Since its launch in mid-2020, decentralized finance (DeFi) has been increasingly gaining traction and growing alongside the nascent world of cryptocurrencies. Today, it is estimated that there are over $44 billion dollars worth of digital assets locked up in the DeFi ecosystem, making it one of the most popular and profitable industries in the cryptosphere.
As the industry continues to grow, more investors are flocking towards the booming DeFi sector. For those of us who were a bit late to the party, this begs the question: What should first-time investors know before diving into the DeFi space?
The DeFi space has quickly become a hot topic among investors, as it offers users high yields for their investments due to its decentralized and automated nature. However, it is important to remember that there are high levels of risk associated with it, as it is largely unregulated and there have been hacks and scams before.
For first time investors, the best way to get started is to understand the basic terms behind DeFi. These include smart contracts, Ethereum, and ERC20 tokens.
Smart contracts are pieces of code stored and executed on the Ethereum network, which allows users to complete certain transactions depending on certain conditions. This means that users are not required to trust third-party custodians in order to securely complete the transactions.
Ethereum is a blockchain protocol, which allows users to create their own applications within the network, while ERC20 tokens are digital assets that work within the Ethereum infrastructure. These tokens can be used to transfer value, offer loan repayments and pay dividends.
Finally, it’s important to understand the most popular DeFi protocols. These include MakerDAO, Compound, and Aave. Each of these protocols can be used to generate higher yields on digital assets, by allowing users to lend or borrow tokens in exchange for lucrative interest payments.
Overall, DeFi offers investors a great opportunity to generate passive income through automated and decentralized protocols. However, given the high risk associated with the industry, it’s important to do your own thorough research before investing your money.
When it comes to investing in DeFi, understanding its underlying technology, key terms, and popular protocols should always be your first step. By keeping these factors in mind, you will be well on your way to investing with confidence in the DeFi space.
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