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What Are DeFi Сoins?

What is DeFi? The DeFi coins craze is very reminiscent of the events around the 2017 ICO. The market is filled with innovative projects-experiments. The excitement and hype make it difficult to see the real essence of most DeFi projects.

The DeFi tokens boom in the financial cryptocurrency market continues. Dozens of new coins appear daily, 90% of which may cease to exist in the next few days. And all because most of the created tokens, unlike Bitcoin and other established cryptos, do not have enough liquidity and are designed to quickly collect money from investors and disappear for good. However, in some cases the risk does pay off.

Today, DeFi includes projects of various types, and this is already a fairly large cap market interesting for regulators. Decentralized finance sector includes under a hundred different tokens associated with DeFi systems. This includes all stablecoins, cryptocurrency wallets, smart protocols, infrastructure solutions, services, networks, prediction markets, marketplaces, dapps, landing platforms, validators in PoS networks that implement staking, and various financial instruments implemented on the blockchain.

What Best DeFi Coins Are Worth Investing in?

Most of the DeFi coins that are being created today by the dozens are made, as they say, on the knee. They are specially released under the farming mechanism, when there is a certain pre-mining for the founders of the project. As a result, most of the assets end up in the hands of the founders of the project, and they inflate the price of the token using farming. 

Then, in the first hours or days, when the price is pumped up to the limit, they sell their tokens and get huge profits.Within a few days, the project is on the decline. In this case, investors who have invested before the project launch can earn on DeFi tokens. They also sell tokens at the peak price, reducing the rate of the coin. As a result, the project dies and leaves the market.

You should not invest in projects that are aimed exclusively at farming and do not have a quality product under them. If there is a high probability of losing money: either the token will not increase in price, or all holders will start selling tokens en masse, lowering its price lower and lower.

If you need a project for long-term investment, then you should give preference to projects that are supported by a worthwhile and finished product or based on DeFi technology, rather than farming. Farming is only a small part of what DeFi technology allows you to do.

Most of the top DeFi coins hype has to do with farming. It is often confused with staking, but they are completely different phenomena. In the case of staking, we are not talking about tokens, but about cryptocurrencies. Large holders who own a significant share (stake) of a certain cryptocurrency get the right to validate (confirm) transactions in the proof-of-stake blockchain of this cryptocurrency, for which they receive a reward similar to miners in proof-of-work networks.

When farming, users are credited with platform tokens, to which they provide liquidity by lending their digital assets (other tokens). Apart from the bonus reward for users, such "farming" tokens have no intrinsic value. Their price is determined only by the popularity of the project by which they are released. For this reason, with the loss of mass interest in the site, the cost of the token can fall hundreds of times, given the previous crazy growth.

Taking into account the fact that, in addition to the farming token, the user receives a percentage of the tokens that he gave to the platform, participation in farming is beneficial in itself. And here the main risk is in hacking the site and losing its entire liquidity pool. But most prefer to just buy a farming token. In this case, they are not charged anything. 

They just keep in their DeFi wallet crypto, the rate of which is almost impossible to predict. DeFi tokens, like any other assets, are chosen depending on the goal pursued: it can be speculative trading, medium- and long-term investment, diversification of an existing investment portfolio. Basically, the criteria for choosing tokens are the same as for all cryptocurrencies.

If we are talking about the acquisition of tokens with the aim of selling them in the near future at an increased rate, then in this case, traders are mainly concerned about the growing interest for a particular project in the crypto community. The main question is: is there any point in this project and what is this token for? And here standard factors are taken into account: a proven team and its potential, real representatives, the main creators of the project, the presence of large investors. 

In the case of the ICO, potential investors looked at the white paper and the presence of a minimum viable product, now they are primarily looking at the audit of the smart contract and the absence of bugs in it.

Making purchases of tokens at this stage is extremely risky, even if people already known in the cryptocurrency space are behind the project. But, in fact, any project at any stage can falter or simply fail. We cannot count on absolute guarantees and the absence of any risks anywhere, and this applies not only to the cryptocurrency world.

