Away from the centralized hub of the current traditional financial landscape, a new financial movement, known as the Open Finance movement, is starting to boom. A movement established upon the decentralized space of blockchain and cryptocurrency. Imagine if you could lend or borrow money instantly or even obtain insurance all in a matter of minutes in a decentralized financial market.
Well, that is what decentralized finance (DeFi) is all about. The DeFi market as of September 11, 2020, has a Total Value Locked (TVL) of USD 7.94B.
Exploring DeFi and Its Applications
As mentioned earlier DeFi is based on decentralization and is made up of a series of financial services such as borrowing, trading, payments, lending, and much more. All these financial services are provided through smart contracts platforms like Ethereum, Fusion, BSC, and the blockchain network in general.
The rise of the DeFi economy can’t be swept aside any longer and Fusion is one of the key drivers of this inevitable rise. Fusion’s vision of an interoperable platform has endeared it to many DeFi projects.
Contrary to the traditional financial markets that are highly centralized, which in the end leads to various gaps in service provision, DeFi offers a decentralized global alternative that is accessible to everyone. DeFi simplifies financial services such as insurance, loans, and trading in a way that doesn’t require tons of documents, applications, and reviews. For example, a DeFi exchange platform such as Anyswap provides simplified token exchange in a way that users can easily swap one coin for another with a simple click.
The DeFi economy is accessible from various dApps built to provide users access to the Open Financial market. DeFi has several applications in many core financial areas like lending and borrowing, Staking, Decentralized exchanges (DEXs), Payment Services, and Insurance.
Lending and borrowing have always been a traditional financial hotspot, and it is no different for the DeFi economy too. Here you will find dApps like Compound Finance and MakerDAO dominating the market.
Another dominant DeFi service is the decentralized exchanges that offer decentralized trading via the utilization of smart contracts. This helps bypass third parties in the transaction chain as the smart contract provides an automatic matching system to connect the sellers with the buyers. We have DEXs platform like Bancor and Anyswap providing this service to end-users. The attractive selling point of a platform like Anyswap is the low fees, high rewards, and getting more token pairs.
Although trading on the DeFi DEXs platforms has been simplified for end-users, it still requires you to know at least the basics of DeFi trading, as it comes with its own risks and pitfalls that must be navigated properly. Here are 10 actionable DeFi trading tips that can help you navigate the DeFi economy with considerable success.
1. Do Not Go After Everything You See
Yield farming is the driving force behind the current bull market in the DeFi economy. That means there are bound to be several enticing DeFi projects. Many of them will start out good; however, not all will mature and go on to be successful. Some don’t even take off at all. With these increased new opportunities for trading and financial reward also comes increased risks.
A quick look at the recently failed DeFi project Yam.finance is a good example of how a project can quickly go under. A wrong line of code was all it took to bring down a project that offered so many promises. As a result, millions of dollars in investment were locked away.
The basic line is the market is full of many projects that look very appealing. However, bear in mind the many risks that abound in the market as well. All these projects require careful consideration and scrutiny. Trying to pursue every market opening is bound to make you lose everything instead.
2. Bad Projects Will Spring Up, Too
Every time the Defi economy becomes highly rewarding financially, frauds and scams are sure to spring up. As scammers try to get a slice of the cake and with the way the DeFi market keeps picking up pace. You can anticipate more nefarious players to come on board the DeFi space.
These scammers find a way to fork a well-known project that is likely to look appealing to the public. These bad projects rely on the popularity and success of the previous reputable project. The tip here is if an offer carries illogical risks and looks too good to be true, avoid it like the plague.
3. Great Data Results In Great Insights
Data is everything in the financial market. It is the pointer that helps you make a great decision and take calculated risks. Besides, you are just as good as the data you gather. That is why it is imperative you take in your data from reliable sources.
You might be wondering how to source for reliable data from reputable sources. Fortunately, quite a few open-source information centers provide tons of data for market analysis. As the current DeFi bull market is Ethereum centered, some of the following sources can come in handy in your quest for high-quality data.
We have Coingecko, the CoinMarketCap equivalent for the DeFi market. We also have DeFiPulse that provides information useful for monitoring DeFi stats. Reliable and reputable sources like these make DeFi market navigation much easier for end-users.
4. Familiarize Yourself With Metrics
Understanding the basic metric can help you familiarize yourself with DeFi trading and some of them are described below:
TVL is the Total Value Locked and the term represents the total number of assets held by every DeFi protocols. Volume is the number of coin/token being traded at a specified period; it could be a 20-day span, 2 days, or even a day. Then we have Fees also known as Gas Prices, which stand for the amount that is charged for every transaction that is done within a specific period. For Ethereum based DeFi protocols, you pay in Ethereum so that you can carry out successful transactions.
