The best DeFi projects to invest in can take years before they take off.
And when they do, the early few will make ridiculous returns at low risk. When investing in blockchain, one big win might be all you need.
But let's not reduce DeFi to a mere "business opportunity." Many features you'll see on upcoming protocols have utility beyond the crypto trader community.
Whether we're talking of institutions or everyday people, DeFi allows us to challenge none other than the banks we've trusted since Ancient history.
Not necessarily to replace but introduce a new way to regain control of your money.
It's what makes DeFi projects so different from generic cryptocurrencies. And to find these hidden gems first, you need a reliable system to help you navigate through the sea of Sh*tcoins. It all starts with knowing what the best DeFi projects look like.
Simply put, DeFi is the financial application of blockchain technology:
To visualize the broadness of this technology, think of the hundreds of DeFi projects out there. All of them present different combinations of those properties. From the investor's standpoint, how do you choose "the One" out of seemingly identical protocols?
Understanding DeFi isn't enough. You also need to know the market contexts and features of the organization as a whole.
One reason research is so underrated is investors' optimism. It's easy for marketers to sell the winning features of their project. For beginners, it might seem all utility tokens are profitable (and they are! On bull markets).
But finance is about risk management more than money-making. And to find out what could go wrong with a project, you need to research. To validate the project, compare it with others, and track its development.
If after all the steps you barely find anything wrong, it's probably a great DeFi project. The next eight conditions can help you tell if a DeFi protocol is run-of-the-mill, fraudulent, or exceptional:
Technology is as valuable as the market decides. Your favorite protocol might, for example, provide Ethereum-compatible smart contracts. But does the market need those features when there are already a dozen highly-ranked providers?
Product-market fit is the demand you can satisfy with the right product relative to competitors' solutions. If there's no demand or too many offers, there is no fit, and you'll need ridiculous competitive advantages (often unprofitable) to succeed. If there's demand and mediocre solutions, there is a fit and entrepreneurial opportunity.
A perfect fit can still fail because of market context. Demand can be erratic, and without competitors, there's no way of knowing the actual market need. Luckily, you can get a clearer idea by observing the underlying foundation.
Bitcoin has smart contracts like every major blockchain. But Ethereum's more practical, which made it the no.1 utility token since 2015. How functional is the blockchain that supports your favorite DeFi projects?
Bad foundations can make even the most innovative projects unsuccessful. Good foundations will benefit your tokens with more utility, demand, and cost-efficiency. And if your protocol works on multiple blockchains, even better.
Which attracts more developers, which means there are more tools to build DeFi projects. Hence why foundations go hand-in-hand with ecosystems.
The ecosystem alone makes a huge market difference. It's why projects like Polkadot and Chainlink are so broadly used, even though they aren't actual blockchains. PulseChain, for example, leverages the existing Ethereum ecosystem, and adds even more.
DeFi projects built on developed ecosystems can use stablecoins, DEXs, governance platforms, NFT marketplaces, liquid staking solutions... Without ecosystems, protocols would have to develop this infrastructure themselves, which is neither cheap nor a priority.
Ecosystems save time and costs. That allows DeFi projects to offer better community-owned fees.
In community-owned protocols, one user's fees are another user's yield. When DeFi projects have high utility and fast-growing communities, they can either lower costs or increase interest rewards. So what fees and penalties does your project have?
Maybe your protocol offers insane yield farming ROI. But if it lacks utility, people will cash out as soon as they earn. Maybe there are no fees but interest rates are lower.
Regardless of the strategy, developers should take measures to make these returns reliable. For example, HEX validators can un-stake before deadlines but face hefty penalties. Penalty "losses" return to stakers as additional interest.
When rules are set by and for communities, we call them governance-free DeFi projects.
Governance is the main difference between DeFi and CeFi. Whoever governs the protocol can direct its utility development and change rules.
In governance-free protocols, there is no central authority. Holders become governors who can suggest and influence decisions. All users start with the same voting power and can increase it based on the consensus mechanism.
Proof-of-stake models generally reward staking quantity and history length. The moment one user can attain more governance power than 51% of the network, it's no longer governance-free. Developers prevent this by adding randomness, capping contributions, and removing admin keys.
Admin keys grant access to funds used by the protocol. Some may argue that these help developers protect from bug exploits. But it defeats the purpose of decentralized, governance-free finance.
