No special knowledge is required to work successfully in decentralized finance (DeFi), but, just as everywhere else, you need to be careful when clicking buttons and, of course, limit your risks. No matter how banal it sounds, by following a simple rule of not betting the farm, you will already protect yourself from at least 50% of the negative consequences of buying hopeless tokens. However, you can lose everything - not necessarily at once, but very slowly, especially when failures provoke new failures and seem to be lining up to test your strength. This situation is most typical for those focused not on the deal quality, but on the desire to earn at all costs, and basically, on placing bets. But enough on psychology.
Before delving into the nuances, let's get a general idea of DeFi. Any network, or as they now say - “ecosystem”, is characterized in terms of user trust by the TVL parameter (Total Value Locked), that is, the volume of assets locked in it. The more money customers bring to the bank, the more trust it seems to elicit (and vice versa). It works similarly in the world of digital finance - the more liquidity users are willing to share for the sake of passive earnings, the more competitive the network is. Today (and yesterday, too), Ethereum is the absolute champion, BSC and Tron follow at a considerable distance, then come Polygon, Avalanche and the 2nd-level Ethereum networks (Arbitrum, Optimism) at an equally significant distance, and then there’s everything else.
According to DeFiLlama
It would be fair to make a sort of digression here to the question that we’ve already raised - how generally adequate is the TOP-20 in the rating of cryptocurrencies and tokens. While the presence of Polygon, Tron and Avalanche in the second ten seems justified, the capitalization of some other assets, including those from the top ten, most certainly appeals to common sense. That’s why our belief that the TOP-20 will undergo significant changes in the coming years is still relevant. But back to DeFi.
The DeFi segment as a whole contains several categories where liquidity is distributed:
Here, billion-dollar positions belong to decentralized exchanges, lending protocols, collateral (CDP), bridges and derivatives. Decentralized exchanges (DEX) are the most popular DeFi user services, which can also be used to compile various ratings:
However, the main rule remains the same regardless of any ratings - limit your risks. This should be enough of an introduction. Now let's move on to the nuances.
DeFi token clones
DeFi space is a breeding ground for token clones. The moment a worthwhile reason comes up in the media space, scammers instantly react to the chance to attract attention. For instance, as soon as the Aptos team revealed the project’s tokenomics, announced the mainnet launch, and the largest sites announced its listings, Aptos lookalikes flooded in, and the real promised airdrop only spurred on the scammers’ imagination and enthusiasm.
Doppelgangers of tokens and even cryptocurrencies do not pose a danger in and of themselves, but they can lead to mistakes. In order to protect yourself from losses, all you need to do is make sure that the token contract address is correct by visiting the project website at least once. In case of cryptocurrencies, there are no addresses, but there may be a wrapped token, whose address can also be found in the original source.
A typical mistake is to learn that a promising token has emerged, go to your favorite decentralized exchange, find it there and buy it without a second look. Exchanges certainly monitor and remove fake tokens, but they do it very slowly and usually after numerous complaints. It is either impossible to sell such a token at all, or only at a large loss.
However, you can end up with a token clone not only by buying it. It can arrive in your wallet on its own under the guise of an airdrop, which was actually also happening in case of the above-mentioned Aptos. At the same time, its book value will be quite tangible - you will see an increase on the balance sheet, even though you’ll never sell it at that price, and if the sale does take place and if there are enough funds in the account, a huge commission can theoretically be deducted from your account.
In the simplest cases, fraudsters' hopes boil down to the fact that, inspired by the airdrop, you’ll buy more of the same tokens immediately, without bothering with the details, or, if you experience any difficulties, you’ll fall into a new trap and contact their “support”.
Technical support in DeFi
Many fraudulent tokens have their own chat rooms where you can complain if something goes wrong. Don’t be surprised that as soon as you send a message, you’ll encounter a crowd of helpers. The same applies to honest projects' chats, where scammers often seize the initiative by tracking client activity. If we are talking about Telegram, you’ll most likely get a call - or five - right away, and you’ll be surprised by their fervent desire to solve all your problems for you. Such zealous responsiveness on the part of tech support should not mislead you. They’ll most likely ask you to go to a certain site and enter certain personal data… oh, let’s say, your wallet password. Don’t ever do anything of the sort!
Today, one of the most popular tech support phrases is "We never DM you first". It is used by everyone without exception, nevertheless, scammers very often write first when they see the sign of the slightest uncertainty. Never accept unexpected help if it knocks on your door on its own!
Honest DeFi projects with surprises
In addition to outright fraud, there are many projects in DeFi, just like everywhere else, where the most important details are written in small print. Users rarely read whitepapers carefully or study all the website pages in detail. The project seems attractive - so why not buy some of its tokens at once, and then some more? However, it may turn out that you didn’t buy as much as you intended. This can happen for several reasons.
The first one is easy to detect - see what Slippage Tolerance value the purchase service has set when all that’s left is just the final “Buy” click. Typically, it’s 0.5% - then everything is OK, but in some cases it may be 6%, or even more. Anyway, don’t agree to a deal with large slippage simply because there are thousands of projects in the world with less crappy conditions.
The image shows the case of an imaginary TTT token (in order not to advertise the corresponding non-imaginary token), and it looks like a pretty sweet deal at first glance, but you should still be paying attention to the honest slippage warning!
The second pitfall is much more difficult to notice, and you will only see it after you make the purchase. Below is a screenshot from the tokenomics of a project that you can explore somewhere in the "About" section if you wish. The token name has also been changed for humanitarian reasons.
As you can see, everything looks fair and there is a ton of convincing words, but you’ll have to pay 14% both when buying and selling this token, which can please only the most hardcore fans of this project.
Where to buy DeFi tokens?
But let's say you’ve triple checked the token characteristics and your funds aren’t threatened by either good or evil intentions. You can most likely purchase tokens in several ways: on the project's website, on a centralized exchange (if it’s sold there), on a decentralized exchange and directly in your wallet. Which is best?
- The best option is a centralized exchange, since it reflects the most objective price and has minimal commissions. However, not every token is traded on CEX, after all, we are talking about decentralized finance.
- The second way to buy tokens is to choose the most secure and respected decentralized exchange (see the rating above), but be sure to check the contract address! Even on a reputable DEX, you can easily encounter token clones.
- The third way is to buy the token directly in your wallet, if swap is available. There is a chance of some losses here, since the wallet, of course, will charge a commission and may come up with some other surprises, i.e., choose a non-optimal conversion path. Buying in a wallet makes it more difficult for you to understand what is happening, although this option is also generally quite safe.
- The last option is to buy directly on the project's website. Here you should be careful for all the reasons described above, and also remember that a non-market price may be easily indicated on the website.
General risks in DeFi
When working in DeFi, it is important to remember that DeFi tokens are a lot more volatile than classic cryptocurrencies. If something happens, TVL plummets like a stone, which is what happened during the collapse of LUNA and FTX. Volatility doesn’t only allow you to earn hefty amounts, it may also lead to losses. But that’s largely a matter of skills.
Otherwise, limit your risks and carefully study the projects you intend to invest in.
Remember: one awkward move - and you are now financially supporting those who are impeding the development of the entire cryptocurrency industry!
