DeFi: Another Instance of Too Little, Too Late?

Dozens of new DeFi coins appear every day. 90% of them may not even exist in a week. Most of the created tokens do not have enough liquidity and are designed to collect money quickly and disappear for good.

Currently, DeFi projects include a wide array of projects within an already established and fairly extensive market. On analytical cryptocurrency aggregators, decentralised finance is referred to as a hundred different tokens associated with DeFi projects.

This includes all stablecoins, cryptocurrency wallets, infrastructure solutions, prediction markets, marketplaces, landing platforms, validators in PoS networks that implement staking, as well as various financial instruments implemented on the blockchain.

However, since this summer, the DeFi hype has been making headlines with yield farming. It is often confused with staking, but these are two completely different things.

In the case of staking, it's not about tokens, but about cryptocurrencies. Large holders who own a significant share (stake) of a certain cryptocurrency are entitled to validate (confirm) transactions in the proof-of-stake blockchain of the cryptocurrency type, for which they receive a reward similar to miners in proof-of-work networks.

With yield farming, users are credited with tokens of the site, with which they provide liquidity by borrowing their digital assets (other tokens). Apart from the bonus reward for users, such “farm” tokens have no intrinsic value. Their price is determined only by the popularity of the project with which they are released. For this reason, if mass interest in the site is lost, the value of the token can fall by hundreds of times, given the previous crazy growth.

Taking into account the fact that, in addition to tokens obtained through yield farming, users receive a percentage in those tokens that were given to the platform. Thus, participation in yield farming is profitable in itself. And here the main risk is the site being hacking and losing the entire pool of liquidity.

Although most people simply prefer to buy a token obtained from yield farming. In this case, they are not charged anything. They simply keep tokens in their wallet, the rate of which is almost impossible to predict.

DeFi tokens, like any other assets, are chosen depending on the goal pursued. This can be speculative trading, medium and long-term investment or diversification of an existing investment portfolio.

Basically, the criteria for choosing tokens are the same as for all cryptocurrencies:

• If we are talking about the acquisition of tokens for the purpose of selling them in the near future at an increased rate, then in this case, traders are primarily concerned with the growth of the popularity of this project in the crypto community.

• The main question is still the same — does the project make any sense and what is this token for? Or, is this rubbish? Here, standard factors are taken into account: a proven team and its potential, real representatives, the main creators of the project, the presence of large investors. In the case of the ICO, traders used to look at the white-paper and the presence of a minimum viable product, now they look at the audit of the smart contract and whether it is bug free. Since the beginning of 2020, we have repeatedly observed the hacking of DeFi projects, which have occurred due to the presence of vulnerabilities in the code that allowed hackers to withdraw funds. It should be noted that it is also worth looking at who conducted this very audit, and whether it is worth trusting it.

• In addition, recently we have increasingly seen how the hype is spinning around tokens that are still at the testing stage, even while launching the so-called test in production. As a recent story featured on eminence.finance has confirmed, making purchases of tokens at this stage is extremely risky, even if people already know the cryptocurrency space and the people who are behind the project.

• But, in fact, any project at any stage can misfire or simply fail. We cannot be certain about absolute guarantees and the absence of any risks anywhere, and this applies not only to the cryptocurrency world. As for DeFi, they are just at the start of their journey, many solutions are unique in nature, there is nothing to compare them with traditional finance in order to predict further development.

It is definitely not worth investing all the funds in one project, it is better to choose several at once in order to increase the likelihood of making a profit. Also, for the purpose of investing, you should not buy tokens during the time of their active promotion. Better to wait for the price to stabilise slightly.

But it may turn out to be much more profitable for you, if you do not simply buy a token, but try to understand how DeFi works and take part in such a project.