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Should I Buy and Invest in DeFi Crypto?

DeFi or Decentralized Finance is the new buzzword in the cryptocurrency world along with NFTs (nonfungible tokens). After Bitcoin, DeFi coins are the next hottest tickets in the crypto town in 2021. These new altcoins are becoming more and more popular as it offers a wide array of digital financial products such as:

  • Decentralized Exchanges (DEX)
  • Peer-to-Peer (P2P) lending
  • Peer-to-Peer (P2P) borrowing 
  • Peer-to-Peer (P2P) trading
  • Innovations such as Non-Fungible Tokens (NFTs) 

Now, let me walk you through some of the most important aspects of Decentralized Finance that can help you decide whether you want to invest in it or not.

What is DeFi Crypto?

Decentralized finance (DeFi) is an ecosystem of digital financial applications that runs on multiple decentralized applications dApps. It helps in revolutionizing and disrupting conventional financial systems. This Defi ecosystem helps blockchain technology or distributed ledger technology in removing the 3rd parties such as brokers, insurance firms, banks, and other financial entities from financial transactions. 

Decentralized finance, therefore, makes these traditional finance and third-party financial institutions completely obsolete, thereby revolutionizing the entire financial system. Some of the major changes that DeFi is capable to bring in are:

  • Slow transaction
  • Red tape
  • Centralized operations and systems that have become outdated

As Defi application replaces these 3rd parties, they replace them by introducing smart contracts. These smart contracts are simply programs that are stored on a blockchain. When predetermined conditions are fulfilled, these smart contracts in the blockchains start working. 

Smart contracts essentially help in the automatic and autonomous execution of agreements when predetermined conditions are met. This ensures that all participants in the network are certain of the outcome without having to be dependent upon any intermediary. Smart contracts are absolutely free from human corruption. 

Is DeFi worthy of Investing in? 

Yes, decentralized finance is definitely worth investing in. Let me explain why. 

Reports say that the total value locked in DeFi protocols at press time is nearly US$40 billion. The figure is especially important to note because this number was hovering around US$1 billion at the start of 2020. This means investment in DeFi jumped by around 40-times within a year. 

The sooner you make an investment in DeFi tokens, the better. The earliest investors, who understood the potential of DeFi protocols early, reaped maximum rewards. An example will help you get an idea. If you invested in DeFi tokens such as YFI in early 2020, it would have given you a 20-to-1,000-times ROI (return-on-investment). Excessively high APYs (annual yield percentages) were returned by liquidity mining schemes. 

In fact, the Defi wave has just arrived. So, there is enormous scope for these protocols in real life and consequently a great potential for their price to increase. However, to succeed in reaping maximum benefit from DeFi investment, don’t give too much importance to APIs offered by them. Instead, dig into their fundamentals to understand their potential and their use-value currently and in the future. 

How to Invest in DeFi?

You can invest in Defi in 3 ways:

  1. Trade DeFi Tokens

These tokens are native virtual assets, which are utilized by decentralized finance platforms. 

Here is an example. Suppose, we are considering the DeFi project Compound. Its base asset is COMP. Another example is Maker. Its native currencies are Maker (MKR) and DAI. Just like any crypto and altcoin, these DeFi tokens can also be traded on cryptocurrency exchanges. 

You can purchase, sell, and hold these DeFi tokens, just like any other digital asset. One important aspect of this token is the fact that these coins are at the core of DeFi protocols, which unlocks their full potential. 

It is advisable to the investors and traders to invest in only those DeFi tokes that provable real use cases. By real use cases, I mean the real-life uses in terms of staking, governance, and others. 

Here are a few examples that will help you to understand. 

  • Uniswap’s UNI token is a governance token. Its main use in real life is that it acts as collateral for loans. 

  • Yearn Finance is a yield farming ecosystem. This protocol’s token is called YFI, which helps users in participating in yield farming in the ecosystem of Yearn Finance. 

Once a DeFi project and its token have real-life use cases, it causes users to get interested in it, leading to a rise in its demand. Once demands increase vis a vis supply of tokens and give rise to excess demand, the price of DeFi tokens increases. That’s why always check the use-value of a Defi project (in addition to checking its fundamentals, funding, and partnerships) before investing. 

  1. Liquidity Mining

‍This is a way through which liquidity is injected into DeFi protocols. The funds are held by the liquidity pools, with which liquidity miners interact. For alluring liquidity providers (LPs) to DeFi platforms, the LPs get incentives by receiving a part of the collected fees. 

Let me explain it with the help of an example. Suppose, there is a decentralized lending platform. In that case, the liquidity providers get a percentage of the fees that the concerned platform charges the borrowers. The best thing about most of the DeFi platforms is that the liquidity providers can withdraw their funds whenever they want. Therefore, you can become an LP and use your idle fund to earn rewards. If you are going to become an LP, always remember that just like any investment, it also comes with the risk of impermanent loss.

  1. Yield Farming

Yield farming is quite similar to liquidity mining. However, there is a twist. In the case of liquidity mining, the liquidity providers deposit their idle money in a single protocol. But in the case of yield farming, the yield farmers search for a wide range of platforms that provide the highest yields or incentives. 

One such DeFi backed yield farming protocol is Let’s explain how this protocol works. In Yearn.Finance protocol, the users deposit their money. This protocol then automatically searches for DeFi projects that provide its users with good rewards to the liquidity providers. This platform also searches the risk profile of other yield-providing platforms in addition to the APY. 

