Friday, November 27, 2020
Home Cointelegraph News Centralized finance is necessary, especially for DeFi crypto investors

Centralized finance is necessary, especially for DeFi crypto investors

If you’re paying attention to developments in the cryptocurrency space, you’ve likely heard of decentralized finance and of the yield farming trend that helped it get over $9 billion worth of crypto assets locked in it.

In short, yield farming — also known as liquidity mining — sees users generate rewards with their cryptocurrency holdings by interacting with DeFi protocols that either let them lend or borrow tokens. These interactions grant them the protocols’ governance tokens, which both give them a “stake” in the protocol and more revenue.

The trend started when lending protocol Compound started distributing its COMP governance token. Shortly after, various other protocols launched their own governance tokens and distributed them in the same way. Now protocols such as Yearn.finance act like smart savings accounts, helping users find the best yields across the DeFi space while rewarding them with YFI tokens.

The appeal of DeFi

Ever since Compound launched its governance token, the total value locked in the DeFi space surged, as users started moving to farm yield as quickly as possible. With rewards generated from the tokens being distributed, annual percentage yields can often exceed 1,000%.

With 10-year treasury yields being at 0.6% and 12-month yields at 0.09%, 1,000% is an extremely attractive offer. Users can lend stablecoins on DeFi protocols, so the risks appear to be next to none: If the tokens they are farming lose value, they’re still earning rewards for lending funds, and these rewards are well above 0.67% on most platforms.

There are, however, hidden risks associated with DeFi and yield farming. Popular DeFi protocols are developed by small teams with limited resources, which can increase the risk of smart contract bugs and vulnerabilities. Even well-known audited protocols have been hacked.

Moreover, scammers take advantage of every opportunity in crypto, and multiple cases of exit scams and outright fraudulent projects in DeFi have already been reported. While there are opportunities to make a lot of money in this space, there are also hidden dangers that investors need to watch out for.

How centralized finance can help?

As we’ve seen before, if you are investing in the DeFi space, it’s always better to bet on diversification instead of short-term gains. A DeFi portfolio should have exposure to top cryptocurrencies in the space, ensuring you don’t lose everything to scams, unexpected market moves or technical issues, and invest in potential gems while it’s still early.

Diversification ensures a sustainable approach to gain exposure to the wonders of DeFi while ensuring you don’t lose all your money to a bug or human error.

Related: The battle between DeFi, CeFi and the old guard

True decentralization is seen as a strength in crypto, and we can use decentralization to our advantage in investing in DeFi and yield farming. There’s no doubt that the best returns are on the protocols that distribute tokens, but using them is also as risky as it gets.

As such, a novel investing approach would be to set part of your funds to farm yield on a centralized exchange. It’s more secure and stable, but the rewards aren’t going to be as wild. For wilder rewards, using a Web 3.0-compatible wallet and testing out new protocols are the way to go. Every farmer should have a different approach, just like every investor diversifies their portfolio among stocks, commodities and bonds.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Jay Hao is a tech veteran and seasoned industry leader. Prior to OKEx, he focused on blockchain-driven applications for live video streaming and mobile gaming. Before tapping into the blockchain industry, he already had 21 years of solid experience in the semiconductor industry. He is also a recognized leader with successful experience in product management. As the CEO of OKEx and a firm believer in blockchain technology, Jay foresees that the technology will eliminate transaction barriers, elevate efficiency and eventually make a substantial impact on the global economy.

Popular Articles

B2BinPay Adds LINK to the List of Available Cryptocurrencies

B2BinPay platform makes it possible for enterprises to accept, receive, store, and send Chainlink coins, enlarging the list of available cryptocurrencies. The majority of smart-contracts...

Yearn Finance (YFI) Climbs 16% Despite Crypto Bloodbath Elsewhere

Yearn Finance’s YFI rose by up to 16 percent in just two days of trading, even though its peers across the cryptocurrency market bled. The...

Chinese police seized crypto assets worth $4.2B today from PlusToken Ponzi

The PlusToken controversy, which has led to the arrest of 109 individuals so far, has also reportedly resulted in a titanic seizure of crypto...

The Transcendence Project Introduces a Highly Efficient VIM3-based Crypto Miner, More in Store

TELOS, which is part of the Transcendence project, has made great strides in recent times with new developments as it strives to create decentralized...

Why the Russia Prime Minister wants to “protect” Bitcoin and crypto users

Russia has enjoyed an on-and-off relationship with cryptocurrencies, with ever-changing regulations and official perceptions fluctuating between periods of yes crypto and no crypto. But a...

ChainLink Bouncing Off its 50-day MA Could Result in a Retest of $20

Quick take: Chainlink is once again at the $12 support zone This support area coincides with where the 50-day moving average currently lies According to MagicPoopCannon, if...