DeFi has become one of the trending topics in recent times, particularly with an emphasis on decentralized access to financial services. Imagine a global financial services network without a single bank or insurance provider. The interest to invest in DeFi crypto among people all over the world has been increasing for specific reasons. You need to choose the ideal DeFi crypto tokens which can have good chances of returns. However, it is important to remember that investment in DeFi is subject to various risks, especially volatility. On the other hand, there is nothing you can do about curiosity regarding how to invest in DeFi projects, especially as they gain momentum.
The following discussion will offer a brief overview of the scope of DeFi, followed by a review of safety concerns in DeFi investments. Subsequently, the discussion will also reflect on the methods for investing in DeFi projects and some notable DeFi crypto tokens you can consider for investment.
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Overview of DeFi
Before you start searching for the best DeFi crypto to invest in 2022, it is important to understand the basics of DeFi and its scope. How relevant is DeFi? Does it deserve the attention of a potential investor? By definition, DeFi or decentralized finance enables distributed access to financial services without any central intermediaries. The origins of DeFi start from smart contracts on the Ethereum network, and it has evolved with popular applications in lending and trading use cases.
As of now, almost $70 million worth of assets is locked in DeFi protocols worldwide. Therefore, it is reasonable to believe that the DeFi sector can serve favorable opportunities for investment. However, beginners would find it difficult to understand how decentralized access to financial services can offer any investment opportunities.
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Scope for Investment in DeFi
Think of the definition of DeFi once again, and you will notice how the programmability feature of Ethereum enables the creation of smart contracts. The smart contracts offer a definition for the specific tasks of a DeFi protocol, and anyone with a crypto wallet could use the DeFi application. Furthermore, the uncertainty regarding DeFi investment funds would also reflect on the differences between DeFi and traditional finance. This is where you can point out the significant value advantages DeFi has over traditional finance alongside identifying the scope for investment in DeFi.
Just like traditional finance, users can borrow and lend money, conduct transactions such as payments, and earn returns on their investments based on arbitrage and speculation. DeFi makes the domain of financial services better with control in the hands of users. Users can rely on DeFi platforms for conducting financial services transactions without the control of any centralized intermediary over their data or assets. Investors can lend their assets on DeFi platforms in return for interest and additional rewards, such as the native DeFi crypto tokens. At the same time, it is also important to notice the risks associated with an investment in DeFi projects.
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Is DeFi Good to Invest In?
The obvious question on anyone’s mind right now would refer to the safety of DeFi. How can you find the best DeFi investment when you are dealing with it for the first time? First of all, you have the advantages of anonymity for users alongside promises for better efficiency. The process for investing in DeFi might have the benefits of flexible and unbelievably lucrative returns. However, it is also important to notice that DeFi also has its own risks, and one of the foremost mentions would refer to regulatory risks. In addition, the novel nature of DeFi also implies that it might bring risks you might have never imagined.
On the other hand, answers to “Is DeFi Good to Invest In?” would also point to risks due to vulnerabilities in smart contract code. Furthermore, investors can also encounter the risks of crypto scams such as rug pulls. It is also important to note that DeFi investments also come with a risk appetite like traditional investments. The most important concern regarding investments in DeFi refers to the supposed ‘self-governance and decentralization. Small groups of stakeholders in DeFi protocols generally replace the traditional roles served by banks, thereby quashing the decentralization feature.
At the same time, it is also important to remember that DeFi protocols do not have any shock absorbers. Therefore, you might have to lose all your assets in the event of any unfortunate accidents without any safeguards or insurance. Without any safety net, DeFi investment funds are always subject to risks. However, the possibilities of investment in DeFi projects can still find a way through investment in proper research. You can evaluate the risk tolerance for specific investments within DeFi through the assessment of different factors related to DeFi protocols.
How to Invest in DeFi Projects?
Any guide on methods to invest in DeFi crypto would also focus on the ease of using DeFi applications. You can interact directly with DeFi protocols and learn about the new industry. DeFi users must also develop a comprehensive understanding of cryptocurrencies and the working of DeFi protocols.
With the basic steps, such as connecting your crypto wallet to a DeFi application, you can easily start learning more about DeFi protocols. One of the best wallets for DeFi applications is the Metamask crypto wallet, available in the form of a browser extension. After funding your crypto wallet with the required amount of crypto tokens, such as ETH, you can start using the services of different DeFi applications.
The discussions regarding the selection of the best DeFi investment would obviously highlight the methods used for investing your assets in DeFi protocols. Here is an outline of the best ways recommended for investing in DeFi projects.
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Staking
One of the most common choices for earning passive returns on your DeFi investment would refer to staking. DeFi users can lock their tokens in a protocol for a specific time period and generate interest on deposited tokens. Users can rely on two distinct methods for achieving staking. The first method would point to choosing a Proof of Stake blockchain such as Cardano or Solana. Subsequently, the tokens can be locked within the related blockchain while also offering flexibility for verifying transactions.
