Since Blockchain technology has taken its space in the Finance sector, its components like DeFi have changed many things for the better. Privacy, security, transparency, and trust are a few of the many advantages that DeFi offers when it comes to managing our money. This phenomenon has the potential to provide us with solutions to the existing drawbacks of the financial sector. Let's understand how.

## What is DeFi?

DeFi, short for Decentralised Finance is just like a digital bank. But without any paperwork or intermediaries. You can lend & borrow, earn interest, make transactions, trade assets, etc. Decentralized apps (dApps) are the main way users interact with DeFi. There is no application to complete or an account to start as there would be at a traditional bank.

## How can DeFi Change the World Economy?

Everyone remembers how in 2008, the world financial systems collapsed. After the collapse, a decision was taken that never again would any government allow the banking system to endanger our social and economic well-being. The finance industry has evolved to play it safe by being less experimental and refusing any change that would necessitate overhauling the entire financial structure. The reason the 2008 crisis took place was because of the high risk-taking of banks.

But, the introduction to DeFi has completely changed things for us. It is a technology made for the people. There are currently a lot of DeFi-related operations happening in the crypto realm. For instance, China is introducing its digital Yuan, the Central Bank Digital Currency (CBDC). This trend is also being followed in Europe.

Although a system built on a blockchain can typically process transactions more quickly and securely, the price volatility of these DeFi tokens is a problem that has prevented widespread adoption. 

At this point, it is safe to say that interactions between businesses will also be impacted by DeFi. Decentralised applications based on smart contracts soon would start serving as an intermediary between institutions as institutions integrate into the blockchain ecosystem and the tokenization of financial assets like derivatives and securities continues to develop.

## Conclusion

Of course, every new technology has its setbacks, but that shouldn’t stop people from exploring it. There is a huge potential for developers to come up with more solutions for the finance sector and turn it into a completely decentralised process that benefits all. 

For institutions that can adapt and embrace the developments in the DeFi space, the ongoing evolution of this new financial ecosystem will present considerable growth potential.



Decentralised applications based on smart contracts soon would start serving as an intermediary between institutions as institutions integrate into the blockchain ecosystem and the tokenization of financial assets like derivatives and securities continues to develop

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How Can Decentralised Finance Change the Country’s Economy?

Decentralized finance (DeFi) has completely transformed the cryptocurrency market. Traders are interested in this domain, both as a promising infrastructure project within the crypto industry and as an opportunity to profit off turbulent token fluctuations.

At the same time, this turbulence has a flip side: a rather high risk. Let’s go through a few strategies for the DeFi market that can minimize these risks on a DeFi protocol.

From the beginner phase, investors adored the DeFi investing domain, since decentralized finance gives them more control over their money. And while early on decentralized finance floated toward loans and credit, DeFi is now at least 5 full-fledged, interconnected fragments: blockchain, decentralized exchanges (DEX), decentralized derivative platforms, loans and credit, & insurance.

Despite its relative firmness, the DeFi segment is still prone to risks, as an investment. The volatility in the tokens of various projects undeniably pulls new investors. However, high yield also means high risk. There are several efficient ways or strategies for managing risks in DeFi.

# **Strategy #1: Position Sizing**

Position sizing formulates how many crypto coins or tokens a trader is willing to buy. The probability of realizing huge profits in crypto trading tempts traders to invest 30%, 50%, or even 100% of their trading capital. However, this is a disordered action that puts you at serious financial risks. The golden rule is: never put all your eggs in one basket. Here are three approaches to achieving position sizing.

-   **Enter Amount vs Risk Amount:**  This approach considers two different capitals. The first involves money you are willing to put in every single deal. Traders are advised to analyze this amount as the size of each new order they take, regardless of its type. The second is the money at risk, i.e. the money that you afford to lose if the trading fails.
-   **Elder’s Sharks & Piranhas:**  This approach relates to diversifying your investments which brings forth two basic methods:

Limiting every position to 2% risk. Dr. Alexander Elder, who is credited with the concept, correlated risk to a shark bite. At times, you would wish to risk a huge capital, but the risk would be huge and disastrous as a shark bite.

Limiting trading sessions to 6% per session. In a losing streak, you may end up disposing of everything you own little by little. Elder correlates this risk to a piranha attack, which takes small bites of its victim until it devours it all.

-   **The Kelly criterion:**  It is a formula developed by John Larry Kelly in 1956. It is a position sizing approach that defines the percentage of the amount to risk. It enhances long-term trading.

![](https://miro.medium.com/max/984/0*TqvydEzNuAVl0p7d)

# **Strategy #2: Diversified Portfolio**

In this strategy, investors fill their portfolios with the most assuring, underrated, and non-overlapping DeFi projects. This compresses the risk of the portfolio losing significant value because of a single asset. You can identify assuring tokens by their market cap to total value locked (TVL) ratio. Tokens with the minimal correlation of these values can be considered underrated, which means there is logic to expect these assets to “catch up” with others in their valuation and growth. Therefore, by buying these cryptocurrencies, traders stabilize their portfolios for the medium & long duration.

