There are still plenty of opportunities to earn yields with decentralized finance. However, there are also some common mistakes that are likely to lead to losses.
DeFi is still a multi-billion dollar industry despite the broader crypto market crash. The total value locked is currently more than $100 billion according to DeFiLlama. Furthermore, it has increased by more than 10,000% since the same time two years ago in May 2020. Therefore, in this article, you will learn how to avoid having mistakes when you invest in DeFi protocols.
You Need to be Prepared to Invest in DeFi
DeFi yield farmers have flocked to the space in search of better returns than banks offer. Many DeFi protocols still offer them, but there are a few things to be aware of before taking the plunge.
Former Google engineer and Magik Invest co-founder, Shiv Sakhuja, shared his experiences with common DeFi mistakes earlier this year.
A lot of people who follow me are new to Crypto or DeFi.
So I'm going to create some more beginner friendly content as well.
This thread covers 5 common DeFi mistakes. 🧵👇
"How to get rekt in #crypto and #DeFi"
Graphics inspired by @visualizevalue pic.twitter.com/bEb65bXuVq
— shivsak (@shivsakhuja) January 8, 2022
5 Common DeFi Mistakes of Beginners.
- Don’t Diversify Your Money to Protect it.
One of the big risks in DeFi is smart contract risk, Shiv explained. This is when the code in the smart contracts that the project deploys contains bugs or vulnerabilities. If exploited, hackers can drain liquidity pools and steal the protocol’s funds. Better projects will have security audits, but even they can and do get hacked. Therefore, it is a good practice not to rely on just one DeFi project.
- Only Investing in Microcaps (very small projects)
Also, small-capitalization projects often get hammered when markets are bearish. Furthermore, their tokens usually underperform Bitcoin and Ethereum often leading to 80-90% losses in bear markets. Therefore, Shiv advised building a portfolio foundation with stronger coins that can survive bear markets. - Don’t Research.
Do your own research (DOYR) before investing in a project that is offering ridiculous yields, Shiv suggested. Many DeFi degens have been burnt chasing unattainable four-figure yields. Additionally, even 5% is 4.99% more than what most high street banks are currently offering. -
Invest in an Unsecure Protocol.
There are too many scams and fake projects in crypto. Therefore, it pays to DOYR again and double-checks where your crypto is being sent. Do not sign transactions in your MetaMask wallet unless you are 100% sure you’re on the correct site, Shiv advised.
- Ignorance.
The fifth mistake is not knowing enough about the project you’re investing in. “Learning is your best chance of making $ in this space,” said Shiv. He added that it is a bad idea to buy coins shilled on crypto social media. Additionally, over-leveraging is also a bad practice and a fast track to getting rekt.
Finally, do not be afraid to start, he concluded. There are hundreds of DeFi protocols on multiple chains now, and many of them are still offering good returns.
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