On the other hand, the answers for “how to invest in DeFi projects” with staking would also focus on using third-party staking platforms. Users can deposit their tokens in the protocol’s smart contract, which would subsequently serve as useful for funding liquidity pools and loans. DeFi Swap is one of the popular examples of a third-party staking platform that can help users stake the native coin of the platform for a longer term.
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Interest in Savings Accounts
Yes, you can create a crypto savings account to try out your chances at investment in DeFi projects. If you have crypto tokens sitting idle in your wallet, you can use them as savings in DeFi accounts. Interestingly, DeFi accounts can offer a higher yield in comparison to traditional currency deposits, depending on the protocol.
Furthermore, certain DeFi protocols also facilitate higher rates upon staking native tokens. One of the examples of the best DeFi investment in a savings account would refer to Aqru, a crypto interest account provider. It has also ensured flexibility for users without any conditions for locking up their assets and allows users to withdraw whenever they wish.
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Yield Farming
The most dominant entry among the methods to invest in DeFi crypto would refer to yield farming. Interestingly, yield farming features many similarities to staking as you would lend your crypto or DeFi tokens to a decentralized exchange or application. In this case, you would serve the role of a liquidity provider for the exchange or the lending/borrowing application.
As a liquidity provider, you can ensure that buyers and sellers can carry out transactions on a DeFi marketplace without depending on third parties. Investors have to contribute their assets in specific liquidity pools, and the transactions in the concerned liquidity pool can help in earning a share of rewards for the transaction fees.
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Stablecoins
One of the safest alternatives among the best DeFi crypto to invest in 2022 would refer to stablecoins. Volatility in the DeFi sector is one of the formidable issues for investors. On the other hand, stablecoins could serve as a significant solution with the stability you need for passive returns on your DeFi tokens.
If you have DeFi crypto tokens of a particular platform, you can convert them into stablecoins and choose the savings account approach. However, you must also look for the risks with stablecoins. You should also try your best to try reputed stablecoins such as USD Coin or DAI for possibilities of higher returns with DeFi savings accounts.
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Integration of NFTs and DeFi
Another recommended answer for “how to invest in DeFi projects” focuses on the integration of NFTs and DeFi. Adding NFTs to your DeFi wallets could help you own complete control of private keys. A promising example of using DeFi to invest in NFTs would refer to Lucky Block. The gaming platform has successfully come up with around 10,000 different NFTs through the primary listing. As the popularity of NFTs continues to grow, investments in NFTs through DeFi protocols can serve the desired results for investors.
Best DeFi Crypto to Invest in 2022
The next critical highlight in a discussion on DeFi investment would refer to the choice of DeFi crypto tokens. As of now, many cryptocurrency projects have found recognition in the domain of DeFi. Therefore, it is difficult to identify the long-term DeFi platforms from the scams. At the same time, you must also identify the opportunity for leveraging the best DeFi tokens that could offer significant returns within a short duration of time.
How could you identify the ideal choice of DeFi investment funds when it comes to choosing a token? First of all, you need to verify the information about the project behind the DeFi token. The details of the project can help you check whether it claims high yields in return for no effort. In such cases, you can conclude that the token and the protocol do not have any long-term potential.
Therefore, you must dive deeper into the documentation of each and every DeFi project before investing your assets in them. One of the ideal recommendations would focus on choosing DeFi tokens featuring high liquidity. Another plausible choice would refer to protocols with a large amount of cryptocurrency staking on the platform. In simple words, the risk factor of a token increases when it has low market capitalization.
Here is an outline of the prominent DeFi tokens featuring massive growth potential over the long term.
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Aave
The DeFi lending protocol has become one of the trusted options for DeFi users to avail of collateralized loans. In addition, it also serves the vital feature of depositing cryptocurrencies to earn interest.
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Curve
The curve is another popular example of a platform to invest in DeFi crypto as an automated market maker. It features a wide range of functions and specializes in stablecoins. The curve enables easier transactions of USDC and DAI alongside ensuring lower fees and slippage.
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Uniswap
Uniswap is a trusted decentralized exchange based on the Ethereum blockchain. It can help any individual trade cryptocurrencies without centralized exchanges holding the funds. With the help of smart contracts, Uniswap could offer a trustless, secure, and permissionless method for exchanging cryptocurrency.
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Yearn Finance
Yearn Finance protocol has been around since the beginning of DeFi and works as a decentralized lending protocol. At the same time, it has also specialized in yield farming as well as decentralized insurance products.
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Bottom Line
The guide for investing in DeFi crypto must have cleared some of your basic doubts about approaching the DeFi sector. Decentralized finance applications are similar to regular applications, albeit without the control of any centralized owner or agency. The clarity regarding how to invest in DeFi projects could help you overcome uncertainties and approach successful protocols. Most important of all, the discussion highlighted the necessity of research in determining the ideal DeFi crypto token. Start learning more about decentralized finance and create your reputation as a DeFi expert.
*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!