The DeFi industry is only at the start of its journey, many solutions are unique in nature, there is nothing to compare them with traditional finance in order to predict further development. It is definitely not worth investing all your funds in one project, it is better to choose several at once in order to increase the likelihood of making a profit. 

Also, for the purpose of investing, you should not buy tokens at the time of their active promotion. It is better to wait until the price stabilizes a bit. But it may turn out to be much more profitable for you if you do not just buy a token, but try to understand how DeFi works and participate in the work of such a project.

How to Invest in DeFi Coins?

How to choose the best DeFi coin? When choosing projects from the DeFi crypto list in the first place, you should make sure that the developers are not anonymous, and that the project participants, especially the technical team and customer support, have sufficient experience in the industry.

It is also necessary to check the activity of the project in social networks and media. A public chat on Slack or Telegram for all investors is a very good sign. Carefully read the reviews, especially if you do not understand technical characteristics. If you are familiar with programming, check out the codes and API of the project. It can be trusted if they are in the public domain.

Scam can be detected at the very early stage of the project. Before deciding on any investment, consult a third party about the project. Find out about the project on Reddit, or ask a fellow programmer for advice. Scams usually don't care about listing on prestigious centralized exchanges. Check if the token is available on yours and which companies the project cooperates with.

Fake accounts are everywhere. Malicious bots are especially common in cryptocurrencies. It is worth paying attention to the customer support service. Contact a real person in the company and see for yourself if they can be trusted.

Every experienced crypto trader will give you one simple piece of advice: don't invest more than you can afford to lose. Initially, hedge funds were funds that held both long and short positions in stocks for the purpose of making a profit, regardless of which direction the market was moving.

The reality is that most cryptocurrency users do not have the ability to determine the market trend. The uniqueness of DeFi is that it is not on the exchange. There is no order book, and there is no long/short ratio. When it comes to top DeFi coins, we need to understand that once a certain rate of return is earned, in most cases the assets are “locked” in smart contracts so that users can borrow from them.This option allows the borrower to earn more than the interest rate on the loan, or use the borrowed funds to trade and earn more than the interest rate on the loan.

The market itself is undergoing a transformation, with an increasing number of cryptocurrencies appearing, which leads to even greater volatility. This market needs to be analyzed. This will be helped by tools that check the trading volume of the decentralized exchanges (DEX), the profitability of various assets, the liquidity level of various DeFi smart contracts, and even the network mempool.

How to Avoid Scams When Choosing DeFi Coins? 

Red flags:

– there is no technical audit of the code. The audit should be done by a well-known, recognized team in the community, and should be specific to this protocol. If an audit was made for a protocol code that was allegedly copied, this does not work.

– the project focuses on yield farming as the sole meaning of its existence. It can be either a pyramid scheme or a direct exit scam: bad DeFi live so little that one is indistinguishable from the other.

– the project “guarantees” unusually high profitability. As a rule, future exit scams offer sky-high farming strategies.

– remember the lessons of ICO – an anonymous team, identity fraud (fake names and photos of the creators), closed code, "infancy", a big "premine" – all this should give cause for concern. 

How to Make Money in DeFi? 

A (meaningful) choice of DeFi crypto coins is only possible within a medium-term strategy. On a short horizon, anything can shoot – as well as collapse for unpredictable reasons, on a long one  – it is not clear what will happen to the context, technology, Bitcoin dominance, etc.

The best strategy is to think thrice before investing in top DeFi coins or depositing a significant portion of your deposit into protocols. Like potential returns, risks are multiplied here.

Hedging (not very significant) can be done in two ways. First, remember that there are different earning strategies in DeFi – direct investment in tokens, participation in farming directly or indirectly – can be divided between them. Secondly, there are ready-made DeFi portfolios and index tokens. They are not a panacea, if the DeFi industry falls, then the whole falls. But due to balance, the blow can be softened.