To prepare for any risk, users need to understand where the returns are coming from in a DeFi protocol. The investor must evaluate the track record of a platform rigorously before putting his money on it.
The wave of DeFi mania happened in 2020, but decentralized finance platforms still captivate investors. The returns that those protocols provide considerably exceed those of traditional banks and finance companies.
Although DeFi platforms offer advantages to users, they also pose risks. Many people have reported scams, hacks, lost money, detected vulnerabilities, and various errors on those platforms.
Developer Facundo Ameal recently spoke about how to take better advantage of decentralized finance. The specialist belongs to the team of DeFi performance aggregator Yearn Finance.
Ameal commented that those interested in decentralized finance should research before risking their cryptocurrencies or tokens on a given platform.
It is Necessary to Evaluate the Track Record of a Project
Argentine specialist Facundo Ameal considers that it a protocol must have a track record. He argues that not only does that ensure there are fewer problems, but it also allows seeing how to respond when there are.
The expert claims that he gives such advice based on his personal experience at Yearn Finance. He has observed that those projects must have many people working on an incident response process. The developer says that must be the case for other protocols with a track record like Aave, Compound, Uniswap, and Sushiswap.
The Investor Must Know Whether the Project Has Audits
Ameal believes another crucial factor is for investors to know that DeFi protocols have audits. In addition, they should be able to read the reports by the auditor, which are generally available to any interested party.
The counselor adds that users should open and read the audit to check whether there have been errors. Likewise, they must see what the members of those projects have done to respond to those problems and solve them.
There is a Generally Greater Risk from Higher Returns
Regarding that issue, Ameal recognized higher investment returns generally equate to greater risk. He recalled that there were returns of 10,000% per year in the DeFi summer when investors had to look at their investments without shutting an eye.
However, the member of Yearn Finance does not consider that to be a hard-and-fast rule. For that reason, he adds that there is a generally greater risk from higher returns but says the same can happen from lower returns.
It is Important to Know the Origin of the Returns Offered by a DeFi Platform
It is essential that the investor knows the protocol in-depth and understands where the returns it offers come from, says Ameal. The origin of those profits may be the issuance of a governance token, other DeFi protocols, or loans, among others.
Facundo Ameal expressed that he believes that is the most important thing to know. He commented that the investor who does not understand where the return comes from is the return.
By Alexander Salazar