Decentralized finance is rapidly changing the finance system from a centrally controlled system to a decentralised one. This industry is growing rapidly with many huge projects being set up in the industry. The DeFi system first got a valuation of over $100 billion in mid-2021 and has since continued to grow tremendously. However, if properly analysed, DeFi projects are still in their early stages when compared to traditional finance(TradFi). So, it would be very appealing and incentivising for one to invest in DeFi now.
In this article, we elucidate what DeFi truly means and the different ways one can invest in DeFi.
What Is DeFi?
DeFi stands for the term “Decentralized Finance,” which is a common term used for a variety of financial applications in cryptocurrency and the blockchain technology targeted toward eliminating the power of middlemen(financial intermediaries) in financial transactions. These applications make it easy to carry out a transaction freely without the intervention of any intermediary.
DeFi works like the blockchain technology which allows several users to make secure, fast and anonymous transactions that are not controlled by any central and single source.
Traditional finance can limit the speed of transactions and less freedom to users over their money.
DeFi is different because it expands the use of blockchain from simple value transfer to more complex financial use cases.
10 Ways To Invest In DeFi In 2022
Just like every investment has its risks and returns, DeFi investments can’t be excluded from such.
The DeFi investments one chooses will determine the types of yields on offer and if you should or should not save your crypto tokens for a certain period.
So, if you are determined to invest in DeFi for the potential profits, then you should consider doing so in any of the following ways;
1. Invest In DeFi Coin:
A good way of investing in decentralised finance is to invest in the best DeFi coins there are, as such you will hold the native digital currency of a particular DeFi project. These DeFi coins will be listed on the crypto exchanges like other crypto tokens and the value of the investment will fluctuate based on the market forces of demand and supply.
There are over 540 DeFi tokens for many DeFi projects, according to CoinMarketCap. These tokens will each specialise in a specific area of the decentralized industry.
2. DeFi Savings Account:
This is almost the same as the traditional banking savings or fixed deposit accounts that pay interest for money saved in the bank over a specific period.
You can invest in DeFi by opening a crypto savings account where you can deposit idle crypto tokens to generate interest in return.
Unlike the traditional banking savings deposits, the interest paid from the DeFi savings account is higher but it depends on factors such as the token to be saved, the DeFi platform, and the period of savings. Some DeFi accounts pay higher rates when their native token is staked.
3. DeFi Yield Farming:
Yield farming is another good method of investing in DeFi which is quite similar to Staking.
The key similarity is that you will lend your idle tokens to a chosen decentralized exchange, except that you will supply liquidity to the exchange.
Liquidity allows buyers and sellers to trade without a third party, so you’ll need to provide liquidity for a specific trading pair. For instance, if you wish to add liquidity to ETH/BNB, you’ll need to deposit an equal amount of Ethereum(let’s say $1000 worth) and Binance Coin(let’s say $1000) in monetary terms.
In other words, you’ll need to add an equal amount of both pairs, so that people of the respective exchange can swap ETH for BNB in a decentralized manner and vice-versa. Each buyer and seller that uses the respective liquidity pool will subsequently pay a trading fee.
4. DeFi Staking:
This is quite similar to using a DeFi savings account but they are slightly different. This method involves the investor discovering a platform that supports crypto staking. This method requires that you will “stake” or “lock” your tokens in the platform for a certain period which will generate interest for you in return.
There are two ways to do this; First, stake your tokens in a PoS(Proof-of-Stake) blockchain like Cardano. The tokens will be locked into the respective blockchain and used to verify transactions, thereafter. However, going direct with a PoS blockchain does not give the highest yield.
The second method is much better because it requires a third-party staking platform that not only has a good reputation but also offers a high APY. This deposit your tokens into the provider’s smart contract which will be used to fund liquidity pools and loans. DeFi Swap is the best-decentralized finance platform for this.
5. Get A DeFi Wallet:
Getting a suitable DeFi wallet is another way of investing in DeFi in the long run. This will allow you to store your crypto tokens in a non-custodial manner as they should be in the DeFi space.
A non-custodial wallet ensures maximum privacy for your wallet and your private keys.
When compared to centralized platforms, when you keep your crypto investments in a centralised platform, the platform takes control of all information, private keys and assets.
Currently, the best DeFi wallet in the market is offered by Crypto.com. This wallet does not only offer a safe storage facility, a range of DeFi services can be accessed there too.
6. Hold StableCoins:
Experienced investors know that the most worrisome thing one can experience is the high volatility of coins which may make one end up losing so much money. Volatility levels are often very high and this can be a gain or loss because, on one hand, you can earn double or triple digits APYs on idle crypto tokens and lose the same within a short time.
However, to minimise this risk, stablecoins were created.
By opening a DeFi account that supports Stablecoins, one can beat the risk of volatility and enjoy high yields. Since Stablecoins are pegged to the strong fiat currencies like USD and EUR.
USD Coin, for instance, is always worth $1, give or take a minute fractional percentage.
7. Invest In NFTs:
Another option to consider from the list of DeFi investments is that of NFTs(Non-fungible tokens)
NFTs are used to represent unique digital tokens that prove ownership of an item, basically an art or music ir video clip.
When you buy an NFT and add it to your wallet, you become ghe sole owner of that token. You can hold this asset and sell it when you wish and at a price you deem fit.
However, NFTs are one of the fastest-growing aspects of the DeFi industry, which makes it a good ground to invest in.
One of the best NFT investments in the market now is being offered by Lucky Block.
8. Invest In DeFi Stocks:
Just like in traditional finance where financial institutions sell stocks to the public, DeFi stocks are a great way to invest in the DeFi industry.
This allows you to invest in DeFi without touching crypto tokens. That is to say, you invest in stocks that are in some way or form involved in the growth of decentralized finance.
By doing this, you need not speculate buy cryptocurrency to speculate on DeFi nor think of wallets and exchanges. You just need to find a regulated stockbroker, open an account and buy your chosen number of shares.
9. Invest In DeFi Smart Portfolio:
This option is for newbies in the DeFi world with zero experience. If you fall in this category, you may want to use this method that requires no personal input and experience.
For beginners, investing in the DeFi smart portfolio offered by eToro is the best option.
eToro is a heavily regulated platform and by investing in its smart portfolio, you can gain exposure to DeFi without choosing your assets or markets.
How is that?
In a single trade, you will be investing in a ready-made portfolio that focuses on leading DeFi coins, including Compound, Yearn. finance, Decentraland etc. The eToro team will manage and maintain your DeFi smart portfolio which means that the DeFi coins within your portfolio will be rebalanced and reweighted regularly.
10. Secured DeFi Loans:
Another core way of DeFi investment in crypto loans. This is not so different from the traditional loans from banks you know. The only difference here is that, unlike banks, you don’t need any credit check or documentation.
Of course, you’ll need collateral but this collateral is deposited as crypto tokens. You can obtain loans with crypto tokens as collateral through a leading DeFi platform without any third parties.
Conclusion
This article has done justice to some of the ways you can invest in DeFi. The DeFi ecosystem is vast and the more it continues to expand, the more applications will be developed.
It’s left for you to study these ten methods critically and choose which one appeals more to you.
