As the decentralized finance industry continues to grow by leaps and bounds, so do the projects that may prove worthwhile keeping an eye on. In this segment, one can identify multiple ventures with future potential and implications. Always conduct thorough research before making any financial commitments in the DeFi space.
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Why Invest In DeFi Projects?
Cryptocurrencies are part of a broader alternative finance industry. Many people are familiar with Bitcoin and what it can offer, but you can explore thousands of other projects. One can put some of these projects in the “decentralized finance” or “DeFi” category, a segment that provides alternative financial services and products to users globally.
As many people missed out on buying Bitcoin at low prices, some speculators and investors hope they can see similar returns from investing in DeFi projects. Identical to the original people who invested in Bitcoin, DeFi projects are not without risks. Conducting thorough research and analysis before committing money remains paramount.
Furthermore, no one can guarantee anyone will make money by investing in DeFi projects. No one can ensure you will make a profit by buying Bitcoin at today’s prices either. It all comes down to personal risk appetite, fundamental analysis using basic indicators, and a fair dose of luck.
What You Can Invest In
Similar to how one can divide the cryptocurrency industry into several segments, decentralized finance has its own ‘sub-industries”. Some of these options may prove more lucrative than others, albeit there are no guarantees for success. Everyone can’t make money in this industry, but some may fare better than others.
Furthermore, it is crucial to invest in projects with a long-term roadmap or chance of success. Investing in infrastructure powering DeFi projects today or in the future is always a good bet, although the returns may not be as astronomical as exploring other markets. Great rewards require exponentially increasing risk, which may not be an option for everyone.
Decentralized Exchanges / AMM Platforms
One of the main reasons why decentralized finance is getting so much attention is due to decentralized exchanges. More specifically, these trading interfaces make it easy for Defi projects to launch their token and make it accessible to millions of users and speculators. As no one needs “permission” to list a token, trading can begin as soon as tokens are created.
Rather than investing in all of the tokens themselves, speculators and investors may want to look at acquiring assets native to these decentralized exchanges and AMM platforms. More specifically, platforms like Uniswap, Sushiswap, PancakeSwap, and 1INCH – to name a few – have all granted tokens to users of their respective platforms.
Through a process known as an ‘airdrop” – a scenario in which users who meet specific requirements receive these tokens for free based on their platform activity – users of the platforms above may have received thousands of dollars in tokens in their wallet. It is always possible for those who haven’t received an airdrop to buy the assets on a DEX or most centralized exchanges today.
That said, investing blindly in these native DEX or AMM assets is not advisable either. A platform like SushiSwap lets users stake SUSHI and earn xSUSHI, a token with many use cases. Uniswap’s UNI token primarily acts as a governance token, with no other uses today. Always figure out the value proposition for these tokens, especially if you expect them to rise in value.
Layer-two Scaling Solutions
For those who want to support the future of decentralized finance, looking at platforms capable of providing possible scaling solutions is crucial. It is apparent that a blockchain like Ethereum – which is home to the majority of DeFi projects – has severe scaling problems. Its high gas fees can cost up to $100 to deposit funds to a decentralized finance platform, which isn’t acceptable.
While most DeFi platforms do not necessarily support layer-two scaling as of yet, there are certain exceptions. Loopring, for example, provides decentralized trading and may become a staple in the DeFi sector. It is a matter of time until developers begin exploring these options, especially as Ethereum 2.0 may take months or years to come to market.
There are other DeFi-oriented layer-two networks on Ethereum to look out for. DFinance, OMG, and zkSync are just a few examples. Putting money into the layers that will help networks, DApps, and DeFi solutions scale and expand can prove worthwhile but is not necessarily a recipe for profit. It is always pertinent to keep tabs on what different projects bring to the table and whether they offer any long-term improvements or solutions.
However, it remains to be seen if and when decentralized finance will move to layer two in the future. More specifically, the Ethereum Virtual Machine doesn’t seem to support such integrations completely, creating an awkward situation. Ongoing optimizations by developers may change the narrative soon, but it remains unclear what the future holds. Additionally, there is also a question as to how many projects will move to a different layer if the option is available.
