Are you tired of the non-existent interest rate in your savings account?
Back in 2020 when cryptocurrency was booming and gaining popularity, I got interested in learning more about the space and how to invest in DeFi.
The measly 0.5% interest rates that my bank was offering me to keep $10k locked in for a year was horrible, and I wanted to invest my hard-earned money in something that actually gave a return on my investment.
I actually want to compound my capital in this lifetime, and not wait for decades until I’m old and can’t do anything with it. So I dived into cryptocurrency and DeFi platforms to learn everything about ways to invest, and more importantly what doesn’t work.
I made a ton of mistakes which you do with any new endeavor, and it’s ok as I was expecting it from the start.
Along my DeFi journey, I also learned how to navigate the space, and actually find relatively safe investments to grow my income entirely passively.
If this sounds like you, or you’ve been debating how to invest in DeFi, let me save you some time (and money) and give you the blueprint of what allowed me to boost my passive income by 30x.
Disclaimer: I am by no means a financial adviser, anything you do with your own money is also your own responsibility and I cannot be liable for your decisions. I’m simply showing you what I’m doing in DeFi and what’s possible to do.
What is DeFi and what are the benefits of investing in DeFi?
Defi stands for decentralized finance – it’s a new financial system designed to allow you to earn interest on your crypto by lending or staking, and DeFi projects are built upon protocols that maintain the security of the underlying blockchain through smart contracts.
Let me break it down further for you:
Staking is essentially an investment where users lock up their cryptocurrency after signing smart contracts so they can have voting rights within the DeFi protocol while yield farming (earn interest) at the same time.
The more you stake, the higher your voting power will be which allows you to vote on how certain processes within the DeFi protocol are handled, remember it’s decentralized, meaning no single government has any say in it.
For example, if there are fees generated from a particular DeFi protocol, then those who have staked might receive a cut from those fees as a reward for contributing to the platform.
DeFi lending means giving protocols your crypto and receiving interest in return. This allows DeFi projects to get funding that they can use to grow the project, while you earn some income.
You can also earn income by trading DeFi protocols with their native token, however, this is not passive and trading is a skill in itself that can take years to master before you’re profitable.
Benefits of investing in DeFi
- DeFi platforms have a significantly higher return on investment compared to traditional investments, imagine that interest rates of 20% are actually considered low in DeFi space.
- You have full control over your own assets and no bank or financial services can ever tell you what to do with your own money when using blockchain technology.
- DeFi protocols allow you to generate income with your crypto holdings, outside of spending or selling it through things like yield farming.
- DeFi allows you to invest in projects that are trying to solve real-world problems and bring widespread adoption for blockchain and cryptocurrency.
- A massive wave of Fortune 500 companies are pivoting hard into the Metaverse space as we speak (Facebook, Nike, Microsoft), mass adoption of Web 3.0 will skyrocket in the coming years.
- DeFi lending gives you the chance to vote on DeFi protocols, which means you’re actively involved in your investments instead of just passively holding them.
When we talk about investing we need to make a distinction between long-term and short-term DeFi investment strategies as they are very different.
Short-term DeFi strategies are where you are trying to make money over the course of months, perhaps even weeks.
Long-term DeFi investment strategies are investments where you’re looking at a year or more as your time horizon.
Depending on your personal goals will dictate which strategies you employ. If you’re looking for pure hands-off passive income, then a long-term play is favorable, set it and forget it (but check in sometimes).
If you’re tolerable with shouldering high risk, then the long-term play might be for you and we’ll get into the risks in the next chapter.
The risks associated with DeFi investments that you need to know!
Let me be clear – DeFi isn’t for everyone – especially the short-term gains which are often referred to as “degenerate gains”, where you throw common sense out the window pretty much like gambling.
I understand, the 80.000% APY is tempting and may work for a few days or weeks but it also comes with the absolute highest risk!
What risks you might ask?
How about your investments dropping over 90% in value in a few weeks without recovering, which is exactly what happened to me and why I can speak from real experience.
There is also the risk of hackers stealing your investments and selling them off for profit, which can be mitigated by managing your passwords sensibly and using a hardware wallet for larger investments to protect yourself.
Risk management is an absolute priority, and we’re here for safer passive income strategies, which requires discipline (aside from some small technical knowledge of how cryptocurrency works and what to avoid).
So if you’re looking for something where you don’t have to lift a finger at all, DeFi is perhaps not what you want right now.
However, the safer ways of investing are something you can learn and get started with just by reading this article in a couple of minutes.
