What is DeFi?
DeFi is not just some weird acronym thrown around by hipsters sipping coffee with their MacBooks. It stands for decentralized finance — a world where you can earn money without middlemen like banks. You become your own banker and can make your assets work for you.
Imagine not having to run to the bank for a loan or to open a deposit. In DeFi, everything happens through smart contracts (cool robots that don’t take bribes). You visit a platform, toss your crypto coins into a “pool,” and then earn a profit as others “borrow” from you or pay for exchanges. It’s like running your own exchange office without a physical office!
Risks and Portfolio Management Strategies in DeFi: How to Minimize Losses?
- Technical Risks:
In DeFi, everything revolves around smart contracts — they’re like laws that operate automatically. If the code has bugs, someone could exploit them and steal your funds.
Example: The bZx platform was hacked twice due to bugs in smart contracts. Developers fixed the bugs, but users lost millions. - Economic Risks:
The crypto market is vast and pretty wild. Today, your asset might be worth $1,000, and tomorrow $100.
Example: The rise and dramatic fall of LUNA led to the loss of billions of dollars from investors. - Regulatory Risks:
DeFi isn’t regulated like banks or stock exchanges. At any moment, governments may decide to “tighten the screws.”
Example: Laws restricting DeFi projects are emerging in the U.S. and other countries.
How to balance your portfolio considering risk and returns?
The main principle here is diversification. As my imaginary friend once said: “Never put all your eggs in one basket, especially if that basket can be hacked.”
- Tip 1: Divide your assets into different categories:
- High risk, high reward: liquidity mining, liquidity pools, highly volatile platforms.
- Medium risk, medium reward: staking stablecoins (DAI, USDC) on reputable platforms.
- Low risk, low reward: using reputable platforms with guaranteed returns.
- Tip 2: Use multisignature (multisig) wallets. If a hacker wants to steal your money, they’ll need consent from several parties.
- Tip 3: Check all protocols you're planning to invest in through audit reports from companies like CertiK or Quantstamp. It’s like inspecting a house before buying it.
Exit Strategies in DeFi: When to Lock in Profits?
It’s important to understand that locking in profits should happen before the market gets “shaky.” Otherwise, you could end up like those who held LUNA tokens until the bitter end. Lol, just like Lena God Investor says, “Buy at the lows, sell at the highs” 😫
- Stay Alert:
Monitor the market and stay updated with the news. If you notice a platform facing issues or hear rumors about a hack, it might be time to exit and lock in your profits. - Use Take Profit and Stop Loss:
Many DeFi platforms allow you to automate the asset selling process. For example, set a take profit when assets rise by 20%, and a stop loss if they fall by 10%. This helps prevent panic selling. - Don’t Be Greedy:
Remember, it’s better to lock in small profits than to wait for millions and end up with nothing. The crypto market has already seen stories where assets crashed 90% overnight.
Example: Yes, yes, the same LUNA, which peaked at nearly $100, and la
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