DeFi Needs Diversification for Sustainable Growth
Much of the hype surrounding DeFi right now is focused on yield farming, otherwise known as liquidity mining. This is a process that allows DeFi users to earn rewards from their cryptocurrency holdings, made possible through interacting with different protocols that distribute what is known as governance tokens (GTs).
While farming yield can be a profitable venture on its own, an added benefit is tokens that are farmed can also see a price surge because their supply is restricted by being locked up, leading to some of the recent insatiable gains we’ve seen in the DeFi space. However, DeFi is about so much more than just yield farming and should not be overly reliant on it.
The Explosive Growth of DeFi Is Not Sustainable
The cryptocurrency space has seen DeFi explode over the last few months. At one point, over $9 billion in crypto assets were locked in its protocols. The growth seems to be related to the uptick in yield farming, a trend that was started by Compound, a major lending protocol, when it started distributing its COMP governance token, with other protocols quickly following suit.
For example, YFI, the governance token of Yearn.finance, a site that helps users find the best yields in DeFi protocols, has a token price worth more than BTC. Over the last 30 days, YFI is up more than 400%.
This is a very different situation from September 2019, when the DeFi space just had a little over $500 million locked in. However, it’s not all about the rewards. What goes up must come down. And, as we have recently seen from large crashes in SUSHI and YAM, investors with too much capital locked into a protocol whose price is tanking stand to make significant losses. Chasing overnight gains throughout the history of investing has never proven sustainable. And DeFi needs diversification for sustainable growth.
How to Support DeFi for the Long-Term
There are many other ways to positively support the development of the DeFi space. More sustainable methods can allow users to gain exposure to the benefits of DeFi, all while minimizing the loss of money to hacking, software errors, or unexpected whale movements. This means following a diverse strategy, understanding the project they are investing in, using derivatives products to hedge their risks, and platforms like OKEx Earn to make a passive income with no lock-up period.
Not “putting all your eggs in one basket” will substantially help investors mitigate the risk from unexpected market moves, technical issues, or exit scams that could ruin an investor, all while still being in with a chance of discovering the next crypto unicorn early on.
Since every individual investor can choose their own DeFi portfolio, adequate research is necessary. For those investors who desire more DeFi exposure, OKEx is fast becoming a one-stop-shop for all their needs and now has a new DeFi category that allows them to access 35 different tokens. OKEx also offers sophisticated trading tools like margin and swap trade for a variety of DeFi tokens, thus allowing investors to execute strategies that maximize profits while hedging their trading risks.
With a combination of these different tools, traders and investors can take advantage of DeFi while optimizing their risk management and ensuring they have some protection in case the next crypto catastrophe strikes.
About the Author: Jay Hao is the CEO and Chief Customer Service Officer at OKEx, a leading crypto spot and derivatives trading platform.
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Guest Author, @KhareemSudlow