Top 5 Safety Tips for DeFi-ers
Learn how to stay safe in the brave new world of decentralized finance.
The decentralized finance (DeFi) market enables anyone with an Internet connection and a crypto wallet to potentially earn crypto investment income. Like all investment opportunities, however, DeFi also carries a degree of risk.
Read on to discover five DeFi safety tips to help you navigate the exciting world of DeFi.
Not All DeFi Protocols Are Created Equally
While the decentralized finance (DeFi) market offers a plethora of exciting opportunities to generate an investment income, it’s essential to know that not all DeFi protocols are created equal.
What does that mean?
It means that there are established, audited protocols built by experienced developers that have been operating without any hiccups for years, and then, there are unaudited, anonymously-operated DApps that are only a few days old, enticing crypto investors with exceptionally high yields to deploy their capital.
If you want to safely deploy funds in the fast-growing DeFi market, it’s advisable to follow basic DeFi safety tips to reduce the chance of losing your funds.
DeFi Safety Tips
Below, you will find five DeFi safety tips that could help to save you money while investing in the DeFi markets.
1. Only Interact with DeFi Protocols You Trust
Trust plays an essential role in the crypto markets despite the trustless nature of blockchain technology.
As a DeFi investor, you can reduce the risk of losing funds due to a hack, rug-pull, or code error by only deploying capital in established DeFi protocols that have been audited and have stood the test of time.
Lending protocols Aave and Compound, for example, have been successfully operating for several years and have undergone numerous smart contract audits. Unsurprisingly, they have managed to establish themselves as the two go-to platforms in the DeFi lending markets.
Depositing crypto in an Aave or Compound lending pool is, therefore, arguably more secure than placing funds into a recently launched high-yielding lending DApp operated by anonymous devs without a known track record. While the latter may offer higher yields, the chance of a complete loss of funds is substantially higher than if you were to deposit funds in an established protocol.
2. Only Deploy Capital in DeFi Products You Understand
In addition to only interacting with established DeFi applications that you trust will keep your funds safe, it’s advisable only to invest in DeFi products that you actually understand.
Just because something is yielding 1,000+% per annum doesn’t make it a good investment, especially if you don’t fully understand where that yield is coming from.
Take your time to read up on some previous concepts we’ve covered such as staking, yield farming, NFT farming, and research any other new terms you may come across before depositing crypto into a DApp that deploys any of these investment strategies.
Once you are comfortable that you understand exactly how a DApp works, you can confidently decide whether you should deposit funds or not.
3. Make Sure You Have Enough Funds to Cover Gas Fees
If you are interacting with DeFi apps on the Ethereum network, it’s essential to hold enough ETH in your crypto wallet. In light of the network’s high transaction fees, you should make sure you have several hundred dollars worth of ETH to cover gas fees when depositing or withdrawing funds from a DApp or to convert one asset for another when taking a profit.
While you always need to hold a chain’s native token to cover transaction fees to use DApps and DeFi applications (like holding BNB (BEP20) when using Binance Smart Chain), Ethereum’s relatively high transaction fees mean you could have trouble acting quickly if the market moves and you want to cash out.
4. Never Invest More Than You Can Afford to Lose
You’ve probably heard this one before but you should absolutely not invest more than you can afford to lose, especially when deploying capital high-risk investment opportunities, such as yield farming.
The DeFi market is only a few years old, and many DApps have only been around for a few months. While sticking to these tips will help you to mitigate many of the DeFi market’s risks, you should still only put an amount of money into DeFi protocols that you can afford to lose.
5. Use a Secure Wallet & DApp Browser
Using a secure, easy-to-use crypto wallet to interact with DeFi applications is essential to a safe and user-friendly DeFi experience.
Trust Wallet, for example, enables users to seamlessly access the world of DeFi using the wallet’s built-in DApp Browser while offering support for 12+ blockchain and 160,000+ digital assets. That means you can seamlessly deploy crypto in your favorite DeFi protocol with a few taps on your smartphone while being able to rest assured knowing your funds are safe.
Interacting with smart contracts can be tricky for first-time users, so using a beginner-friendly crypto wallet with DApp support is a smart way to mitigate risks stemming from accidental errors on the side of the user.
Safely Navigate DeFi with the Trust Wallet DApp Browser
Arguably the safest way to access the DeFi markets is using the Trust Wallet DApp Browser.
The DApp Browser allows you to access decentralized finance protocols across multiple chains with just a few taps on your smartphone, making it not only highly user-friendly but also a secure way of entering the exciting new world of DeFi.