How to Create and Grow a DeFi portfolio?

How to Create and Grow a DeFi portfolio?

DeFi is "decentralized finance", refers to a range of financial applications in the blockchain or cryptocurrency industry.

How to Create and Grow a DeFi portfolio?

DeFi, or decentralized finance, is a fast-rising technology that has gained the attention of crypto enthusiasts and investors alike. It uses cryptocurrency and blockchain technology for managing financial transactions, and is touted to be the future of banking globally.

People are beginning to realize the potential of decentralized finance, as it removes some of the most common bottlenecks in a traditional financial system.

If you’re someone who’s looking to get started with DeFi and wants to grow your portfolio, you’re at the right place. In this article, we’ll dive deep into the basics of DeFi, while also helping you with tips for growing your DeFi portfolio.

Here’s everything you need to know about making your DeFi portfolio in under 10 minutes!

So, what exactly is DeFi?

As mentioned above, DeFi is an umbrella term for a range of banking/finance-related activities such as investing, lending and trading taking place through a decentralized, non-custodial platform. Unlike traditional financial structures, DeFi has no intermediaries and fosters seamless collaboration and transparency.

Most actions associated with DeFi are controlled via smart contracts, which make the system secure and more open. The possibilities offered by DeFi and smart contracts, in particular, are endless.

Why should you use DeFi?

Using a DeFi platform in place of traditional banking/financial services offers several benefits. People often use a DeFi platform for the following reasons:

  • Autonomy: Decentralized finance platforms are independent of control from a centralized financial institution. DeFi platforms use “self-custody”, which makes them autonomous and mitigates the risk of storing one’s assets at a single place. These protocols are typically managed by Decentralized Autonomous Organizations (DAOs), which are distributed networks of participants overseeing the day-to-day activity on the platform.
  • Increased transparency and security: Another big benefit offered by DeFi is the increased transparency and security levels. Most of these protocols are based on smart contracts published on a blockchain. It provides greater transparency about how and where your assets are stored by maintaining a record of all transactions that take place on the platform. Smart contracts add a much-needed layer of security to blockchains and are immutable (unchangeable).
  • Low fees and higher interest rates: DeFi removes the role of intermediaries, allowing users to transact with each other directly. This also leads to lower transaction fees, apart from both users negotiating terms around interest rate. People using DeFi networks for lending also often enjoy higher interest rates compared to their traditional counterparts.
  • Increased accessibility: Apart from the transparency and security, the level of accessibility offered by a DeFi network is mind-boggling. DeFi allows anyone with an Internet connection to access a bank account, unlike traditional banks which require you to fulfill multiple eligibility criteria.

People can now get loans instantly, irrespective of their location.

How to create a DeFi portfolio?

It’s quite easy to start investing with DeFi. You can easily do so by setting up a crypto wallet like MetaMask or Zerion. Such “self-custody wallets” are your ticket to the world of decentralized finance. Once you’ve signed up, make sure to store both private and public keys to your wallet for the future. These keys are crucial, since they  provide you a gateway to access your wallet.

Apart from buying crypto assets, you can also start trading them. Investing small amounts in stable coins allows you to understand the crypto landscape, manage risk and learn more about the platform.

The best way to ensure maximum returns is to diversify your portfolio, eventually rebalancing them by holding and selling assets based on your goals.

Tips to Grow Your DeFi Portfolio

Once you have enough experience buying and trading cryptocurrency, it’s time to take it to the next level.

That said, here are some helpful tips to grow your DeFi portfolio:

  1. Hodl

This is one of the most popular DeFi investment strategies used by beginners. Much like the traditional stock market, the idea is to buy new assets and hold them for a longer period to see maximum returns. While it certainly helps you grow your portfolio, HODLing isn't the most recommended DeFi investment strategy, especially if you're looking to generate some passive income.

  1. Staking and Yield Farming

Staking and yield farming usually go together, all thanks to the interoperability offered by DeFi networks.

That said, staking helps you grow your DeFi portfolio by locking up idle assets. This way you can contribute to the market liquidity and increase the level of security offered by decentralized networks. You get governance tokens in exchange, which you can either keep or trade. On the other hand, yield farming combines investing, lending and staking for maximum profits. This is usually done by charging interest on the assets and staking rewards.

Yield farming, although popular, is a high-risk investment strategy not recommended for beginners.

  1. DeFi Indexes

DeFi indexes are yet another DeFi investment option you can use to grow your income. Similar to how ETFs are used for tracking the price of traditional assets, DeFi indexes are used to track the prices of crypto tokens. Tokens in a given DeFi index are often selected based on their size and volatility. One of the most popular DeFi indexes is the 'DeFi Pulse Index' that collates all top DeFi projects. You can also explore the 'Metaverse Index' which allows investors to bet on the future of several NFTs.

  1. Borrowing and Lending Cryptocurrency

Borrowing and lending crypto assets is another way to grow your portfolio. To do so, one must have some collateral they're willing to forego in exchange for the tokens/coins. There is no credit check involved, and no banks to approve or reject the loan. Smart contracts are ideally used here as digital alternatives of an intermediary, with rates being set based on coin availability in the liquidity pool. Lenders usually lend cryptocurrency, hoping to gain a profit through interest.

Final Words

Once you’ve gained a fair bit of knowledge about DeFi and cryptocurrency, you can start investing and trading to grow your DeFi portfolio. These investment strategies have been used by  people across the years and can help you get started with crypto as a beginner easily.