Decentralized Finance (DeFi) has drawn a lot of attention in recent days. Uniswap and Compound have led the innovation from the front. Some notable developments include:

• DeFi market capitalization has crossed $10 Bn

• Uniswap has overtaken Coinbase

• Yearn Finance have overtaken the price of Bitcoin for a single unit, it’s all-time high touching the $43,000 mark

However, there is a hidden dark spot in the DeFi landscape. Rugpulls and hacks have tarnished the market. People have lost a huge amount of money. It is important to know the risk areas and stay safe.

Here are 7 tips that will help you to take better Yield Farming decisions:

1. High APY does not always mean high returns: The first thing people fall for is high APY. Many projects offer an initial APY greater than 10,000%.  It seems like a quick way to multiply your money. Get answers to 2 questions:

• Will the High Yield be sustainable? Check the high yield timeline. In the initial days, the supply is hyperinflated resulting in high yields. There are halvenings in quick successions. However, this drastically falls over a quick period.  

• Will you be able to sell at a profit? In many cases, even if you can earn a substantial amount in the initial hyper-inflation period, you are unable to sell the token as a majority of them will be locked. Check how much of your earned tokens you will be able to sell.

Example: 75% of Token in Luaswap is locked for the first 16 months.

2. Invest in Tokens having actual Use Cases: Ask yourself, why do you need the token given by the project. Governance is highly overrated for many projects. Does the token have any other usage apart from Governance?

Do you know that you can use UNI as collateral to get loans on other platforms? That is a real utility. That gives UNI value. Many other DeFi tokens are money grabbers without proper utility and are destined to fall.

3. Only invest in Audited Projects: Always check if the project is audited by a reputed organization. The code of the project must be audited.

When Andre Cronje disclosed that he is linked with the “in production” project Eminence people started to pour in the money based upon his good reputation. However, Eminence was still a work in progress and unaudited. Inevitably a hacker stole $15 M from the project.

Notable auditors include Quantstamp, Trail of Bits, etc.

4. Include Gas Fees in your profit calculations: Note that in these days of high gas fees your actual investment is

Fees for (Purchasing Token Pairs in Uniswap + Approving Liquidity Pool Pair in Uniswap + Approving LP Staking in the Yield Farming Protocol + Actual Staking in Yield Farming Protocol + Unstake in Yield Farming Protocol + Sell yield token in Uniswap + Removing Liquidity in Uniswap)

You simply can not neglect this Total fee. Always include this in your profit calculation.

5. When are you entering the Yield Farming project? If you are entering a project late, which can be as early as a day, not that there is already a selling pressure that has been created. This is from the profit of Day 1. The market tends to fall after the initial few days. Decide whether you want to enter at this point.

6. Take Impermanent Loss into consideration:

As the price of the yield farming tokens falls down Uniswap adjusts the number of tokens you have paired in the liquidity pools. Your yield farming token amount will increase and your second token (let's say ETH) will decrease.1. This will be in the ratio of your original pool submission. Your total value will reduce than what you would have got if you would have just held these 2 tokens. However, note that you do not incur impermanent loss till the time you remove liquidity. Long time liquidity provision in the pool might resolve this issue.

7. Always calculate the price on the Total Supply: In the initial days as the circulation is low, the Token price remains high. It is logical that with more tokens in circulation in the coming days the price will fall. Identify where you see your invested project in the coinmarketcap ranking (Let's sat Top 100-200) and try to determine its unit price based on another similar supply project in that CMC ranking. You will be astonished that the Unit Price will come very low!

Conclusion

DeFi is a High-Risk Game. Only invest the amount you are ready to lose. Only invest in trusted projects. Do not FOMO in. Spare a little money for the cost of learning.

Note: This post was first published here for Cryptowriter in association with voice.com.

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