For additional diversification of your risks, you can choose projects on different blockchains, such as Ethereum or Binance Smart Chain. Another way is to select negatively correlated tokens, meaning that when one token is highly turbulent in day trading, you should choose a more stable asset for balance.

Diversifying your portfolio by including an insurance project is even better since the demand for safeguarding capital within the decentralized finance ecosystem is only going to increase. Having such tokens in your investment portfolio will help you to significantly counteract an adverse situation if one were to suddenly occur.

# Strategy #3: Staking

You can also minimize your risks of value loss with stake-able tokens. The cryptocurrencies of certain DeFi projects offer the feature to profit just by storing them. For example, users of the international cryptocurrency exchange CEX.IO can earn up to 16% annual interest for storing their tokens. And the gain from staking rises when the coin’s price rises. For example, if a trader invests $100 in XYZ token at $0.20 per coin, with 16% interest for staking they would get approximately 580 XYZ at the end of the year as their reward. If in that period the price has increased from $0.20 to $0.40, the trader would get $232 when they cash out. Considering the coin’s price surge, the profit increases to 132% instead of 20%.

To safeguard your portfolio against major fluctuations, you can invest in stablecoins that provide staking, such as Dai. On one hand, the passive yield from your tokens can increase your total profit from investing in the DeFi sector, and on the other hand, it can cushion potential losses if the market ramps down. Additionally, traders can restrict their losses to the amount of their prospective staking reward. As soon as the losses on their positions get near to the profit they would get from staking, traders can simply close them.

# Strategy #4: Hedging

In the fundamental hedging process, while buying an asset on an exchange, traders open an opposing position in the associated derivative at once. These derivatives could be futures, alternatives, or contracts for difference. So if a trader buys XYZ on the exchange, to hedge the risk of the asset losing value they would immediately sell a contract for a difference for the same amount. In the end, if XYZ gains in price, the losses on the contract for difference would be cushioned by the rise in the cryptocurrency’s value. However, if the price for XYZ decreases, this difference would be covered by the contrasting position on the contract for difference.

Derivative trading is offered by specialized platforms where you can use them to gain from turbulence in the prices of cryptocurrencies without having to physically buy them and hedge assets you’re holding. A contract for difference permits traders not to participate directly in DeFi and escape the technical risks, uncertainty, and complexity linked with it. To manage risks, most of the platforms use automatic safeguard orders, such as stop-loss and take-profit.

Many platforms allow users to draw out maximum profit from fluctuations in the DeFi market and, if necessary, apply strategies to efficiently protect their capital.

Decentralized finance (DeFi) has completely transformed the cryptocurrency market. Traders are interested in this domain, both as a promising infrastructure project within the crypto industry and as an opportunity to profit off turbulent token fluctuations.

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Risk Management Strategies for DeFi

What does being wealthy mean? It means building your assets and making your money work for your goals. In other words, having a sizable net worth. But how does one build wealth? 

Although active investment can give you huge benefits, it also comes with risks and requires much more time and understanding. Since it’s not always a good idea to be a risky active investor, it is generally advisable to opt for ways/strategies to generate passive income efficiently. 

To help you understand which strategy would suit you the best, we have drawn differences between two major passive investment strategies coming to light in the Crypto world right now: Yield Farming vs Staking.

## What is Yield Farming?
Yield farming is a form of investment that allows users to lend their cryptocurrency assets in a permissionless way to DeFi platforms. Since, in this case, you are lending money to the bank, this is comparable to receiving interest from a bank account. Contrary to depositing money in a bank, only yield farming may be riskier, more variable, and more complicated. 

## What is Staking?
Staking allows you to stake a portion of your holdings and earn rewards. How does that work? Your cryptocurrency generates dividends while being staked because the blockchain uses it. Staking-enabled cryptocurrencies use a "consensus technique" called Proof of Stake to guarantee that all transactions are secure and confirmed without the involvement of a bank or payment processor. If you decide to stake your cryptocurrency, it joins that operation.

## Key Differences between Yield Farming and Staking
Being a nascent, average investor, the terms yield farming and staking can leave you perplexed. Often used interchangeably, these strategies have distinct meanings and features that can be tedious to understand.

Keep reading to know the major differences between Yield Farming and Staking, and find out which suits the best for you. 

**1. Mechanism**
Staking uses a Proof-of-Stake(POS) consensus mechanism. Unlike Proof-of-work, there are no miners involved in this consensus mechanism. But with Yield Farming, users can use dApps to stake their assets in a lending protocol.

**2. Incentives**
Users receive staking benefits every time a block is validated, thanks to the distribution of incentives on-chain, which creates new tokens of that currency. On the other hand, investors who opt for yield farming earn their incentives in the form of APY (Annual Percentage Yield)

**3. Security**
In particular, if there are bugs in smart contracts coding, yield farming based on more recent DeFi protocols may be more susceptible to hackers. Because stakers are a part of the blockchain's stringent consensus process, staking is considered more secure. Any system-trickery effort could cause the perpetrators to lose their staked money in an instant. 

