Decentralized Finance, or DeFi, is a new approach to the financial system based on blockchain technology and smart contracts. This term refers to a set of financial products and services that operate on decentralized platforms, free from intermediaries such as banks, brokers, or other traditional financial institutions.
DeFi has become a true revolution in the financial industry, providing investors with unique opportunities that were not available in traditional financial systems before. This new approach, based on blockchain and smart contracts, is changing the rules of the game, offering users more freedom, control, and access to new financial instruments.
One of the killing features of DeFi is its accessibility. For billions of people around the world, DeFi has become a bridge to financial freedom and wealth. Bypassing traditional financial institutions allows to overcome barriers and restrictions that previously access to financial services.
Another unique aspect of DeFi is decentralization. The absence of central control creates a more robust system that is not reliant on a single point of failure. This helps reduce risks associated with potential hacks or malicious actions from third parties.
Transparency also plays a crucial role in DeFi. All transactions and operations are recorded on the blockchain, providing full visibility and the ability to verify each operation. This enhances trust among participants and helps prevent fraud.
Decentralized finance also opens the door to new types of assets and tokens that did not exist before. Investors can diversify their portfolios by investing in various projects and tokens with different levels of risk and return.
Moreover, participation in voting and governance of DeFi protocols gives token holders more control over the development of projects and strategic decision-making. This enables the creation of more democratic financial systems, where each participant has a say.
Let's take a closer look at the main types of investments available in this ecosystem and analyze their characteristics, risks, and potential profitability.
The “HODL” Strategy
HODL, an acronym for "hold on for dear life," has become a mantra among crypto enthusiasts, signifying a long-term approach to cryptocurrency investing. This approach reflects GameKyuubi's rationale in the original post that novice traders are likely to mishandle their attempts to time the market, and thus, they should simply hold onto their coins.
The main essence of HODL (a misspelled word "hold") or long-term crypto investment strategy is its appeal as a passive and simple approach to grow assets over time. Unlike active trading, hodling involves buying cryptocurrencies and holding onto them for an extended period, usually a year or more. This strategy attracts investors who seek to save and multiply their assets with minimal effort and without engaging in technical analysis. HODLers believe that their chosen cryptocurrencies have the potential to become long-term winners, leading to a rise in their real value over time. The profit in this strategy comes from the increasing public interest in cryptocurrencies and the positive trend of the market capitalization over the years. To mitigate risk, investors diversify their portfolios by investing in several cryptocurrencies rather than just one. Overall, HODL has evolved beyond a simple investment strategy, becoming a philosophy and lifestyle for many crypto enthusiasts.
DeFi indexes have emerged as a simple way to gain passive and diversified exposure to the market amidst the rise of DeFi tokens and structured financial products. Similar to traditional ETFs, DeFi indexes track the performance of various assets or sectors. However, there are significant differences between the two. DeFi indexes can be set up quickly and with lower costs due to their permissionless nature and use of smart contracts for portfolio management.
The management and rebalancing of DeFi indexes are transparent and automated through smart contracts, reducing the need for human intervention. DeFi indexes often offer bonus yields through liquidity mining, where users can earn additional rewards by staking index tokens.
To compare DeFi indexes, one should consider factors such as price performance, market cap, index methodology, eligible tokens, weighting, rebalancing methods, and portfolio structure. Different DeFi indexes can produce varied returns based on their underlying tokens and methodologies. It's crucial for investors to evaluate fees, staking opportunities, and potential exposure to impermanent loss when considering DeFi index options.
Simplicity: The index provides a straightforward way to gain diversified exposure to the DeFi market, representing the value of the best DeFi projects without the need to purchase individual assets.
Efficiency: The index adheres to the core principles of DeFi by eliminating intermediaries and enabling more efficient asset management.
Low cost: Investing in the index is accessible as its price is typically much lower than the combined cost of all the assets it represents.
Volatility: The index is subject to price fluctuations since its value depends on changes in the prices of its constituent assets, which can affect investment returns.
Smart contract risk: Like all cryptocurrencies, the index is exposed to risks associated with vulnerabilities in smart contracts, which may impact its security and stability.
Regulatory risk: Potential future regulations on cryptocurrencies could influence the price and liquidity of the index, creating uncertainty for investors.
On Notum, you can explore the main DeFi indexes from key providers.
Yield farming, also known as farming or yield aggregation, is a process in DeFi where users earn income by providing loans or staking assets within DeFi platforms. Users lock their cryptocurrencies in protocols and receive tokens representing their stake. The profit comes from interest rates received for providing liquidity and additional tokens as rewards. Yield farming offers higher interest rates compared to traditional investments but carries risks like liquidity loss, protocol safety, and cryptocurrency exchange volatility. Liquidity providing occurs in DeFi platforms like DEX, Perpetual DEX, Lending, and Bridge.
