DeFi Investment: 9 Basic Principles, 8 Attentions and 7 Economic Tips

Recently, DeFi has lost a little of its popularity, both in terms of its token price and rate of return, which down from its peak. But it would be an exaggeration to say that DeFi is in the deep freeze. I believe that DeFi is gaining momentum for the next wave.

The price of BTC has hit a two-year high as Paypal announced that it will soon support bitcoin transactions. DeFi’s foundation remains robust, and with Silicon Valley’s venture capital firms on the scene, some critics say it could be driven into a bubble in the coming years.

“Looks like Silicon Valley has finally discovered DeFi. Compared to the indigenous people of the crypto community, Silicon Valley entries late whether on BTC, ETH, or DeFi. But if the historical revelations are anything to go by, we can say they will hype it up and create a huge DeFi bubble in the next few years.” — crypto analyst Qiao Wang

But as with all early industries, DeFi has both advantages and disadvantages: there are stories of sudden wealth, opportunities for high returns, but also lies, scams, plates and scythes. The players involved, have to watch out and improve their ability to control the opportunity and risk, then they won’t be like a reckless man, holding the torch high and passing through the powder keg.

The Defects of CEX and the Rise of DeFi

With the emergence and prosperity of DeFi apps like Uniswap, crypto-asset traders have found their toys. Criticism of central exchanges pins, frauds, backroom deals, and so on has emerged one after another. DeFi, instead, has been well received and positively responded by the crypto community.

There are many criticisms of CEX, such as:

  1. It is too powerful and become a monopoly of the project

2. corruption

3. manipulation of asset prices

4. minting counterfeit to circulate in exchange

5. insider trading

6. manipulation of the securities margin trading and options trading

7. false start trading, price manipulation

8. force the customer must do KYC process

9. without consent, transfer the personal data to government agencies

10. high commission

11. When problems arise, let users assume responsibility

12. go wrong at a critical moment

With OKEx’s recent accident, perhaps we can add another: the private key controller is at risk of losing contact and then users may not withdraw funds.

To sum up, it’s not hard to see the growing popularity of decentralized protocols, with many expecting DeFi to play a key role in the next cryptocurrency bull market. However, it should also be considered that the risks of DeFi networks cannot be ignored either.

Where there is money, there will be frauds.

The trading process of the decentralized protocol allows traders 24*7 access to the crypto market, their funds and new projects. With this in mind, we will now investigate some safety rules to help trade in this attractive growth area.

DeFi protocol allows traders to continuously trade crypto assets, participate in new projects, and manage assets. In order to participate and operate safely, we need to understand some basic principles.

9 Basic Principles

  1. Follow new projects you’re interested in via Twitter and Telegram. Many projects publish official information through these channels and, where possible, verify the news through these official channels.

2. Follow up and analyze team announcements. Is the team working on schedule or not? If there are exceptions, it may indicate that the team is understaffed, poorly planned, or, even worse, there is a risk of absconding with the money.

3. Check information from trusted sites, such as Coingecko, compare and verify the announcements in the telegram group. It is not complicated to check the project’s contract address, but this simple procedure prevents fraudsters from often duping unsuspecting traders with fake addresses in the name of legitimate projects.

4. Check corresponding liquidity in Uniswap. Some programs, though already online, have not increased liquidity on Uniswap, which means that traders cannot trade tokens timely. This is often a red flag, meaning that the project side may have to pull up and let the crypto asset traders take over.

5. Investigate project members’ secretly fraud. This information is often difficult to detect, and sometimes impossible to prevent. But watch out when there are “surprises” in token distribution and project progress, especially in places that shouldn’t go wrong.

6. Check smart contracts. Some clues to the project can be found by publishing and verifying smart contracts. GitHub allows you to verify contracts, but you should also be aware of delays in the release of smart contracts. If a project releases a smart contract only 24 hours before release, it may indicate that the project has something to hide.

7. Look up project details such as whitepapers and website information. This will help you make a decision about whether the project is a scam. Whether the preparation is insufficient, or just the market conditions are not appropriate, the launch time is not ripe. Some criteria should also be listed, such as the team’s lockup tokens, and the influence of the team portion on the market token circulation.

8. Use common sense. A lot of copycat projects are named after food, which sounds ridiculous, and it’s easy to abscond with the money. As a DeFi participant, your common sense should tell you.

9. Think independently. Remember that while social media can be fun, don’t be fooled by all the hype. They are not your friends or your well-intentioned crypto community, they are often nothing more than a combine harvester with a scythe tucked away and ready to fall.

It’s easy to entertain yourself on Twitter and blogs about crypto information. But just take a look at the case of Blue Kirby, the biggest fans of YFI, who went from a heartthrob to a money cheater in just three months. Don’t trust anyone so easily.

8 Attentions

Don’t invest just based on the influence of so-called KOL on Twitter/ Weibo and other We-medias. Many experienced traders are still making money from the copycat programs. They just buy early and sell quickly. Thus, don’t fall for other people’s stories too easily.