How to invest in DeFi with different safety levels
All investments come with inherent risk and that is true regardless of whether it’s stocks, bonds, real estate, NFTs, crypto, and so on. It’s always a balance between the risk to reward ratio, so always keep that in mind.
You could even argue that there is a risk of keeping your money in the bank since inflation is eating your cash alive and the value is dropping by the minute.
How much risk are you willing to take in order to make a profit?
The safer DeFi strategies
When it comes to safer alternatives, you want to invest in stable assets that have decent APY, which naturally lends itself to stablecoins.
Stablecoins are assets that are either pegged to the dollar or backed in any other way to maintain and keep the same price value of $1 no matter what the market does.
There are several stablecoins on different ecosystems such as:
- USDT (Tether)
- USDC (USD Coin)
- UST (TerraUSD)
- BUSD (Binance USD)
USDT is the most used stable currency when it comes to trading on different exchanges and also comes with lower yields when invested. The most popular interest accounts with USDT are:
BlockFi – 9.25% at writing
Celcius Network – 8.5% at writing
These are great alternatives to your regular bank and probably a 10 times higher APY than you currently have.
My personal choice is holding UST on the Terra blockchain with their savings as a service, as it’s just as safe while earning higher APY.
Anchor Protocol – 19.5% APY
Now getting your fiat money (regular “real world” currency) into these savings accounts does require a few steps:
- Sign up for a cryptocurrency exchange such as KuCoin, Binance, Coinbase, or Gate.io that supports UST trading.
- Either buy UST as a cryptocurrency straight, credit cards work.
- Or buy USDT, and exchange USDT for UST in the spot section of the exchange.
- Get a TerraStation wallet that will hold your UST fund on the Terra blockchain.
- Finally, deposit the UST on Anchor and start yield farming interest immediately.
As you can see there are a few steps but once you set up everything you’ll get the hang of it. Watch the video below for detailed step-by-step instructions:
Riskier DeFi strategies
There are of course a plethora of DeFi projects that we can invest in, all with their own visions, roadmaps, ecosystems, and so forth. If you’re going to explore this space then make sure to do your own thorough research!
What should you research?
- Who is the team behind the project?
- Are they legit people that have decades of business experience?
- What does the economy look like? TVL?
- Are there any real use-cases for the project?
- How much are you willing to risk if you were to lose it all?
There are some questions to ponder on, and after doing my own research and what I’m comfortable with I invested in a project called Strongblocks, which essentially is investing in nodes that contribute to the infrastructure of the blockchain.
How to increase your chances of earning a return safely
If you’re entering the DeFi and crypto space with a larger amount of cash then I’d strongly recommend investing in a hardware wallet first thing to keep your cash safe from hackers.
The two most popular choices are either a Ledger or a Trezor hardware wallet. I myself use a Ledger, which essentially needs my physical input with passwords in order to approve any transaction that happens on the blockchain.
So even if someone snuck their way into your online wallet, they need to physically be in my home to sign the transaction, which is a great second step for protection.
FAQs about DeFi investment
How do I invest in DeFi coins?
The absolute easiest way to invest in any decentralized finance coin is to sign up with a cryptocurrency exchange and buy the coin of your choice.
What is the best DeFi coin?
There are no best DeFi coins as all of them are on different chains, DeFi protocols, and ecosystems and do their own thing. But the two largest coins in terms of market cap are Bitcoin and Ethereum.
Is DeFi safe?
Degenerate DeFi with 80.000% APY is not safe at all. DeFi where you own your own money and stable assets with hardware wallet protection is safe.
How much money do I need to use DeFi?
You can start in DeFi with as low as $10 (save some for gas).
What is DeFi 2.0?
DeFi is a concept that started to grow in popularity with the rise of Bitcoin. DeFi refers to decentralized applications or platforms, going against centralized financial services like exchanges and banks; DeFi has no intermediaries between users.
As technology advances, DeFi 2.0 generally refers to DeFi projects that are able to provide high interest rates; previously DeFi was only profitable if you were shorting it (i.e., betting on deflation).
DeFi 2.0 also includes dApps that don’t need ETH by using their own token, such as CAKE on PancakeSwap.
So, what do you think? Is DeFi something you want to get involved with?
It’s definitely not without risk, but if you understand those risks and are willing to take them, the potential upside is huge.
I hope this article has helped give you a better understanding of what DeFi is all about and how it works. Do your own research, make your own decisions, and good luck!