How to buy DeFi tokens in 2022

How to buy DeFi tokens in 2022

DeFi offers multiple investment opportunities, but as with all crypto there are risks. Jordan Finneseth offers us three ways to analyse the DeFi tokens on offer, together with their protocols.

As he says, “There’s more to investing than just technical analysis and gut feelings.” Since decentralised finance projects burst onto the scene, we have seen some blockchain analysis platforms appear with the aim of providing better insights into the “fundamentals supporting a cryptocurrency project” and these offer us three ways to evaluate them.

  1. Check the community and developer activity

Looking at this is one of the most basic ways to begin your evaluation. Many of the top protocols in the space offer analytics that track the growth in active users over time. For example, you should look for the average number of active wallets on a daily, weekly and monthly basis. Investors should also look at the number of transactions and volumes transacted on the protocol, as well as sentiment about the project on social media channels, such as Twitter. Information about developer activity is available on GitHub.

  • Look for increases in total value locked (TVL)

The overall strength of a project may be revealed in the sum of all assets deposited on the protocol, otherwise known as the total value locked (TVL). Growth in the TVL shows that momentum and interest in the project are increasing. Tools you can use to look at this are DeFi Llama and DappRadar, which allow users to dive deeper into the data and look at the statistics for different blockchain networks, such as Ethereum, and on individual projects.

  • Identify the majority token holders

Another factor to consider are the benefits given to a project’s token holders for their activity. Finneseth says, “Investors should also look into the manner in which the token was launched and who the dominant token holders currently are.” He also warns, “caution is warranted when excessive yields are offered for low liquidity, anonymously-run protocols with little community activity because this can be the perfect setup for catastrophic losses.” This is what is referred to as a ‘rug pull’ in DeFi speak. Also, look at the number of tokens allocated to the developers and founders vs. the tokens held by the community as this could be an indicator of a platform that could fall victim to a rug pull.

And that is a basic guide to buying DeFi tokens. Season’s Greetings to my readers, and wishing you all a healthy, happy and prosperous 2022.

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