  1. Stay alert from anonymous team projects, in spite of its excuse. The risk of anonymity is obvious, that teams can escape and remain anonymous to hide their identities. Of course, you have to judge by yourself.

2. Keep an eye on the mechanism of token liquidity supply. Many projects want to run away but are not willing to give up, so they manipulate and pull up the price and then sell it at a higher price, causing huge losses to traders. A small supply of tokens, or a small number of unlocked tokens in circulation, may be both red flags, so please watch out for them.

3. Beware of the so-called KOL’s smooth tongue. This is often done deliberately in order to throw their tokens to you, so be on your guard. These tokens were either sold privately or given for free to promote the project. Promoting projects is a red flag because they often do it without considering the project’s qualifications and it is just for the money. Remember to do your homework.

4. Stay alert from rhetoric saying like “If you miss bitcoin, don’t miss the next bitcoin XX”. These kinds of projects are probably copied and pasted from another project for a quick profit and quick exit.

5. Stay alert from rhetoric saying like “coming soon”, which may mean that they have nothing to announce and are just hoping to coax you before they get your money.

6. Beware of projects that have a small number of token addresses and even with a large number of lockup tokens. If tokens in circulation are largely concentrated in the hands of one or a group, it is likely to cause unsuspecting DeFi traders to take the plate.

7. Beware of another opposite situation: some projects may have a lot of addresses with the small but same number of tokens. In these cases, developers will make it look like legitimate tokens sell for outsiders, but in reality, these are just a cover.

8. If there are many spelling mistakes on the project’s website, please be careful!

7 Economic Tips

In addition to security considerations, there are special economic risks to consider for DeFi. Due to the limited length, we abbreviate these seven economic tips.

  1. High APR doesn’t mean a high real rate of return

What about APR? That’s the first thing people care about. Many projects initially have ridiculously high APR that seems like a good way to increase your income. But first, please ask yourself two questions:

First, can this high return be sustained? In the beginning, when tokens were distributed in large quantities and the heat was high, the mining profits were indeed considerable. However, in a short period of time, they would also fall sharply.

Second, can I get a good price for my token? In many DeFi projects, the initial market value is inflated due to a large number of token lock-ups, but the price will soon take a nosedive.

2. Usage scenario is important

Is the token of a DeFi project really valuable? In fact, the value of governance tokens in many projects is overestimated. Besides governance, what are other functions?

For example, Uniswap UNI token can be used as collateral to obtain loans from other platforms, which is a real embodiment of the usage scenario. And this adds extra value to UNI, while many other DeFi tokens, which are temporarily overpriced without real usage scenarios, are destined to fall soon.

3. Be alert of unaudited project

In front of money, the credibility that without the audit support, sometimes can not stand the test. Be sure to check that the project has been audited by a reputable audit team. Besides, the project code must be audited too.

For example, Andre Cronje once revealed that he was associated with a project in development, and people trusted his good reputation and invested a lot of money for it. However, the project was unaudited and the hackers stole $15 million from the project.

4. Remember to count GAS cost when calculating profits

DeFi investors should be familiar with ethereum’s period of high Gas fees. Especially when it comes to complex contracts, when trading volume is low, the small profit often isn’t enough to cover the high Gas fees. Remember to take this into account when calculating your profits.

5. The timing of market entry is critical

When to start mining? The timing of entry is critical. Mining initial tokens of one project have become an unspoken consensus among many because market yields tend to start falling in the first few days after the initial launch, and if you notice the project only then, be careful not to pick up the plate.

6. Consider impermanent loss seriously

The number of trading pairs you have staked for market-making will change as the prices of all trading pairs involved in market making move. Impermanent losses are caused by the volatility of tokens, and careful selection of market-making pairs can help to reduce unnecessary losses. Every trader involved in DeFi should know impermanent loss. Some DeFi would provide comparison data that you can view. In trading pools, providing liquidity over a long period of time could help to solve this problem.

7. Remember to calculate the total market value

In the beginning, the circulation of the token is small and the price is high. Then, the value of DeFi token will drop in the next few days as the number of tokens in circulation increases. One way to look at this is to use statistics from websites such as Coingecko to find out how your investments rank and then compare them against the supply of tokens from another similar project as a reference for future price fluctuations. This kind of calculation helps you to calm down from the false high of the current project, because you will find that the unit price of the project will be reduced by calculation.

Conclusion

The fast-growing DeFi, despite its considerable benefits, is often a high-risk game. Remember, do your homework and manage your risks before you jump in; invest only in assets you can afford to lose; invest only in projects you trust; avoid FOMO. Invest a small amount of money as the cost of learning, and with that mindset, you’ll do well in DeFi.

Article from $ trong

Translated by Yang(Milian Tech)

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To translate some latest policy and issues on blockchain and fintech happened in China