High returns: Yield farming offers the potential for high returns through interest earned and additional token rewards.
Liquidity: Yield farming enhances market liquidity as users lend their assets for others to borrow.
Decentralization: Being part of DeFi, yield farming provides financial activities without relying on traditional institutions, granting users more control over their finances.
Flexibility: Users can choose their preferred assets and platforms, offering flexibility in investment strategies.
Accessibility: Yield farming is open to anyone with internet access and DeFi knowledge, making it accessible to a broader audience.
High volatility: Cryptocurrency market fluctuations can lead to significant losses on the lent or borrowed assets.
Impermanent loss: Providing liquidity may result in losses if asset values change relative to other pool assets.
Smart contract vulnerabilities: Interacting with smart contracts can expose users to potential hacking risks and loss of funds.
High gas fees: Frequent transactions in yield farming can lead to substantial gas fees during periods of high network traffic.
Scams and fraud: DeFi's lack of regulation can make it easier for scammers to create fake dApps, leading to potential losses for investors through rug pulls or fraudulent schemes.
On the Notum platform, you have access to a wide selection of pools, vaults, and strategies in the world of DeFi. You can easily find options that match your preferences and criteria by using filters such as APY, TVL, and other important characteristics. This allows you to efficiently manage your DeFi investments and make wiser decisions to achieve a desirable income.
Staking & Liquidity Staking
Staking is a cryptoeconomic model that rewards network participants for correct behavior and strengthens the security of Web3 protocols. It is used in proof-of-stake blockchains like Ethereum and DeFi applications like MakerDAO.
Liquid staking involves staking user deposits on their behalf and issuing a new token in return. This new token represents the staked assets and can be traded or used as collateral in DeFi protocols, providing liquidity to the staked assets.
Unlocked Liquidity: Liquid staking tokens allow staked assets to be traded and used as collateral, unlocking their inherent value and providing liquidity.
Composability in DeFi: The tokenized receipts for staked assets can be used across various DeFi protocols, enhancing their usability and flexibility.
- Reward Opportunities: Users can continue receiving staking rewards while earning additional yield in different DeFi protocols through liquid staking.
Outsource Infrastructure Requirements: Liquid staking enables users to participate in staking rewards without the need to maintain complex staking infrastructure.
Slashing: Users are exposed to the risk of having their funds slashed if the liquid staking service provider acts maliciously or unreliably.
Exploits: Depositing tokens to a liquid staking service may put funds at risk if the node operator's private keys are compromised or if there are vulnerabilities in the protocol.
Secondary Market Volatility: The price of liquid staking tokens is not pegged to the underlying assets, leading to potential price fluctuations during liquidity crunches or unexpected events. Lower trading volume can also amplify the volatility of staked tokens.
On the Notum platform, there is an extensive list of various Liquid Staking Providers.
How-to-Use Notum App For Entering DeFi-Strategies
Step 1. Go to Notum App & connect your wallet (e.g. Metamask or Trust Wallet).
Step 2. Choose a Type of Investment
All yield farming opportunities could be found on Investments tab - you can choose appropriate pools using filters. All DeFi indexed and tokens are grouped in ‘Explore’ tab.
Step 3. Study the details of a particular strategy
Every investment opportunity that you find on Notum is guided with a detailed description including what assets are in the strategy, what are the sources of profitability, and other important decision-making metrics.
Step 4. Enter a strategy
It’s quite easy to enter a strategy. You just need to enter the required amount of money that you need for a particular strategy in the ‘Swap’ box. Then, the system will build the most appropriate route and assets will be displayed right in your wallet.
To Sum It Up
DeFi is offering a wide range of investment strategies adjusted to every individual investor. Depending on the risk tolerance and desired income, time, and knowledge an investor has, they can choose the most suitable investment type.
Part of the mentioned investments are rather unified and can be found in the traditional financial market: Hodl's strategy implies buying and long-term saving of acquired assets counting on their further price increase. The only evident problem with this strategy is that an investor has to do full due diligence on many projects and narratives.
Another part of the strategies is quite specific to the DeFi space. Let’s take Yield Farming as an example. This strategy involves various types of investment strategies such as staking, and liquidity providing on different decentralized platforms including lending, DEXs, etc.
All in all, all these strategies demand an investor’s deep understanding of the crypto market and the basics of how returns are forming. This makes investments more successful, thus profitable.
Investment strategies in the DeFi market go along with a high level of risk and require monitoring multiple parameters which is almost impossible due to lack of time and expertise. That was an eureka moment for the Notum team to simplify the entire process. The Notum App batches various investment proposals, group them into a large number of directions, and by doing this, clears up an investment process.