How To Invest in DeFi: A Step-by-Step Guide

Blockchain and cryptocurrencies offer many ways to invest money. The easiest strategy is to “HODL” (buying single or various digital assets and holding them for some time to profit from the price difference). There are also various niche strategies like investing in DeFi. This particular industry is looking very promising as DeFi becomes more and more popular among cryptocurrency holders and investors. By reading this article, you will understand what DeFi is and how to invest in it.

DeFi Basics: How decentralized finance works

DeFi (decentralized finance) is an alternative to currently existing centralized financial organizations like banks, insurance firms, or exchanges. While the latter is governed by a single authority, decentralized finance projects have no managing bodies. Blockchains like Velas allow developers to create various decentralized smart-contract-driven applications. 

By using DeFi, two or more parties can interact with each other without any intermediary. And as a result, users can get access to various services at lower costs and with the lowest level of bureaucracy.

The first-ever DeFi was Bitcoin. This means that you will invest in decentralized finance even if you buy a portion of the first cryptocurrency. Nowadays there are plenty of other platforms and services that allow you to significantly diversify your portfolio when it comes to DeFi investment.

The most popular niches to invest in DeFi

The decentralized finance industry is immense. Here we will categorize the most popular directions. 

DeFi includes the following markets:

1. Decentralized exchanges

Those are considered to be the most popular products that you can find across the Internet. DEXes are often considered to be the main competitors of the traditional centralized cryptocurrency exchanges like Binance, Coinbase, Gemini, and others, where they are governed by a centralized authority. 

2. Stablecoins

Stablecoins are backed by real-world assets like USD, EUR, GBP, and even some commodities and metals like gold (they are connected to the price of the underlying assets). While stablecoins may seem useless, they are good when it comes to various restrictions. If you can’t use USD to pay for services or goods for a particular reason, you can use stablecoins without any limitations.

3. Lending platforms

This niche was the privilege of banks in the past, now users can lend or borrow money without such an intermediary. Special smart contracts protect users from various malicious acts making lending activities safe and secure. 

4. Gaming and gambling

DeFi is widely used in niches such as gaming and is not simply about entertainment anymore. Modern titles offer various sets of loot and perks that are bought and sold. Decentralized finance helps to make this process safer and more transparent. When it comes to gambling, smart contracts are very useful in this market as they allow punters to place bets without the need to go to online casinos. A smart contract can substitute any centralized gambling site.

5. Margin trading

Traders had to rely on brokers' leverage in the past. Now with the expansion of decentralized finance, speculators have more opportunities including non-custodial lending protocols, etc. 

6. Decentralized Autonomous Organizations (DAO)

 Those are the analogs of financial institutions but with no central governance. Their main goal is to provide basic financial services like managing assets, fundraising, and others. 

Apart from the above-listed services and use cases, DeFi has more applications. Even this short list of the things you can do or get access to gives you an idea of how important and promising this niche is. 

The most popular strategies to invest in DeFi

Investing in DeFi may bring you significant profits as this industry is booming.

This table reflects the interest in this market, which has been consistently growing since mid-2020. 

Four main strategies will help you to understand how to invest in DeFi:

  1. HODL.
  2. Lending crypto.
  3. Staking.
  4. Investing in DeFi indexes.

HODL

To invest in DeFi it is enough to buy cryptocurrencies like ETH, NEO, EOS, or VLX and wait for their price to grow. 

The most popular blockchains that serve as a platform for DeFi applications:

Ethereum

This was the first blockchain to offer smart contracts. It could be said that it was the Ethereum network that ignited this DeFi industry. There are plenty of dApps that are currently working on this platform. By buying ETH, you will invest in decentralized finance projects indirectly.

All DeFi applications that are built on top of the Ethereum blockchain use smart contracts that use Ethereum tokens to be launched. With the growth of the number of dApps, the interest in ETH increases, which will support the price of the token in the future.

EOS

This blockchain is considered to be the “Ethereum killer” blockchain as the team attempted to solve some essential issues that Ethereum has. EOS offers higher transaction speed with lower commissions. Unlike Ethereum, EOS is based on the delegated proof of Stake consensus mechanism. 

Velas

Velas is an innovative blockchain developed by a team of professional entrepreneurs and blockchain visioners. The project is driven by Alex Alexandrov, who has already launched some successful projects, including CoinPayments, a popular cryptocurrency payment gateway.

The main goal of Velas is to provide the developers with all the necessary tools to create dApps and the customers to benefit from the unseen simplicity when using the blockchain network. The most beneficial part of the Velas project is that it uses a hybrid approach to the system itself as Velas is a mixture of an upgraded Solana code and Ethereum Virtual Machine. 

By combining those systems, the Velas team managed to create the fastest blockchain ever (up to 75,000+ transactions per second), which is designed to create various types of dApps. Developers can easily deploy any Ethereum-based decentralized application thanks to the Ethereum Virtual Machine that was added to the network.

Why is HODLing Velas tokens promising? The main reason is that the blockchain looks very attractive to both developers and end-users. Being one of the fastest and most cost-effective networks, Velas welcomes both single software creators and teams to build various types of dApps that will be fast, secure, and provide users with low-cost services.

