The world of DeFi, or decentralized finance, is one that is full of both risks and rewards. No matter where you are in your journey with cryptocurrency, it is likely that you have considered investing in DeFi at some point in time.

But the DeFi realm is full of risks, and the rewards are few. So, just how can you get involved with decentralized finance safely? We have a few tips and tricks, so keep reading.

What Are the Risks of DeFi?

If you are asking this question, it means you are likely new to cryptocurrency as a whole, as DeFi has long been riddled with scams, which cause investors to lose everything. Below are some of the largest and most common risks of investing in DeFi, just to name a few.

·      Outright scams

·      Rug pull schemes

·      Blockchains with fatal flaws that have gone untested

·      Hacks

·      Collapses

·      Impermanent loss

·      A project that never takes off the ground

Sadly, these are just the largest risks of investing in DeFi. Of course, there are more, but we don’t have the time or space to list them all.

Don’t get discouraged, though, as there are some ways to lower your risk exposure when investing in DeFi. We cover these in the section below.

7 Tips for Staying Safe When Investing in DeFi

If you aren’t discouraged by what we mentioned above, here are some tips to stay safe when considering DeFi projects for investment.

1. Only Invest in Proven Projects

This may seem counterproductive, but one of the best ways to lower your risk exposure is by only investing in blockchains that have been around a long time and have proven their safety and security.

Sadly, these aren’t the investments that will change your life with their net profit, but they are a somewhat safer and more secure way to explore DeFi. We especially recommend this for those new to the industry.

Examples of proven projects in DeFi include Uniswap, Solana, Ethereum, and Binance.

2. Research, Research, Research

Not all “unknown” projects in DeFi are dangerous, but in the early stages of a blockchain project, it can be difficult to differentiate the trustworthy projects from the scams. One of the only ways to find a project that is trustworthy early on is to do some research, then research some more.

It can be challenging to know 100% that a project isn’t a scam, even with hours and days of research. But it can help you to eliminate the outright scams. Here is what you should look for as you search, as these are all indications of a possible good investment.

·      Easy to find whitepaper

·      A whitepaper that is well-explained and technologically sound

·      Well-designed website

·      Creators/Backers who are publicly named with established social media profiles.

·      Creators with extensive expertise in the industry

·      Third-party security testing

These are just a few of the things you should look for during your research. We also recommend skimming the social media pages of the platform to ensure they have an established and up-to-date presence and seem to know what they are talking about.

3. Don’t Believe Any Promises

DeFi projects are often most well remembered for their insane promises. Either they say you will earn X amount of money, or that they are the “next big thing.” Remember, if it sounds too good to be true, it probably is.

We recommend only considering projects that aren’t making massive promises that they are unable to keep.  Plus, due to delays in technological development, projects which are more honest about their goals are usually more likely to stick to them long-term.

4. Join the Community First

Before buying, establish yourself as a member of the community just to see what others are saying. For example, if there is a Reddit thread for a blockchain project you are interested in, join it. Also, check for a Facebook group, Telegram chat, or whatever you can find.

If no community exists, this is your first red flag. If you are able to find a community, ensure you lurk around for several weeks before buying and take note of anyone complaining about the company/blockchain. Also ensure that the community is active. A lack of posts or chatter can indicate that a blockchain isn’t interesting enough to hold the attention of the general public.

5. Use a Hardware Wallet

This may seem like a given, but ensure you always use a hardware wallet when investing in DeFi. A hardware wallet, which you disconnect after each session, can go a long way toward protecting your investment from hacks and other vulnerabilities. While you can’t avoid them completely, at least this way, you are only susceptible when you are actively using your wallet.

6. Only Invest What You Can Afford to Lose

We may sound like a broken record when we say this, but when you do find a DeFi project to invest in, your last line of defense is to ensure you only invest the money you are prepared to lose if the investment goes south.

7. Diversify

While it is possible to get lucky when investing in DeFi, like those who found Solana before it went through the roof during COVID, it is extremely unlikely that you will be able to accurately invest your money in a DeFi project before it goes to the moon.

For this reason, we recommend focusing on diversifying your portfolio instead—focusing on filling it with a few good DeFi projects rather than putting all your eggs in one proverbial basket. While this will split your gains, it also splits your risk, ensuring you survive to invest another day.

Additionally, consider dollar cost averaging methods when deciding what assets to add to your portfolio. This will allow you to focus on all of your investments equally and ensure you are in the best financial position possible.

Overall, there is no way to remove 100% of the risk when investing in DeFi projects, but if you follow these 7 tips for investing in DeFi, it should help you avoid almost all of the malicious actors in the industry (though it doesn’t work 100% so you still need to be vigilant!)