We’ve already touched upon the importance of using tried and tested Defi protocols, whose code is less susceptible to vulnerabilities. Here are additional steps you can take to reduce the risk of suffering loss of funds, and to protect your crypto assets.
Consider Insurance
Just as you can take out travel insurance before going on holiday, you can take out Defi insurance against loss of funds through hacks and exploits. Projects such as Cover and Nexus offer this service.
Research the team behind the project
Many Defi projects are operated by pseudonymous teams who wish to keep their identity private. This is perfectly normal, and there are ways for such projects to gain community trust by taking measures to prove that they cannot steal user funds even if they wanted to.
However, as an additional safety measure, you may wish to use Defi protocols backed by known teams, whose public reputations would be harmed if they were to act immorally.
Choose simple yield generation strategies
Simple Defi earning strategies (e.g. “stake token A to earn token B”) are far less susceptible to vulnerabilities than more complex ones. The more moving parts a smart contract has, the likelier the chance of a vulnerability creeping in that can be exploited.
Don’t invest more than you can afford to lose
This should apply to everything you do, in crypto and in life. It’s particularly true of Defi, though, since there’s no recourse should you lose your funds.
As a general rule, it is prudent to place no more than 5% of your assets into any one protocol. That way, should the worst happen, your portfolio won’t be wiped out.
Decentralised finance is one of the most exciting sectors in crypto and a hub of innovation and opportunity. It’s an unforgiving environment, however, that calls for a moderate degree of knowledge before entering.
Only place your assets into Defi protocols once you’ve taken the time to understand how they work and considered the upside and downside of doing so.
Once you understand how it all fits together, Defi can be extremely effective way to earn cryptocurrency..
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