Decentralized finance (DeFi) has transformed the financial sector. It provides decentralized, transparent and open access to financial services, eliminating the need for intermediaries. Over time, DeFi has continued to grow. By January 2025, there will be various investment opportunities in DeFi. If you’re wondering how to invest in Defi, this growth makes the ecosystem a profitable investment. Read this guide and you will get all the information and skills you need to successfully invest in DeFi.
Understanding DeFi
DeFi includes various financial applications on different blockchains, mainly Ethereum. These apps are for lending, borrowing, trading, stablecoins, and yield farming. DeFi is built on openness, inclusion and decentralization, making basic financial products accessible to everyone.
Why invest in DeFi?
Investing in DeFi offers several potential benefits:
High yield opportunities: Regarding the advantages, DeFi platforms pay rather high interest rates and stipends compared to centralized establishments.
Diversification: DeFi creates new asset classes by providing more investment opportunities and also helps diversify a portfolio.
Accessibility: DeFi is available to anyone with access to the internet and a digital wallet that can hold cryptocurrencies.
Transparency and control: DeFi runs on open blockchains, making its transactions and smart contracts transparent and giving consumers complete autonomy in owning and using their funds.
How to invest in DeFi?
Find out: Firstly, it is essential to have prior knowledge about blockchain, smart contracts and certain DeFi protocols with which the user will interact. All the necessary understanding can be obtained from internet tutorials, articles, forums, etc.
Set up a digital wallet: To interact with DeFi platforms, you will need a crypto wallet that supports the Ethereum blockchain that hosts the tokens. Some of the most used wallets are Meta Mask, Trust Wallet, and Ledger wallets. Make sure your wallet is secure and you have control over the keys.
Acquire a cryptocurrency: Buy Ethereum (ETH) or other potential tokens required to interact with most DeFi platforms from any trusted exchange. Move the crypto you purchased to your e-wallet.
Explore DeFi platforms: Investing in DeFi comes with research and choosing the right DeFi platforms that match investors’ needs. Some popular DeFi applications include:
- Uniswap: It is a leading decentralized token exchange.
- Aave: Application where you can take out and grant a loan in cryptocurrency.
- Financing of the Lido: A platform that allows users to participate in staking while maintaining the ability to liquidate assets at any time.
Start small and diversify: You should start small to understand the DeFi market and the different products and services. So, use different platforms and instruments and disperse your investments to reduce possible risks.
Popular DeFi Investment Strategies
Yield farming requires users to deposit their tokens on different DeFi platforms to earn additional tokens, from which the DeFi protocol was created. This strategy can provide high returns, although it carries relatively higher risks than the zero research level strategy.
Staking means putting your cryptocurrency into a DeFi protocol to help fund network activities such as verifying transactions in exchange for certain incentives. One example is Lido Finance, where you can stake your coins while still transacting with them.
Many decentralized finance platforms, such as Aave and Compound, allow their users to provide funds to other users with an additional interest rate to pay. On the other hand, you can take collateral on assets to raise funds. It is an electronic system of direct payments, excluding the usual intermediaries, often offering less advantageous conditions.
Another method is to participate in decentralized finance projects by directly purchasing tokens linked to these projects. Coins such as UNI, AAVE, and LDO have risen due to the development of the platforms behind these tokens. However, research is necessary before investing as the market is rather volatile.
Risks and Considerations
Although DeFi presents exciting opportunities, it is essential to be aware of the associated risks:
Smart contract vulnerabilities: The problem often involves flaws or bugs in smart contracts, which can cost the owner dearly.
Market Volatility: Cryptocurrencies are well known for their volatility and exhibit wide variations in performance.
Regulatory uncertainty: Different structures and approaches have been implemented by DeFi platforms, divided by country. Due to the emerging nature of the DeFi market, the current legal status may change.
Temporary loss: Providing liquidity exposes an investor to the possibility of incurring losses whenever the price of the two correlated assets changes from the market price relative to holding the bare assets.
Best Practices for DeFi Investing
Conduct in-depth research
Research the DeFi platforms and tokens you want to invest in. Check their history, technology, purpose and fans. If you’re looking for advice on how to invest in Defi, some sources, from an analytics perspective, include DeFi Pulse and CoinGecko.
Implement risk management strategies
This is the most important rule when it comes to investing because you can’t afford to lose all your money. When it comes to investment risks, there are two options. The first is to invest in a diversified manner to avoid disasters if a company goes bankrupt, and the second is to place so-called stop-loss orders to avoid significant losses.
Stay informed
Development in the DeFi space is constantly improving. To stay on top of everything, always read trending news, chat in C/S communities, and explore all regulations.
Prioritize safety
Take advantage of the hardware wallet to store massive tokens and coins. Enable two-factor authentication and be wary of phishing attacks. Another solution is to use current software to prevent people from taking advantage of different openings or folds.
Community engagement
It is based on decentralized applications that are used to offer various forms of financial services without conventional intermediaries, thereby forming a global community of like-minded users and fans. This year, the community was instrumental in several key trends:
- Layer 2 solutions: Layer 2 solutions such as Optimistic Rollups and Zero-Knowledge Rollups have since been rapidly adopted by a wider audience. These technologies increase reviewability and reception costs and improve the relative accessibility of DeFi. According to L2Beat, the total value locked (TVL) on Layer 2 platforms increased by 232%, reaching $37 billion and counting.
- Governance tokens and DAO: The problem is using governance tokens to incentivize users to decide on different factors. Decentralized Autonomous Organizations (DAOs) such as Uniswap DAO and MakerDAO have emerged. As of June 2024, more than 40% of the market capitalization of approximately $4.81 billion was governed by DAOs.
- Throw-in and performance strategies: EigenLayer introduced staking and re-staking, allowing staked assets to generate more returns. As a result, its total value locked (TVL) increased from $1.3 billion to $17.9 billion at the start of 2024. This rise reflects the community’s interest in innovative yield generation methods.
Developer activity in DeFi
The expansion of the DeFi ecosystem is supported by a vibrant developer community dedicated to innovating and improving protocols, making it an exciting space for those wondering how to invest effectively in DeFi.
- Growth in the number of developers: The number of developers with more than two years of experience increased by 27% in 2024. This group is responsible for 70% of code commits, meaning this community is essential in the development of DeFi solutions.
- Top projects by developer activity: Some projects include Internet Computer, Solana and Chainlink, and the latter led development activity. Internet Computer recorded 417.8 commits as of December 2024. Popular DeFi platform Aave adopted CCIP to receive GHO on different blockchains, making it more versatile in the DeFi ecosystem it serves.
- Worldwide distribution: There has been an increase in decentralized developer participation, meaning that developers from all over the world have contributed to the development of the software.
Emerging trends
Several trends have emerged at the intersection of community engagement and developer innovation:
- Modular DeFi protocols: DeFi 2.0, a system containing interconnected and highly specialized applications, allows developers to create complex software solutions while driving greater advancements in the environment.
- Integration of real-world assets: The platforms integrate real-world assets into DeFi, making the services it offers much more diverse and open to a wider choice of users.
Conclusion
DeFi security measures require an ecosystem approach, which we will discuss below. By applying securities and information delivery methods, we can reduce the risks of investing in DeFi and help unlock the potential of this new financial field.
