Another scam method is when they try to copy different projects and present themselves as legitimate. There are many scam coins that resemble legitimate ones, but the most common practice here is making fake NFTs. Bored Apes Yacht Club is one of the biggest NFT projects where each NFT is worth hundreds of thousands of dollars and there are many different fake NFTs presenting themselves as Bored Apes and scamming people out of their money.
Cryptocurrencies are notoriously volatile. Because of this investment in them comes with high risks. There can be cases where you made profits in a one-month timeframe but then lost all of it in just one day. Because of this volatility, some investors are more attracted to stablecoins which always keep the 1 USD mark. But there are significantly fewer returns on those tokens, and you are unlikely to make huge profits from them. These tokens are also not perfect as there have been instances where these stablecoins lost their value.
So after learning all of this, should we invest in DeFi? The short answer is yes. DeFi is a fast-growing field that has unlimited development opportunities. When investing in DeFi, newcomers are not forced to make huge investments. What is good about this new field is that because it is still growing fast, even a small investment can generate high profits. Investors can easily make small and unmeaningful investments and forget about them for some time. These investments have a high chance of growing and generating huge profits. The logic behind this is that if the investment fails you are not put in a bad position as your investment was small, but if it succeeds then the profits it generates will be lucrative.
Of course, this is not the only investment possibility and just like many others, you can go in big. Investing big money in DeFi of course comes with bigger risks, but potential returns are so high that, if done correctly, one big investment has the potential to set investors up for life.
“Everything will be tokenized and connected by a blockchain one day.” – Fred Ehrsam
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Investing in DeFi might be a complex process but to start investing in it all we need is a crypto wallet. Once you have a crypto wallet and some crypto on it, you are ready to invest in many different projects with different approaches. You are also able to invest in DeFi without the need for crypto wallets if you take a more traditional approach and invest in DeFi stocks.
If you know what you are doing, then yes. DeFi tokens are volatile so investing in them can be tricky, but if you know what you are doing and have a good investment strategy then investing in DeFi tokens can be one of the best investments you can make.
DeFi dashboard is an app that gives investors opportunities to track their investment portfolios. Using the DeFi dashboard gives investors opportunities to analyze their portfolio in one space without the need of analyzing each project they invested in individually.
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