Blockchain Oracle Services
If there is one aspect the DeFi industry cannot do without, it is accurate price information. As many projects provide yield farming and other ways to generate money, depicting correct price values is of the utmost importance. For this reason, many DeFi developers opt for decentralized price oracles, such as Chainlink, to leverage the potential of blockchain technology.
The primary purpose of these oracle services is how they provide external data to smart contracts. At their core, smart contracts are incapable of interfacing with information in the real world. Through oracle services, it becomes possible to obtain that data and use it to empower a smart contract further. Pricing feeds are just one example of how this technology can make a difference.
A decentralized price oracle will always source data from multiple sources. Doing so makes it easier to find the correct value, as it bases the “verdict” on these inputs. Having more data sources will yield a better result and one that cannot be tampered with due to blockchain technology.
Whereas Chainlink has the highest market capitalization among blockchain oracles, other projects can prove worthwhile. iExec has a decentralized oracle service, as do Corda, Oraclize, Town Crier, Aeternity, Mobius, and many others. Competition in this segment will likely ramp up over the years to come, creating potential opportunities for DeFi enthusiasts and investors.
DeFi Insurance Providers
The DeFi industry is one with great opportunities but equal risks. Investing in any project, currency, or asset always carries certain potential drawbacks, yet decentralized – and largely unaudited – projects pose a different kind of risk. Purposefully exposing one’s portfolio to this industry isn’t always the smart idea, regardless of how prominent the potential return on investment may be.
Several projects in this industry aim to address this problem by creating a decentralized insurance solution. It is a model that remains relatively new, yet various DeFi teams see the benefit in obtaining coverage or insurance for user funds. As is often the case with new ideas, the business models may be subject to further improvements, yet the basic concept seems valid.
Today, several decentralized insurance projects exist. Names to explore include Nexus Mutual, Cover Protocol, Etherisc, CDx, Opium Insurance, Tidal, Evertas, Coincover, Aon, and so forth. Similar to blockchain oracles, the decentralized insurance sector is likely to undergo tremendous growth over the coming decade. Its role in decentralized finance remains unclear, but it doesn’t take much to put one and one together.
Cross-chain DeFi Projects
The last “big” option on this list is investing in decentralized finance projects that go beyond “one blockchain”. More specifically, what people currently perceive as DeFi is nothing more than an extensive collection of decentralized applications on the Ethereum blockchain, incapable of handling this volume. Although other blockchains see some decentralized finance solutions as well, their impact remains minimal, for the most part.
That said, exploring only one blockchain for DeFi liquidity seems detrimental. Etheeum’s market cap is over $200 billion, yet Bitcoin sits at over $1.06 trillion. Furthermore, the entire crypto market capitalization recently surpassed $1.79 trillion, making Ethereum seem like a minor fish in the pond. Decentralized finance products and services exploring liquidity across different blockchains may undergo massive growth in 2021 and beyond.
Today, there are a handful of projects catering to users on different blockchains. Some even hope to integrate assets like Bitcoin and XRP in the future yet have no clear timeline for doing so. As more exchanges begin integrating decentralized finance protocols directly, demand for multi-asset support will only grow. Creating decentralized finance will require supporting nearly all cryptocurrencies in existence, yet that may not happen for years to come.
Stick To The Golden Rules
Regardless of which DeFi projects you want to explore as an investor, there are a few golden rules to respect:
- Never invest money you can’t afford to lose
- Always perform thorough research by combining multiple data sets
- Cryptocurrencies are long-term investments and not get-rich-quick schemes
- Trading can be successful, but sometimes it is better to HODL for a more extended period.
As most of the industry’s decentralized finance projects are still in the early stages of development, there will be plenty of price fluctuations. Do not be alarmed by sudden price movements, as those will occur in any market. Any project worth its salt and with a long-term road map will succeed eventually, even if the financial gain remains limited.
There is a lot of excitement surrounding the dozens of DeFi projects on the market today. Rather than looking at individual assets, it is crucial to figure out what the accompanying platform or service aims to achieve. The five industry pillars mentioned above are just an example of what developers can achieve in the years to come.
Following the hype is a great way to lose money in the cryptocurrency world. Always stick to your research and trading strategy before making any commitments. Decentralized finance is an exciting industry, but one that is still in its infancy today. It needs to be treated as such, as do any investments in individual projects or technologies.