What are the Most Popular DeFi Tokens you should Invest In?

Top Most Popular Decentralized Financial Protocols

  • Uniswap, 0x (decentralized exchange)
  • Aave (interest rate protocol)
  • MakerDAO (lending protocol)
  • Synthetix, UMA ( creating synthetic assets such as tokenized Tesla shares)
  • Yearn Finance (automated investing), and a wide array of investment Decentralized Autonomous Organizations

Top DeFi Performers in terms of Price Rise

  • AAVE coin: Its price increased from US$85 to US$380.61 during December 2020-March 20, 2021. At press time (early August 2021), AAVE price is hovering around US$360.

  • Synthetix (SNX): Its price increased from US$6.11 to US$20.41 during December 20, 2020-March 20, 2021. At press time (early August, 2021), AAVE price is hovering around US$9.89.

  • Yearn Finance (YFI): Its price increased from US$26,571 to US$35,845 during December 20, 2020-March 20, 2021. YFI’s price reached an all-time high at US$93,435.53 on May 12, 2021. At press time (early August 2021), AAVE price is hovering around US$32,633.46.

Top DeFi Protocols in Terms of Investment Money Locked

  • Danish MakerDAO: More than US$6 billion are invested in the developers of the stablecoin DAI.

  • Curve Finance: US$4 billion is locked in this DeFi protocol that is created by a Russian and is Swiss-based. 

  • Synthethix: This Australia-based protocol is the leader in derivatives DeFi, where around US$2.4 billion have been invested.

  • Badger DAO: In this Canada-based decentralized finance protocol, US$1.36 billion has been invested.

  • Flexa: Around US$424 million has been invested in this US-based DeFi payments platform.

What do Analysts Say about the Prospects of DeFi in the Future?

  • Audrey Nesbitt, Global Head of Marketing at Metaverse says:

“There is a lot of opportunity for retail investors in the DeFi space, especially for creating passive income...Token holders can deposit their funds into a liquidity pool to earn a passive income. There are some more established DeFi lending and borrowing protocols like Aave. Token holders of Aave get reduced fees, improved loan-to-value ratios, and staking rewards. The more utilities there are, the greater the token is worth in my opinion.”

  • In a 19-page report, one of the top executives of Massachusetts-based Sarson Funds (a specialist in blockchain-related investing), Daniyal Inamullah, said that his company expects “meteoric growth” of the DeFi protocols. He wrote in the report that “Protocols are continuing to show that there is real demand and a product market fit for DeFi.” Sarson Funds, on the basis of their analysis, considers that many cryptocurrency protocols are “incredibly undervalued”. 

  • Adrian Peng, CEO of Cook Finance (a decentralized asset management platform) said: 

“We are in the early stages, with a lot of hype and bubbles around it, just like the internet in the 90s… DeFi has the potential to eventually reshape our current financial industry.”

Invest in DeFi, Invest in the Future

The market capitalization of DeFi is around US$74.8 billion. When compared to the total market cap of the cryptocurrency market (more than US$1.4 trillion) and stock market (around US$90 trillion), this figure is not impressive at all. 

However, experts say that Bitcoin was also not impressive or attractive back in 2009 or even in 2013. However, creating a multi-billion dollar market in such a short period of time is an achievement in itself, especially vis-a-vis the stock market that has existed since the 17th century. 

American billionaire entrepreneur and crypto enthusiast, Mark Cuban, believes that the Defi industry is relatively small currently and has the potential of exploding in the coming 10-years. 

Founder of Velas and, Alex Alexandrov, said:

“Once it becomes mainstream, and different aspects of DeFi trickle into everyday life and everyday finance, it will impact everyone - from the tech savvy to those like grandma who don’t otherwise understand what’s going on behind closed doors… The layers of DeFi will deepen — especially with the implementation of Layer-2 or gas-improving features on Ethereum — and then innovations will move at speed… That’s when the real investment opportunities will emerge.”

You can buy and sell DeFi tokens against various fiat currencies (US Dollar USD, British Pound, Canadian Dollar CAD, South Korean WON, Singapore Dollar, Chinese Yuan, Hong Kong Dollar, etc.) through a wide array of crypto exchanges. 

If you want to increase your investment explosively in the coming 10 years, buy DeFi coins now. Keep an eye on the market news, price statistics, block times, and others to time your trading of Defi systems and tokens for maximum profit. 

You can also diversify your crypto coin portfolio by including other cryptocurrencies such as Bitcoin Ether ETH, Bitcoin Gold, Bitcoin Cash BCH, Basic Attention Token, Ethereum Classic, Binance Coin, Wrapped Bitcoin (some also call it wrap bitcoin or wBTC), USD Coin, Gemini Dollar, ERC20 tokens (created on Ethereum blockchain), NFTs, and others. 

Also, invest in various types of stocks, mutual funds, index funds, real estate, and others to improve your personal finance. If possible, get help from a portfolio manager or wealth management firm for maximum return. 

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NapBots provides you various indices that include a basket of tokens with high market capitalization and are categorized by theme (such as Solana, NFT, DeFi, and others). This platform introduces an intuitive interface as well as advanced allocation tools for enabling new investors to create and manage advanced crypto indices easily.

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