Cryptocurrency as a financial instrument has changed the way people invest, with many people abandoning the traditional system of entrusting their investments with a bank, broker, or other financial institution in favor of relying on the decentralized nature of cryptocurrency, which provides them with complete control through peer-to-peer capabilities.
Of course, why should you put your investment in the hands of a financial institution that decides when and how you get your funds while charging you high commissions when you can take control of your investment with cryptocurrency and earn a higher return without paying any commissions to any third party? Cryptocurrency has undoubtedly eliminated central control over investment by completely decentralizing the financial system.
However, cryptocurrency's decentralized nature can be categorized into centralized finance (CeFi) and decentralized finance (DeFi). Although both categories seek the same goal, decentralization, they accomplish it differently. CeFi is the most popular category in which people invest due to its user-friendly interface and straightforward investment approach.
While CeFi provides a straightforward investment approach to crypto investors, it has limitations in that it places custody of your funds and private keys in the hands of an intermediary, typically a custodian wallet provider, who protects your crypto investment and manages all related activities. Unfortunately, this compromises cryptocurrency's decentralized goal of putting absolute control in the hands of its users.
DeFi investment, on the other hand, can be technical and complex, but it provides an open financial system in which you have complete control as an investor. DeFi provides a transparent, open-source financial environment in which everyone with a crypto wallet can participate, with several investment alternatives in addition to trading crypto assets regularly, as CeFi does.
Despite the technicalities and complexity of comprehending DeFi, it is critical to diversify your crypto portfolio as an investor by investing in DeFi projects, as it provides you full control and unlocks the power of your digital assets. With this advantage over CeFi, how do you invest in DeFi projects, particularly as a beginner in the DeFi sector?
Before delving into the numerous DeFi investments and how to profit from them, it is critical to grasp the fundamentals of this emerging decentralized financial system. DeFi is a type of blockchain-based finance in which central financial intermediaries do not provide services. Instead, it conducts transactions through blockchain-based smart contracts and cannot be updated or erased. As a result, smart contract transactions are handled entirely by the blockchain, with no involvement from a third party or central authority.
Without the need for a centralized body, DeFi effectively delivers decentralized trading through smart contracts that are used to carry out transactions on a peer-to-peer basis. Furthermore, no registration is required because the transaction is done via smart contracts. DeFi conceals investors' identity, as it does not require user registration or authorization.
With DeFi, you can generate passive income without trading your crypto assets by utilizing protocols on decentralized applications (dApps) powered by smart contracts that will allow you to earn an income by investing in staking, yield farming, providing liquidity, lending your digital assets, and so on.
Steps to Invest in DeFi
Set up a Self-custody Crypto Wallet
After you've learned the fundamentals of DeFi, one of the most critical stages for investing in DeFi projects is to create a crypto wallet. Unlike CeFi, where you can select between a custodial and a non-custodial wallet, DeFi requires a self-custody or non-custodian crypto wallet.
A self-custodial wallet gives you complete control over your private keys and funds. As a result, only you have access to and ownership of the funds held in these wallets, and your private keys are not accessible to third parties.
One of the best self-custodial wallets to store and manage your digital assets for DeFi investment is Cwallet. Cwallet is a straightforward wallet for beginners that supports 50+ networks and unlimited custom coins. All ERC-20, BEP-20, Layer2, Solana, and Polygon tokens, as well as 800+ mainstream tokens, are fully supported
Research and Choose a DeFi Project
You can choose from several DeFi projects with varying investment risks. Before making an investment decision, conducting thorough research on various DeFi projects and platforms is critical.
Some popular DeFi protocols to explore and invest in include crypto lending and borrowing, staking, participation in liquidity pools, yield farming, DeFi savings, etc. These numerous DeFi investments allow you to earn while maintaining complete control over your investment and income level.
Apply Proper Risk Management Strategies and Diversify
In general, cryptocurrency is risky because of its volatility. Investing in DeFi, on the other hand, carries a higher risk due to smart contract vulnerabilities, regulatory uncertainty, temporary loss, and a high slippage tolerance. As a result, assessing these risks and implementing adequate risk management measures is critical to ensure long-term performance and capital stability. Applying adequate risk management measures also means diversifying your DeFi investment across several DeFi projects and platforms to decrease your exposure to investing in a single DeFi project.
Invest What You Can Afford to Lose
When investing in DeFi projects or cryptocurrency in general, it is recommended that you start small and progressively expand your investment as you gain market exposure and experience. As a result, only invest money you can afford to lose, particularly if you don't completely understand how a protocol or platform operates. DeFi is complicated; therefore, invest a small percentage of your portfolio to grasp it well. Investing a small amount lets you pay attention to how the platform works and learn from your mistakes. Remember that investing only what you can afford to lose is a risk management strategy, and try not to get emotionally involved in trading decisions.
DeFi has grown significantly in recent years, and more investors are becoming aware of the possibility of harnessing blockchain technology to establish an open financial system. As a result, many people are riding the DeFi wave and investing in various DeFi projects.
By understanding the fundamentals of DeFi and the steps required in investing in various DeFi projects, you can start your DeFi investment journey with Cwallet and explore fascinating new methods of shaping the future of finance.
Also, using a crypto wallet like Cwallet allows you to choose between storing and trading your cryptocurrency in either custodial or non-custodial wallet environments. Cwallet is unique to you because there are no transaction fees, allowing you to maximize your profits.
- No Deposit Fees
- No Internal swap fees
- No Internal/ External withdrawal fees
- The lowest network and gas limit allow you to pay the lowest network fees.
Why wait any longer? Download the Cwallet App today and gain access to over 800 cryptocurrencies across 50 networks, and begin your DeFi investment journey.