What to Look for When Choosing a DeFi Protocol to Earn Yield

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Alex Lielacher

Here’s what you need to

There is a multitude of DeFi protocols offering exciting yields. However, not all DeFi platforms are created equal.

In this guide, you will learn what to look out for when choosing a DeFi app to earn yield on your crypto.

Not All DApps Are Created Equal

The DeFi market allows anyone across the globe to access Internet-native financial services, including borrowing, lending, savings, trading, and investing.

Arguably the most popular use case in the burgeoning DeFi market is deploying capital in trading or lending pools to earn above-average yields.

However, the quality and security of DeFi protocols vary greatly, with some having a long track record of stability and others turning out to be outright scams. Therefore, it’s imperative to conduct thorough due diligence on the protocol you intend to use as a DeFi investor.

So, let’s take a glance at the main things you should for to determine whether a protocol is worthy of your crypto.

Audit Report for the Code

Code is king in DeFi.

The code dictates all actions on the protocol. All transactions on a DeFi protocol are handled by smart contracts. But if the code has flaws, there are going to be problems. Hackers can easily take advantage of vulnerabilities and exploit them to steal user funds.

Unfortunately, the list of DeFi hacks is long. For example, an unknown crypto-criminal orchestrated one of the biggest DeFi hacks in 2020, siphoning about $25 million from Harvest Finance, a yield aggregator. The hack was made possible due to flaws in its price feeds.

Analytics firm CipherTrace also reported that a total of $156 million was stolen in DeFi hacks between January and April of 2021. That’s more than what was lost in the whole of 2020.

Always ensure that reputable security firms have audited the DeFi protocol before looking to deposit your funds.

Examples of recognized DeFi smart contract auditors include Certik, OpenZeppelin, and Quantstamp. They often publish the audit reports of these projects and rank them based on security levels.

Community Size and Support

There’s no DeFi without an online community.

A community is pivotal to the success of a DeFi project. They help spread the word about the project, invest their money, and contribute to the development and governance of the protocol.

The most successful projects have a huge community. Though a large number of people following them on social media and Telegram isn’t a guarantee that the project would be successful, it’s often a great way to know the sentiment of people about the project.

Also, ensure the community is active. There are projects with large Telegram groups, but a huge portion is just bots, not real humans. If it has an active community, it signifies that people are interested in the protocol, and it could continue to stay relevant.

Investors & Partners

What kind of investors and partners believe in a project at the earliest stage is another aspect to look at when analyzing a DeFi protocol.

DeFi protocols can increase their chance of success by receiving backing from reputable venture capital (VC) firms, crypto funds, and other institutional investors.

Seeing top VC and crypto funds backing a DeFi protocol often means three things:

  • thorough due diligence must have been done before they invested;

  • the DeFi project has the potential to get access to large capital in the future to keep building;

  • and the founders will get top-notch mentoring and can tap into the network of the institutional fund.

Reputation of the Founders

DeFi projects need strong technical founders since their success depends on the quality of the code or smart contracts.

While many DeFi projects have anonymous founders, you should probably think twice about deploying a large amount of capital in a DApp that could be run by anyone.

Having founders with a track record and the right technical experience can make a world of difference for DeFi protocols. That is also why most of the leading DeFi apps have known founding teams.

There are also some DeFi protocols governed by Decentralized Autonomous Organizations (DAOs), which means the community determines the roadmap of the project. But most leading DeFi applications have their teams listed on their website.

Ultimately, you need to check the team’s backgrounds and look to find answers to questions like:

  • What significant project have they done before now?

  • How experienced is the engineering team?

  • How experienced is the marketing team?

  • What’s the reputation of the founder(s) in the crypto space?

If the developer team is anonymous and it doesn’t have a strong developer community, this could be a red flag. What happens if the anonymous team gets tired? The project will shut down.

Use Case of the Platform

**DeFi projects are meant to solve problems in the world, just like any other business. **

Many projects have emerged with no real-world use case in the DeFi hype that started around a year ago. New DeFi staking protocols often give very high yields, but investors have to be very careful of the sustainability of these projects.

Do your research and try to understand the risk you’re taking for the return they are offering. Better still, stick with well-known and established DeFi protocols with real-world use cases like Compound, Aave, Uniswap, and Pancakeswap.

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