It allows original smart contract deployers to access liquidity and burn addresses. These keys might also be given or stolen by others, putting everyone's funds at risk. DeFi protocols should have no admin keys unless legally necessary (which could be multi-signature or governance-owned).
Depending on whether admin keys exist or not, the code should be either flexible or immutable.
While most blockchains are immutable, DeFi dApps don't necessarily are. If there are admin keys AND smart contracts can be changed, there's no free governance. And since the best DeFi projects to invest in are truly decentralized, it doesn't matter how good the fees or product-market fit is.
This doesn't mean updates aren't possible. Developers should include in smart contracts how code upgrades will work. When there aren't such functions, users fork the protocol.
e.g., Pulsechain is a hard fork and direct copy of the Ethereum blockchain.
Immutability makes code difficult to correct (if even possible) in case of cyber-attacks. It's considered reliable once the protocol passes a crypto audit.
Audits are extensive examinations of how smart contracts interact with their blockchains. These networks (ETH, BNB, SOL) typically have no audits, as they've been "battle-tested" for years and are considered secure. As for the protocols, you can check for audits on coin explorers (e.g CoinMarketCap).
After verifying a token, auditor companies share the results on public lists on their website. Notably, Fairyproof, Hacken, and Certik. If your project doesn't show audits on coin explorers or auditor websites, it's either too new or not that reliable. If there is, the most recent, the better.
While it's not guaranteed to protect you from vulnerabilities (e.g., Terra Luna was audited too), it's worth checking during research.
Research can be so time-consuming that some dedicate full-time to it. Not every project is the same, and you don't want to waste hours analyzing bad projects. Here's a simple 3-step process to know where to look —and hopefully find those gems before anyone else:
Once you know what the best DeFi projects look like, you can revisit the ones you already know and check these conditions. New projects are promoted all the time, so research isn't that required for finding good ones. But if you want to find them before they blast off, searching is better than waiting.
Your options are:
You can also find browser extensions to filter projects and save time.
Many dApps are either inactive, too small, or too similar to each other (AKA no product-market fit). Not only that but there are at most a few hundred projects to cover.
If you compare that to the ~20,000 existing cryptocurrencies, mastering DeFi is a very manageable goal.
Validation can be a simple checklist like this:
If one project caught your attention, chances are you're not the only one learning about it. There might be other investors who researched and shared their thoughts on social media, blogs, and interviews. Use these sources to save time and contrast your findings.
If the information doesn't match, find out why. Maybe you've overlooked something, maybe they made a mistake. If it does, next step:
By now you might have found the best DeFi projects to invest in. But until you start getting good ROI, research never ends. You see, the roadmap and price potential don't matter if the project never takes off.
You want to watch those projects and make decisions as you get new information. It's not smart to buy big just because it could go up 100 times (so can dozens of other coins), or because prices are too low to lose. Unless you want to hold, the recommended approach is dollar-cost averaging (DCA).
Every 1-2 weeks, you spend a few minutes reviewing your projects:
Assuming your "best DeFi projects" maintain that status, you now just need to decide when to buy.
Market timing is a different world. It can make bad projects look profitable and good ones worthless. But it's hard to get right and can be time-consuming.
As a rule of thumb, it's always a good time to buy the best DeFi projects, either with a lump-sum or DCA.
If you're buying big, however, a bit of analysis can go a long way. There are three ways to do it:
Technical and sentimental analysis can be negative and that's good because it's an entry opportunity. Fundamentals only change based on community and developer updates. If all three types are positive, it won't be long before your DeFi projects make the headlines.
The mentioned research tactics will help you find the next great DeFi project. Or if you don't want to put in the time, at least you'll be able to recognize the opportunities around you. At LiquidLoans, we believe Pulsechain is one of those projects that check all the boxes:
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Disclaimer:Please note that nothing on this website constitutes financial advice. Whilst every effort has been made to ensure that the information provided on this website is accurate, individuals must not rely on this information to make a financial or investment decision. Before making any decision, we strongly recommend you consult a qualified professional who should take into account your specific investment objectives, financial situation and individual needs.
Connor is a US-based digital marketer and writer. He has a diverse military and academic background, but developed a passion over the years for blockchain and DeFi because of their potential to provide censorship resistance and financial freedom. Connor is dedicated to educating and inspiring others in the space, and is an active member and investor in the Ethereum, Hex, and PulseChain communities.