## Conclusion
Yield Farming and Staking, both have their perks and disadvantages. To put a pin on the best strategy to generate passive income would be unfair because it depends on more than one aspect. If you’re an average investor, try learning more about all the strategies.

Research is a tool which comes in handy when you’re beginning your journey as an investor. Remember that information is your only best friend. We hope this article helped you gain some insights into the two most famous investing techniques in Crypto. 


To help you understand which strategy would suit you the best, we have drawn differences between two major passive investment strategies coming to light in the Crypto world right now: Yield Farming vs Staking.

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Yield Farming vs Staking: The Best Passive Investment Strategy in Cryptocurrency

DeFi is an encompassing term for a multitude of public blockchain apps and ventures aimed at disrupting the conventional financial world. DeFi refers to financial applications built on blockchain technologies, generally leveraging smart contracts, and is driven by blockchain technology. According to several crypto enthusiasts, decentralized finance is a revolutionary next step in finance. A new venue like this may provide people with new possibilities to earn money while also contributing to a larger-than-life community-run goal.

While being a part of such an emerging space for making money, a few mistakes here and there come in handy. To identify the mistakes in their nascent stage, read more below.

Common Mistakes to avoid while Investing in DeFi

## 1. Not Reading enough about the Space you’re about to Invest In

How did you become interested in Defi? What are your information gathering methods? Perhaps you’ll subscribe to a YouTuber with extensive knowledge of DeFi or personnel associated with a corporation. Nonetheless, it is always preferable to gather a variety of viewpoints rather than learning from a single source of information. It will assist you in gaining a greater understanding of the DeFi and Crypto world and a better picture of the current market condition.

You must acquire information since what may be a sensible investment for one person may not be appropriate for another due to differences in risk tolerance or investing goals.

## 2. Making Basic Functional Errors

By nature, blockchain transactions are permanent. While a bank may be able to refund funds to your account in the event of an error or fraud, all crypto transactions are irreversible. That implies users must send tokens to the respective addresses and also provide their addresses to others so that they can receive transactions.

## 3. Not Keeping Seed Phrases and Private Keys Safe

Users must have a private key — a strong, unique string of characters that allows access to a cryptocurrency “address” and the funds included within it — to utilize DeFi apps and services. In conventional banking, a private key supplements the standard username or email and password approach for managing an account.

Because the private key or seed phrase is all that is essential to access funds from an address, and there are no respected administrators to assist people if they lose their keys, it is vital to keep it safe.

## 4. Not Looking For Secure Interfaces

Scammers are out to defraud you. To steal money, they develop fraudulent interfaces, ask for your private keys on social media and messaging sites, and apply other methods. Take care to deal with only an authentic version of a DeFi application, browser extension, software downloaded from an app store, or a site interface.

## 5. Misunderstanding the ‘Makers’ in DeFi World

It’s okay to get confused between the Makers in DeFi. A quick insight to understand them individually!!

- Maker Foundation
MakerDAO was established with the help of this entity. With that procedure completed, the Maker Foundation is methodically working towards its long-promised separation while also aiding the DAO in becoming self-sustaining and fully decentralized.

- Maker Protocol
Users can self-generate DAO using the Maker Protocol and collateral deposited in a smart contract-based escrow. The DAO stablecoin, Maker Collateral Vaults, Oracles, and Voting are currently part of the Maker Protocol.

- Maker DAO
The worldwide community of MKR token holders preserves the stability of DAO and the security of the Maker Protocol by voting on significant criteria such as the Stability Fees imposed on Vaults, debt ceilings, and the addition of new collateral types through the Protocol’s blockchain voting system. MakerDAO is a decentralized independent organization made from the Maker Protocol and the Maker community.

## 6. Confusing between Sai and Dai

The original single-collateral Dai token was Sai. Sai was decommissioned in November 2019 with the deployment of Multi-Collateral Dai (MCD). Users were asked to move their Sai to Dai at the time. Users can still redeem Sai for its underlying ETH collateral, however, that option is no longer in service. Because both Sai and MCD are referred to as Dai, and certain platforms have been sluggish to alter their wording, if you still have Sai in your wallet, you may mistake it for MCD.

## Conclusion
Despite some of the difficulties associated with functioning on the cutting edge of innovation, the world of decentralized banking is on its way to glory. It’s difficult to anticipate how this space will evolve as the ability to build financial services becomes more progressive. However, at the juncture where Defi and fintech collide and integrate, budding financial technology will become an element of a new financial system.

DeFi is an encompassing term for a multitude of public blockchain apps and ventures aimed at disrupting the conventional financial world. 

31 July 2022

2 min read

What is DeFi?

How can DeFi Change the World Economy?

Conclusion

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