Decentralized finance (of DeFi for short) is about taking control of financial operations away from banks, governments, and other finance-based centralized institutions.
Instead of these entities performing the operations they handle in traditional finance, modern technology negates the need for them all together, creating a more independent type of currency.
It was once a radical idea, but with more projects unfolding and global popularity rising, DeFi is now an integral part of the future of finance. If you are considering investing into a DeFi project, there are a few things to consider first.
Here are five important considerations before investing into a DeFi project in 2023.
1: Staking VS Lending
Staking and lending are the two most popular ways to earn crypto returns through DeFi projects. Before you start investing, you need to think about which option is better for you.
With lending, you put your crypto into the system for other users to borrow in the same way they would take a loan from a bank. You earn interest (usually more than a bank would), so it can be an easy way to make a profit.
However, it is not without risks. The returns only come when the lender pays you back, and if the liquidity of the project drops, you may have to wait longer than you want to withdraw your investment.
Staking is a lower-risk way to do things, but it doesn’t have the same yield potential. You use your crypto to help the network as they validate and secure transactions, then earn rewards in return.
Rewards usually come in the form of tokens for the platform. It is a simple way to do things, but could keep your funds tied up for a while, so it is best if you have idle funds that you don’t really use.
2: Be Aware of the Limitations and Liabilities
This is all still fairly new, and there are still the odd teething issues with some platforms. Scammers may take advantage of the lack of knowledge, and other times, models simply fail because the idea doesn’t work in practice.
It is important to know about the things that can and do go wrong. Don’t invest in a project until you are confident it is reliable, and always be aware that risk is ever-present in the world of investing.
3: Have Your Digital Wallet and Crypto Funds Prepared
You can’t invest in any DeFi project if you don’t already own cryptocurrency and have it stored in a recognized digital wallet. If you already have this covered, you are good to go- but make sure your wallet’s security systems are up to scratch.Â
Those who are totally new to the crypto space need to first consider what coins they want to buy to fund their DeFi investing journey. Bitcoin and Ethereum are the two leading blockchains, but DeFi projects in 2023 are predominantly Ethereum-based using the Ether cryptocurrency.
Next, you need to pick a wallet they trust. It is also important to work with digital wallets that allow access to DeFi exchanges and provide systems to connect the two. Otherwise, the process gets a whole lot trickier.
4: Browse Your DeFi Project Options
You have to consider the range of projects out there and the differences between them. Some operate like banks for loaning and borrowing, others are purely designed for staking, and then you get projects like Bitcoin Bank that offer higher ROI on your investments.
Look into the length of time they have been active, how many people use them, what their worth is, and the types of investors they are looking to attract. Most reputable projects have a clear feature list and investment profile to research before setting up an account, so there is plenty of material to browse before you commit your cryptocurrency.
5: Decide What Investment Strategy You Want to Follow
Like any investments- centralized or otherwise- your risk tolerance and goals have a lot to do with how you proceed. Considering these things before you invest in DeFi is a must. We already touched on staking and lending, which are the two main categories in DeFi projects, but your considerations should go a little further.
If you are looking for something quite hands-off, you can deposit your crypto with a project that uses it for investments and pays you interest in return. This is a good way to earn money without doing a lot, but it is hard to know exactly how much interest you will get.
Lending also varies between projects. Some are straightforward with repayment contracts and low risks, while others have more lucrative potential but come with higher risks.
You could also explore DeFi indexes- letting you track and invest in multiple cryptocurrency coins. Many people enjoy the flexibility and convenience that come with this, as it is an easier way to effectively trade with minimal research.
Final Thought
The most important considerations before investing in DeFi projects in 2023 are how and where you want to invest. Explore your options, determine your goals, and find the best fit for you.
