If you are interested to invest in DeFi, you need to understand where the returns come from in a DeFi protocol.The trajectory of a platform must also be rigorously evaluated by the investor.
One year after the “DeFimania” of 2020, decentralized finance platforms (or DeFi, for its acronym in English), continue to captivate investors. In general, the returns these protocols offer greatly exceed those of traditional banks or finance companies.
But just as there are apparent advantages to DeFi, there are also risks. Crypto DeFinance has already reported numerous cases of scams, hacks, loss of money, detected vulnerabilities and errors of various kinds on many of these platforms.
On September 10, the Blockchain Summit Latam 2021, dedicated its last day to decentralized finance. Among the protagonists of the ecosystem who paraded on the screen at the virtual conference was the renowned YouTuber Juan Nuvreni, better known as Crypto Shenix.
The Argentine influencer with 45,000 followers on YouTube was not alone but shared the scene with his compatriot, the developer Facundo Ameal. The latter is part of the DeFi yield aggregator team, Yearn Finance.
During the dialogue, Ameal explained what, in his opinion, someone who is interested in decentralized finance should investigate before putting their cryptocurrencies or tokens on a given platform.
How has the trajectory of the project been?
“It is important that a protocol has a track record,” says the specialist. According to him, that “not only ensures that you are going to have fewer problems but [allows you to see] how they will respond when there are problems.”
According to Ameal, that’s advice she gives based on her personal experience at Yearn Finance. He mentions that when the project first started, there were 10 people doing what they could. However, there are far more people now and they have an incident response process in place. The developer says that the same will surely happen in other protocols with a history such as Aave, Compound, Uniswap, or Sushiswap.
Does the project have audits?
Another important point for Ameal is that the DeFi protocols are audited. And it is not enough to know that they are, but you have to read the auditor’s report, which is generally available to any interested party.
“The audit must be opened and read,” says the panelist, adding: “Did you find errors? Surely yes. What did you do? Did they respond? Did they fix them? Anyone who can read English can read the audits. ‘
Higher return, higher risk
Asked about the matter by Crypto Sheinix, Ameal acknowledged that, in general, higher investment returns equate to higher risk. “In the DeFi summer, when there were returns of 10,000% per year, you had to look at the investment and not sleep,” he recalls.
In any case, the member of Yearn Finance does not make this an immovable rule, so he adds: “in general it is like that, the higher the return there is the greater risk, but it does not mean that the lower the return equals the lower risk.”
Where does the performance that a DeFi platform offers you come from?
Something that for Ameal is essential is that the investor knows the project in-depth and understands where the performance offered comes from: it can be through the issuance of a governance token, or through other DeFi protocols, or based on loans, among other methods.