Blockchain is the net.
DeFi is the web.
Why is DeFi special?
DeFi has the potential to save our current financial system from itself by providing a fair playing ground for financial solutions of the future.
By utilizing blockchain and smart contract technology it seems that it has endless possibilities for innovation and improvement.
Why should I care, are we early?
Decentralized finance is currently (Q4 2021) in the early stages of massive growth and development:
- Multiple projects being released every single day on multiple blockchains.
- Countless incentive programs and investments from huge exchanges, layer 1 projects, institutions and private investors all around the world.
- A quickly growing community of developers, educators, marketers, gamers, influencers and users.
Keep in mind that DeFi is still not the popular kid in crypto at the moment with the size of about 7% of the total crypto market cap. That’s because it’s still young. This means there is a huge unexplored area of economic and technical fusion which will likely change the world as we know it today (for better or for worse). Unfortunately being young can also mean being stupid, unexperienced, not taken seriously and being bullied by older kids.
What is the long-term future of DeFi, will it survive?
Despite all the opportunities for real-world financial and technological change, DeFi currently runs mostly on sentiment and hype. While it is gaining respect in the community, it’s still mostly viewed by outsiders as a ponzi scam factory. Its longevity and sustainability is debatable. Current incentive programs will eventually run out of steam and no one really knows what happens to the growth or demand of these platforms then. That said, DeFi could survive this puberty period and come out even stronger. The right answer to the question about the long term future of DeFi is “No one really knows, but it has potential”.
Should I invest?
For the short-term (next 3 – 6 months) DeFi will probably be alive and well as it currently has too much momentum to stop dead in its tracks. And this means there is no reason not to try it out, join the humble farmers community and earn some sweet yields. Keep in mind though, that DeFi is extremely sensitive to market movements so plan your investments and follow the market sentiment to avoid risks.
How should I start and where should I invest?
Your path into DeFi is going to vary based on your knowledge of the space and technology, investment capital, time that you are willing to spend researching and managing your portfolio and other personal preferences. In this article we are going to focus on yield farming, as this is by far the most profitable use of DeFi at this time.
If you are a complete beginner start with some guides on how to use and understand the platforms and technology. Unfortunately using DeFi platforms can be a bit of a pain sometimes. The only way to learn the flow of all the transactions is to try it yourself. Pick a fun and popular project (like DeFi Kingdoms) and read the documentation and watch some videos on how to use it. Start small. Get through the depositing, swapping, bridging, providing liquidity, staking LP tokens and withdrawing rewards. Be careful and precise during the process and eventually you will become comfortable with managing your assets throughout the DeFi landscape.
Make a plan.
This plan has to be a reflection of what you wish to accomplish with your investments. It should comprise of the following:
- Choose a healthy starting capital. Remember that you can always add more later, if you feel the need.
- Decide on how you will split the capital in terms of risk. For example, 40% stablecoins, 50% low risk and 10% high risk. You can do some research at this stage to better approximate how to split the capital in the most effective way.
- Choose a timeframe or a period for taking profits. This will greatly help you stay level headed in phases of market euphoria. If you are confident in your market reading skills (or you follow me on twitter) you can dynamically adapt your profit taking intervals according to market movements.
Research. This is what it’s all about. DeFi is a gold mine but it’s up to you to find and mine the gold. Since it’s growing so quickly at the moment, it is especially important to follow the scene daily. Find twitter accounts, youtube channels, discord and telegram groups (and my blog of course) to help you stay on top of the new releases and innovative projects. You can also check out websites like RugDoc to see the launch calendar, risk assessments and audits. When something catches your eye, open up the documentation and try to understand it. Check out the team behind the project (bonus points if they are doxxed). Try to understand their marketing strategy and the community sentiment. Learn about tokenomics and evaluate the project based on other forks or similar projects (if they exist). If you’re curious about the profitability of certain farms or complex strategies, try finding or making a yield/profit calculator and simulate the outcomes.
Once you’re happy with your plan, it’s time to make it a reality. Find the best flow of transactions to get the funds you need in the right place. Watch out for abnormally large gas fees, slippage and fees when swapping on dexes. Before you deposit your funds into farms, always check the deposit and withdrawal fees. Once your funds are safu and earning some sweet rewards, you should write down your allocations and yields in a spreadsheet or a preferred portfolio tracking tool. You can also check on your positions with tools like vfat.tools.
Repeat steps 2 and 3.
In order to give some better insight into the world of yield farming strategies, here are some basic examples from the previously mentioned categories. Keep in mind that some of these might be outdated in less than a week due to the rapidly changing DeFi landscape and sentiment. It is also worth mentioning that the proposed strategies might provide better results on certain chains. So bottomline is “do your own research”.
- Liquidity Pools – Curve (1-25% APR)
- Autocompounders (20-30% APY) – Grim, Reaper, Beefy finance
- Leveraged Yield Farming (> 30% APY) – Eleven finance, Tarot
- Degenbox Looping (60-100% APY) – Abracadabra
- DeFi Kingdoms (800-1000% APY*)
- Autocompounders (50-200% APY)
- Autocompounders (1K-8K APY)
- OHM forks (> 10K APY)
- TOMB forks (> 1K APY)
This article should help you get started, but once you dive deep into the DeFi ocean, you’ll quickly start to discover the vast opportunities and complex strategies for yourself. Remember to keep up the curiosity and knowledge will follow.