A Guide to Investing in DeFi Cryptocurrencies: From Theory to Practice

Newcomers to the DeFi ecosystem often feel overwhelmed by the sheer volume of new information, opportunities, and concepts that wash over them as an unstoppable tide. Difficult onboarding, incomprehensible educational materials, and the lack of reliable sources of insights create a noticeable knowledge vacuum that cannot be easily filled if you do not know where to look for valuable content.

Let’s have some fun and talk about the world of DeFi as two different beasts: 

1. The idealized financial ecosystem built by and for visionaries is described with unyielding enthusiasm.
2. The tough investment landscape does not forgive complacency, poor judgment, and unpreparedness.

The dream of cryptocurrency investing

When a particular someone called Satoshi Nakamoto launched Bitcoin, finance changed into something unseen. While the main political motivation behind the creation of decentralized finance was to avoid the next 2008 financial crisis caused, in large part, by the total control of centralized entities over the economy, many investors quickly realized that Bitcoin is just the first foundational stone that can be built upon.

Ethereum and its virtual machine gave birth to a rapidly growing ecosystem where DeFi protocols can interact with assets through smart contracts, largely excluding humans from the equation and allowing capital holders to work directly with financial services.

In theory, the idea is quite simple:

• Build a decentralized network capable of storing immutable data and changing it only when users agree to make a change.
• Add tiny applications that can interact with this architecture in a trustless and permissionless manner to remove intermediaries.
• Build novel financial services that require less administrative processing, manpower to run, and data collection.

During the earliest stages, many blockchain investment strategies were difficult to implement as users needed to learn a variety of technical skills and have deep knowledge of the technology behind digital assets. Everyone has access to a wide range of user-friendly instruments. They make the investment process more convenient and accessible for newcomers.

You don’t need much to get started:

• A crypto wallet allows you to interact with the DeFi ecosystem. Modern applications are capable of working with different blockchain networks even if they are drastically different in terms of architecture allowing for effective cross-chain investment approaches to be used by adventurous capital holders.
• Investable funds that can be allocated to protocols or used on exchanges. Here, many investors feel lost as the DeFi ecosystem has over 120 tracked chains with thousands of different tokens and digital assets. It can be quite hard to decide what to buy and where.
• A good strategy for smart crypto asset allocation and achieving consistent returns. Coming up with a good system that allows you to pick appropriate investment targets, identify opportune moments to exit positions, and adjust holdings according to the dynamically changing market situation can be incredibly difficult even for veterans.

Ideally, you will need efficient tooling to optimize profitability and analyze the market as well as possible. Crypto investors often use DeFi portfolio trackers, advisory services like Rivo, and many other excellent instruments to ensure that they have access to the finest information and most effective methods of interacting with the ecosystem.

Using decentralized finance opportunities

Having a strong theoretical foundation is important but may not even matter when it comes to practice. The world of DeFi is diverse with over 5,200 different protocols all with unique interfaces, complex products, novel investment instruments, and unfamiliar features. What works when you are dealing with Aave and its lending pools may be absolutely irrelevant on something like Aerodromw with its sophisticated rewards system.

Let’s talk about the actual steps you need to take to become a DeFi investor:

1. Choosing a reliable wallet. Note that you must have a software wallet that can easily interact with various types of DeFi protocols. Some of the most popular ones are MetaMask for EVM-compatible projects, Wallet Connect, and Solflare for Solana. You can also choose a more specialized tool like Rivo Wallet which is a great choice for investors interested in receiving advice from professionals and tracking investments in real time.
2. Setting up security measures. Before you even start thinking about token economics basics and various investment instruments, it is important to focus on protecting your holdings from various safety threats. Multi-factor authentication, safe key phrase storage, and assessing the safety of protocols and smart contracts you plan to work with are crucial factors!
3. Selecting target protocols. The DeFi ecosystem has over 5,000 tracked protocols and a seemingly infinite number of investment instruments including liquidity pools, direct staking, insurance, lending, real-world assets, and more. These are scattered across over 120 chains each with its unique financial ecosystem. To acquire the right assets that will form the investable capital, you must choose where to start.
4. Obtaining tokens. To interact with protocols you will need to have the necessary resources. For example, if you want to invest in the ETH pool on any lending protocol deployed on mainnet (i.e. Compound), you will need ETH tokens that will be used as capital and to pay for transactions associated with the operation.
5. Finding the right strategy. Due to the variety of options available to DeFi investors, picking the most profitable or the safest approach to capital allocation is nearly impossible. For instance, some investors believe that aggressive yield farming mechanisms are too risky but they have been consistently producing returns for thousands of proactive capital holders willing to engage in high-risk/high-reward strategies.
6. Tracking and adjusting. Since contemporary DeFi users have access to thousands of different digital assets and ways to utilize them, tracking all holdings, even if you are operating on a low budget, can be challenging. Use portfolio trackers like Zapper or partner with a platform that offers analytics, insights, and strategies like Rivo. It is important to track the performance of your portfolio and make adjustments to the asset composition when needed.

Note that the strategy selection process is often the most difficult. It is relatively easy to get a grasp on how protocols work. However, investment risk assessment can turn into a nightmare if you don’t have access to relevant insights and useful, actionable information about the market and various investment instruments.

The main takeaway

Reading about the DeFi ecosystem on various social media platforms can be entertaining and inspiring. However, it is not enough to know where to invest and how to calculate potential profits. Smart contract evaluation, gas fees, reward types, protocol safety, and many other factors can dramatically affect the outcomes of your investment activities. You will have to deal with cross-chain transactions, interact with smart contracts, and practice safe methods of self-custody.

On the other hand, it can feel liberating to fully control your finances and being responsible for the safety of holdings. You can even directly affect the DeFi ecosystem by participating in DAOs. Just don’t forget to conduct proper governance token analysis before investing in protocols that reward you with them. Tokens like Curve DAO can be valuable due to their utility alone but many others can quickly turn in purely speculative assets.

We strongly recommend spending less time reading and fantasizing about the DeFi ecosystem and more time experimenting with novel investment instruments and interacting with protocols.