What Every Investor Should Know about Decentralized Finance

 Since 2019, the popularity of DeFi has grown, and at the moment it is a common opinion that decentralized finance can become one of the vital foundations of the global digital economy.

Due to the use of blockchain technology, private investors and investment funds have become able to get fast profit. 

What should an investor know about DeFi? The most important is to get its essence, study the advantages and disadvantages of decentralized finance, and what methods of earning it offers and their features.

What is DeFi

Decentralized finance is an independent, public and decentralized ecosystem of financial services and application based on some public blockchain. DeFi is applied in trading operations, lending, and other financial services. As mentioned earlier, it is becoming increasingly popular with users and companies. This is due to the key features of decentralized finance.

Main Features

  •   There is no single centralized management structure. A smart contract includes rules for conducting financial transactions. Via the use of a smart contract, decentralized services can function without the participation of users.
  •   DeFi is transparent, since the source codes of decentralized applications are open for verification. Accordingly, any investor can view it. Transactions are also public.
  •   Decentralized platforms are available to any investor. Also, DeFi ecosystems are inclusive, meaning everyone can develop their own service and use it.
  •   DeFi can be developed via a variety of its elements, that is, the system can be assembled in a variety of forms.

It should be noted once again the main feature and advantage of DeFi is absence of regulator, controlling authority or community able to exert any pressure on decentralized finance. This is what attracts a lot of investors to DeFi.

At the same time, investors should consider some of the risks associated with DeFi.

DeFi Risks

There is a risk of hacking smart contracts. Despite the fact that they have a high degree of reliability, program codes may contain vulnerabilities when written by developers.

Lack of financial resources in decentralized finance. This is the main disadvantage of DeFi. Loans that are issued on decentralized platforms are quite small, when compared with classical banking structures.

But despite the above mentioned disadvantages, DeFi continues to develop and attract the attention of more and more investors due to the fact that there are different ways to generate income from investments.

Profit-making methods provided by DeFi

  1. Farming (profitable farming)

Its essence lies in the fact that an investor acquires tokens of a decentralized protocol as a reward for providing liquidity, issuing a loan, etc. What is the benefit for the investor if he takes up farming?

He gets the right to take part in the further management of the protocol or project, it is possible to make a big profit in a short time, since tokens can gain popularity in the market.

At the same time, the investor should note that there is also a risk. It lies in the fact that any token is volatile and the profit can be much lower than expected.

  1. Investments in DeFi tokens

The peculiarity of this type of investment is that the investor can benefit fromthe growth of tokens` price. Tokens often grow in value by thousands of percent after their launch. If you purchase promising tokens for small amounts, then the profit can grow hundreds of times in a short period of time. An investor can be recommended to pay attention to several parameters before choosing a token.

If the issue is small, then there is a high chance that the value of the asset will grow after a while. It is great if the token is listed at some exchange, which indicates that the project is not fraudulent.

The advantages of this type of investment are that you can make a profit very quickly, sometimes it literally takes 1 day and amounts to thousands of %. But there are also disadvantages – it is difficult to find promising tokens, since assets enter the market in large quantities.

  1. Staking

Its meaning is that the asset is not moved, but blocked on the wallet. Staking pools are being formed, offering different% of income. There are pools that offer annual returns of up to 25%. This type of investment is advantageous because if an asset with a high capitalization is selected, but there is also a risk that the asset rate may fall sharply, and then the income will fall significantly. 

  1. Loans

Decentralized platforms offer investors the opportunity to issue loans at a certain percentage to other users. Thanks to this system, investor can be sure that his funds will be returned with interest, despite the fact that the price of the cryptocurrency can decrease or the borrower has not returned the loan issued to him.

Now P2P loans in decentralized finance are considered one of the most effective areas in terms of ROI. The advantages of this type of investment also lie in the fact that you can choose assets that offer a high interest rate, minimal risk of loss of funds.

  1. DeFi leverage

This is another way of investing when a margin trader gets cryptocurrencies at a certain percentage. You can earn up to 25% from lending to a margin trader. The benefit investment is that lenders do not lose their investments, as they use automatic liquidation if the trade has become unprofitable.

 Outcomes

Thus, the investor can use any of the above methods of investing his funds, or combine them. Investments in decentralized finance can bring significant income in a short time, although there are still risks of losing funds.

However, if you conduct a thorough study of a decentralized protocol, you can minimize them.

The DeFi sector continues to develop, and more and more protocols that can bring investors significant profits are entering the market.