Diversification is key to ensuring you will be able to take advantage of every opportunity without incurring too much risk.
If you’re paying attention to developments in the cryptocurrency
space, you’ve likely heard of decentralized finance and of the yield
farming trend that helped it get over $9 billion worth of crypto assets locked in it.
In
short, yield farming — also known as liquidity mining — sees users
generate rewards with their cryptocurrency holdings by interacting with
DeFi protocols that either let them lend or borrow tokens. These
interactions grant them the protocols’ governance tokens, which both
give them a “stake” in the protocol and more revenue.
The trend started when lending protocol Compound started distributing its COMP governance token.
Shortly after, various other protocols launched their own governance
tokens and distributed them in the same way. Now protocols such as
Yearn.finance act like smart savings accounts, helping users find the
best yields across the DeFi space while rewarding them with YFI tokens.
The appeal of DeFi
Ever
since Compound launched its governance token, the total value locked in
the DeFi space surged, as users started moving to farm yield as quickly
as possible. With rewards generated from the tokens being distributed,
annual percentage yields can often exceed 1,000%.
With 10-year treasury yields being
at 0.6% and 12-month yields at 0.09%, 1,000% is an extremely attractive
offer. Users can lend stablecoins on DeFi protocols, so the risks
appear to be next to none: If the tokens they are farming lose value,
they’re still earning rewards for lending funds, and these rewards are
well above 0.67% on most platforms.
There are, however, hidden
risks associated with DeFi and yield farming. Popular DeFi protocols are
developed by small teams with limited resources, which can increase the
risk of smart contract bugs and vulnerabilities. Even well-known audited protocols have been hacked.
Moreover, scammers take advantage of every opportunity in crypto, and multiple cases of exit scams
and outright fraudulent projects in DeFi have already been reported.
While there are opportunities to make a lot of money in this space,
there are also hidden dangers that investors need to watch out for.
How centralized finance can help?
As
we’ve seen before, if you are investing in the DeFi space, it’s always
better to bet on diversification instead of short-term gains. A DeFi
portfolio should have exposure to top cryptocurrencies in the space,
ensuring you don’t lose everything to scams, unexpected market moves or
technical issues, and invest in potential gems while it’s still early.
Diversification
ensures a sustainable approach to gain exposure to the wonders of DeFi
while ensuring you don’t lose all your money to a bug or human error.
Related: The battle between DeFi, CeFi and the old guard
True
decentralization is seen as a strength in crypto, and we can use
decentralization to our advantage in investing in DeFi and yield
farming. There’s no doubt that the best returns are on the protocols
that distribute tokens, but using them is also as risky as it gets.
As
such, a novel investing approach would be to set part of your funds to
farm yield on a centralized exchange. It’s more secure and stable, but
the rewards aren’t going to be as wild. For wilder rewards, using a Web
3.0-compatible wallet and testing out new protocols are the way to go.
Every farmer should have a different approach, just like every investor
diversifies their portfolio among stocks, commodities and bonds.
This
article does not contain investment advice or recommendations. Every
investment and trading move involves risk, readers should conduct their
own research when making a decision.
source link : https://cointelegraph.com/news/centralized-finance-is-necessary-especially-for-defi-crypto-investors