Another basic term you should be familiar with is the Dominance rate, which represents a DeFi asset’s market cap percentage of the total market cap of all DeFi protocols in the market. For example, we can say that the DEXs project market presently has a dominance rate of 35% in the DeFi economy.
Total or circulating supply, these two metrics are also important basics that you should know. The total supply represents the total number of coin/token that will be released while the circulating supply stands for the amount presently in circulation.
5. Watch The Gas Prices
Most DeFi protocols are Ethereum based and the recent surge in ETH transactions means you have to watch out for the gas prices. Given the number of users that are eager to participate in several DeFi projects, you should expect the gas prices to go up. Careful planning of your trading strategy can save you some Ethereum in fees.
You can make use of an exchange like Anyswap that is known for its low fees, which are 100000 times lower than what is obtainable in the market. You can also keep track of gas prices using the ETH Gas Station.
6. Get To Know The Decentralized Exchanges
The DeFi bull market has been aided very much by DEXes, which is why you need to get yourself familiar with them. For newbies, it will be very helpful to gather as much knowledge as you can about DEXes. This can be achieved through tutorials on DEX as well as demo trading. You can also begin trading with little money that you can afford to lose until you become more accustomed to DeFi trading. A good place to start includes platforms like Anyswap, Uniswap, Mesa, etc. Additional DEXes include Balancer, Kyber Network, Bancor, Curve, Matcha, and many more.
7. Watch Out For Volatility
Anybody familiar with the blockchain sector will be aware of market volatility. However, for newbie traders, this is something you must watch out for in DeFi trading. Prices can come down as swiftly as they spike up in this market. Having this in mind prevents you from been caught unaware.
This is not to say that severe volatility is the constant status of the DeFi market. However, it is better to be prepared for it.
8. Follow Communities That Align With Your Interest
Once you pinpoint a project to trade in, it is best you follow the communities with the same interest as you closely. You can do that by visiting mediums that host mass discussion for the project of interest. Social media is a popular platform where you can find thriving communities for various DeFi projects. Social media platforms like Twitter, Telegram, Discord, and Reddit are hotspots for DeFi communities. These platforms offer many useful data on several projects and also provide you the opportunities to connect with people of similar interests.
9. Be Security Conscious
As mentioned earlier in tip number two, security is essential to evade the series of scams that are sure to spring up in the DeFi market. Be security conscious even as you try to experiment with different projects. Be wary of dubious websites aiming to steal your credentials through phishing attacks. Look at the web address of the site you are visiting and ensure it is the real one.
Projects that offer what is too good to be true should be carefully scrutinized to avoid falling victim to fraud. You can also make use of a hard wallet to store your tokens securely. Your wallet’s seed phrase is exclusively for your personal use. Do not share it with anybody and do not type it online carelessly. Dodge shady DeFi projects and websites.
On matters that are not clear, seek clarification from legitimate sources to help you make informed decisions.
10. Recognize The Risks
As exciting as DeFi projects are, you must know the classes of risk that comes with them. This will help you navigate this economy properly. Regulatory risk has to do with the decentralized nature of DeFi projects. Each one has a different level of decentralization, which makes it difficult to track all the claims made by the project.
We also have the volatility and collateralization risk. This kind of risk is more associated with lending and borrowing. It refers to certain collateral risks on loans. In some cases, the use of over-collateralization brings down volatility risk. However, that can backfire if the value of the collateral falls sharply.
Smart contract risk is the risk the DeFi protocol itself carries. A lot of these protocols are newly built and still require time to undergo rigorous testing and use to be deemed secure, safe, and successful. Therefore, the interaction between the series of DeFi protocols means the risks involved increase. So in case one protocol has a smart contract bug like the Yam.finance bug, it could expose the whole system or cause it to shut down. It is advisable to wait out the early stages of any project or put in a small amount you can afford to lose.
However, another sector of the DeFi market can help edge out these risks and that is DeFi insurance. You can explore DeFi insurance platforms like Nexus Mutual.
The act of trading is delicate and requires careful planning and considerations so as not to run into losses. Given that the DeFi economy is very large and ever-expanding, it calls for making informed decisions every step of the way as you trade. That way you can protect your investment and steer clear of bad investments.
We’ve had millions of dollars already invested in the massive potential of the DeFi economy with some yielding returns and some resulting in losses. The huge potential of the DeFi market means it will experience even more investment. Therefore, keeping up to date with various trading information and tips can give you the upper hand in investment decisions hence, ensuring a better chance of trading successfully in the DeFi market.