Investing in DeFi: A Step-by-Step Entry Strategy for Beginner Investors

Building a portfolio full of digital assets from the decentralized finance sector and making it work can be a difficult task for many newcomers since they are often overwhelmed by the variety of options and the sudden rush of information that must be learned quickly. In fact, over 60% of investors who prefer to stay away from the DeFi ecosystem cite challenging onboarding as the main hurdle.

Learning how to create efficient DeFi investment strategies is not easy even for veterans with years of experience. The volatile nature of the crypto market also adds complexity to the decision-making process. However, a beginner uses some basic techniques to avoid excessive risks and build a balanced portfolio that performs well under different circumstances.

While the process may involve a multitude of high-level concepts, all investors who want to thrive in the DeFi ecosystem must do the following steps:

1. Find the right size of initial capital that fits the investor’s personal preferences and circumstances.
2. Identify the desired risk profile of potential investments and set reasonable profitability goals.
3. Explore the DeFi ecosystem and search for protocols and pools that seem to fit the criteria above.
4. Find a good portfolio tracking tool or wallet to keep track of investments.
5. Make adjustments according to the dynamics in the market and the DeFi sector.

This simplified beginner’s guide to DeFi indeed contains all the necessary steps one must take to get started. We assume that potential investors are familiar with decentralized platforms and understand how to interact with them.

Prepare to enter the ecosystem

DeFi instruments are less complex than they appear to be. The novelty of user interfaces and types of operations make it hard for people without experience to get started. However, once you understand the core principles and acquire some first-hand experience, everything starts making perfect sense.

We cannot educate you about the intricacies of using specific DEXes or other DeFi protocols. However, we can tell you what you will need to interact with the ecosystem:

• A source of educational materials. You don’t want to feel like a fish out of water. Go to community resources and forums for support. Use Rivo’s AI agent Maneki to learn more about various DeFi features or find a website that has useful information.
• A wallet that works well for DeFi investments. Rivo, Zapper, MetaMask, and many other wallet apps are excellent choices for newcomers as they can easily connect to a wide range of protocols.
• Capital must be allocated to appropriate blockchains. If you want to invest in Solana and its risky pools, you need funds on this chain specifically. Make sure to check where you are moving funds.

You will spend some time on your first crypto wallet setup if you never had one. While it takes just a couple of minutes to create a new address and install software, learning how it works and setting up security measures can be a lengthy process for a newcomer.

Choosing the right capital size

The typical rule for investors is to follow the 70/30 ratio where 70% of investable funds are allocated for stocks and other volatile assets while 30% goes toward fixed-income assets like government bonds. Having 70% of your capital dedicated to only crypto may seem like a good idea but one must remember that diversifying investments is incredibly important.

Diversification should be used on all levels. Your portfolio must be comprised of different asset classes. Each asset class must be further diversified to different types of instruments with each once again diversified across various individual targets.

Here’s a simplified example:

1. You may dedicate 70% of your portfolio to stocks and 30% to US treasury bonds.
2. Funds used for the stock market can be evenly divided between options, futures, short positions, and long positions (25% each).
3. Each of the instruments may be split between different stocks and indexes.

The same principle can work in the DeFi ecosystem considering the sheer number of available options, staking opportunities, and other targets for capital allocation. As of the time of writing, DeFi data aggregators are tracking over 5,200 protocols offering over 11,000 pools. While many of them are inactive or do not have meaningful cashflows, it is still an incredible complexity that may overwhelm a newcomer.

A safe capital size can be anywhere from 5% to 25% of your total investable assets. Risking everything you have is like making a very risky bet on the uncertain future of digital assets that have a history of immense volatility and unpredictability.

Risk management in DeFi

It is hugely important to focus on selecting the right risk profile for your investments. Diversifying across different protocols is a sound plan but you don’t want to work with risks that cannot be offset by other investments. At the same time, long-term holding is not for everyone as many investors enjoy investment instruments with a higher risk premium.

Here are some of the instruments that you can find in the ecosystem and their respective risks:

• Liquidity provision strategies are moderately risky. Most decentralized platforms need liquidity and are willing to share revenue with liquidity providers or reward them with incentives and fixed payments. Some DEXes have incredibly high APYs. For example, Aerodrome on Base offers 332 pools with an average APY of over 90%. Investing in the USDC-AERO here yields over 45%.
• Lending cryptocurrencies on DeFi platforms can be a great choice for risk-averse individuals interested in preserving wealth. Aave is one of the biggest protocols in the entire ecosystem. It works across 13 chains, operates 143 pools, and pays 2.93% APY on average. Staking USDT here yields 6.63% APY which is significantly higher than high-yield bank accounts (roughly, 5%) or US treasury bonds (close to 4.1% in 2024). Lending is safer and more consistent but the risk premium is absent.
• Yield farming is a highly risky approach to DeFi investments where you invest certain assets to receive mostly rewards and incentives. In some cases, it can be an incredibly efficient method of capital allocation. Let’s talk about some yield farming basics. When the market is bullish, many tokens take off. However, if reward tokens start losing value, your portfolio goes down in value too. A good example is investing in the USDC-USDT pool on Pancakeswap for 1.09% base APY and 2.84% in CAKE rewards. If the price of CAKE goes up, you will end up with a better deal compared to Aave’s USDT staking.

Portfolio diversification in decentralized finance

We recommend creating a somewhat balanced portfolio where you can have riskier positions and offset the danger by also allocating capital to lending protocols, liquidity pools, or simply staking on various mainnets. Note that many projects have their unique native tokens that may provide additional utility and incentives. Understanding governance tokens and their role in the DeFi ecosystem is crucial for investors who are interested in building well-performing portfolios.