Velas welcomes new developers with a special Velas Grants Program, which is likely to contribute to the blockchain expansion. With Velas Grant, a $100 million worth foundation was launched with the single idea to attract software designers to create their projects on top of the network. 

Cryptocurrency lending

You can earn interest by providing others funds they need. This is a new page in the financial industry as only banks could do this in the past. Now thanks to smart contracts, lending is available to the wider public. 

How do you invest in DeFi using this strategy? You need to find a decentralized application that allows users to lend or borrow cryptocurrencies. The next step is to create your personal offer by indicating the interest you want to have and the amount you are ready to lend. By the end of the lending period, the borrower will give you your tokens back and pay the interest. Investments of this type are protected by the smart contract.

Staking

This is another strategy to use your coins to earn a profit. Staking is locking a certain amount of tokens to validate blockchain transactions. 

Dozens of modern dApps and blockchains allow you to stake their coins. 

Best dApps and blockchains for staking:

  • Velas (VLX)

Velas is an innovative hybrid blockchain network with high performance and low transaction costs. VLX is used for payments, fees, and to reward validators for their contributions to the network. Delegates can also stake tokens on validators to increase their chances of participating in the network. The validator retains a portion of the validation reward, while the remainder is distributed among the delegates.

  • Tezos (XTZ)

This is a decentralized blockchain system with a proof of stake consensus mechanism. Along with Velas and other blockchains of this kind, Tezos is a platform for conducting p2p transactions and deploying smart contracts. Currently, the blockchain contains about 400 bakers (validators).

  • Algorand (ALGO)

This blockchain system uses the pure proof of stake consensus mechanism and serves as the home for various DeFi applications. The main idea of creating Algorand was to solve the issues with scalability, which are typical for blockchains such as Bitcoin and Ethereum.

  • Decred (DCR) 

The project was designed to solve the problems with scalability that Bitcoin has. This public network offers a high level of security, which is combined with the lowest rate of censorship. The platform’s ecosystem includes wallets, chain swaps, as well as the ability to create smart contracts.

  • Synthetix (SNX)

Ethereum-based Synthetix Network Token (SNX) drives Synthetix, a decentralized platform for issuing synthetic assets. MINTR, a decentralized tool for communicating with the Synthetix contracts, is used to mint synthetic assets when token holders provide their SNX as collateral. The protocol currently accepts synthetic fiat currencies, cryptocurrencies, and commodities as well as other forms of digital currency. This project is focused on creating ERC-20-backed assets that you can hold or trade on decentralized exchange platforms. 

DeFi Indexes

Those who have had previous stock exchange investment experience are aware of the indexes and their benefits. Indexes are composed of financial instruments that may include various separate assets that have something in common. 

DeFi indexes are created with the same idea. They are tracking and reflecting prices of various assets and calculated as the average of those quotes. You don’t necessarily need to invest in DeFi using indexes. You can simply add them to your watchlist to be aware of the market situation in total or for a particular asset.

Decentralized finance indexes can also be added to the portfolio, allowing you to diversify your investments. 

A step-by-step description of the investing process

To start investing in the decentralized finance niche, you will need to complete the following steps:

1. Get Familiar. 

The first essential step is to study the project you are interested in and the risks associated with it.

2. Create an account for a cryptocurrency wallet.

A cryptocurrency wallet is a digital wallet where cryptocurrencies can be stored to engage in multiple DeFi protocols. You need to create an account in a wallet that is compatible with the token you want to buy, stake, borrow or lend. 

MetaMask is a well-known alternative. It allows anyone to trade DeFi coins and partake in multiple DeFi protocols.

3. Buy a token. 

If you want to participate in DeFi protocols, you'll need cryptocurrency. To buy a token, you can go to an exchange where this coin is traded. 

Since Ethereum is now the most popular platform for building new protocols, it easy easier to start with Ether or an ERC-20 token.

4. Get familiar with protocols. 

The protocol allows individuals to invest in a variety of ways: join liquidity pools to earn interest on transactions done in pools, partake in yield farming to earn interest by participating in loans, and more.

Most protocols have a similar workflow: visit the official website or mobile app, link your wallet with the platform to give them access to your cryptocurrency, and then follow the on-screen directions to begin trading, yield farming, or any other action.

5. Track Your DeFi investments.

If you've officially finished your investment procedure in the previous step, the next step is to track your DeFi investments. To do that, you can do your own research or use services like CoinMarketCap that will help you to see your portfolio performance.

Final words

Investing in DeFi is trendy as the projects are becoming more popular. There are several strategies that you can use to earn interest or profit in other ways from such tokens. DeFi investing is not only an opportunity to buy or lend cryptocurrencies but also to be aware of the latest technological trends and updates.

CoinShark is not responsible for any content, accuracy, quality, advertising, products or other content posted on the site. The review is for informational purposes, reflects only the opinion of the author and is not a proposal for action. The financial market is dangerous and full of risks, investments in cryptocurrencies can lead to losses. Users should do their own research before taking any action.

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