10 Best DeFi Projects To Invest In 2021

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10 Best DeFi Projects To Invest In 2021

In this article, we look at what is DeFi, why you should invest in DeFi and which are the best DeFi projects to invest in!

Introduction to DeFi

We’ve always had third-party control in every facet of life, from health to governance, finance, and relationships, amongst others. Though it was largely successful, it was clouded by a lack of transparency. The Idea of a system where intermediaries are eradicated was thought of, and the blockchain system was birthed. The blockchain, which was meant to be the foundation for decentralized systems, was quickly occupied by centralized exchanges. While this helped build trust in blockchains and cryptocurrency, it defeated one of the three purposes of the blockchain; decentralization.

DeFi, also called Decentralized Finance, gained its root from both the blockchain and open finance. It helps increase the speed of transactions by eradicating intermediaries, and it also gives investors full control over their money. Most DeFi tokens run on the Ethereum platform because the Ethereum smart contract is more flexible and easier to build on than Bitcoin and most other platforms.

With DeFi, you take a step further from the normal cliche of storing and exchanging tokens to advance use cases like staking, yield Farming, lending, amongst others.

Before you jump into DeFi, you need to understand the different platforms and the best DeFi projects to invest in. Let’s take a look at the advantages and disadvantages of DeFi!

Pros & Cons of DeFi

True Decentralization

DeFi democratically removes the need for oversight and storage space by ensuring all transactions are recorded and immutable. There is no need to wait for an authority to allow, restrict or monitor your transactions. Being decentralized also removes the barrier of entry from cryptocurrency. The need for country-specific information that limits unqualified investors from investing in cryptocurrency is removed.

Immutability

Records on the blockchain cannot be tampered with. So you can be fully assured that the information you see is true. Unlike centralized platforms that are obligated to keep transactions, the information on decentralized finance platforms is secure and has full integrity. You can integrate DeFi apps (also called DApps) to automate payments.

Liquidity Problems

One of the major problems plaguing DeFi plagued projects is liquidity. Though the value of liquidity locked into DeFi is over $12.5 billion as of October 2021, which is huge, it is meager compared to traditional systems. One of the first things to consider when going into DeFi or choosing the best DeFi project to invest in is the liquidity available.

Complexity

With centralized finance, the institutions do all the hard work and leave you to do the basic ones. DeFi is different, and its complexity is one of the major hindrances to its mass adoption.

Scalability

There is a dilemma with DeFi. DeFi is perfect when few people are in the system, but you need many people with their liquidity to keep the system growing. When there is congestion in the system, the effect is seen on fees as their prices skyrocket, but having a few people in the system could pose a liquidity problem when a massive withdrawal is made. Ethereum is a perfect example of this.

Insurance

Most -if not all DeFi projects are not insured. While their centralized counterparts leverage insurance to woo new members, DeFi is a risky field for investors’ money.

Why Invest In DeFi?

The Future of Finance

Blockchain disrupted traditional finance, and now, DeFi is disrupting blockchain technology. With the stability of stablecoins, DeFi can be used for almost everything our traditional finance solves. From payment to insurance to lending and borrowing. All these for lesser fees and no third-party intervention.

Diversified

Apart from DeFi breaking the barrier for users to access cryptocurrency worldwide, it also brings finance to people in a decentralized manner. There’s hardly any sector where DeFi tokens do not touch.

Redefining Cryptocurrency

DeFi tokens are not just used as a means of exchange. They also offer automation at a lower cost and are posing as the foundation for greater transparency and access to the cryptocurrency world.

How To Make Money With DeFi?

Having seen the need to invest in DeFi and the pros and cons, let’s look at how to make money with DeFi. Unlike the known methods of hoarding your tokens, DeFi allows you to earn from your tokens passively. Let’s look at some available means of earning with DeFi!

Liquidity Pools

You can earn passively by providing liquidity to pools. Automated market makers allow you to use your liquidity to trade illiquid trading pairs. Illiquid pairs are often subjected to high slippage, and the liquidity providers are seen as facilitators of such trades. Liquidity providers can fall victim to Impermanent loss, but sometimes, trading fees earned offset Impermanent losses.

Non-Fungible Tokens

A non-fungible token cannot be replicated or exchanged. Unlike fiat currency, these tokens are not fungible. The NFT is a relatively new concept in the DeFi space and looks here to stay with a few iterations. It looks to appreciate and recognize creatives for their work, but it has been tried in real estate, gaming, and sports with considerable success in its relatively short existence.

No-Loss Games/Lotteries

The No-loss lottery is one of the risk-free features of DeFi. Participants buy tickets with stablecoins, and the tickets are subjected to a pool and randomly selected. The winner takes all the profits accrued on the games while the losers can either get their capitals back or buy more tickets to increase their chances of being selected. The games’ rules are encoded in their smart contracts, and selection is done randomly.

Lending

Perhaps, one of the widely recognized features of DeFi, the ability to lend tokens and earn interests or to borrow tokens, is the defining factor in recognizing the best DeFi projects to invest in. Using cryptography to facilitate peer-to-peer transactions is one perk that makes it better than traditional bank loans.

Crypto Lending allows investors, traders, or enthusiasts to unlock more potential from their holdings. You can use your tokens as collateral to get loans in fiat, and you can also lend your loans to earn interest. Unlike traditional lending, crypto lending requires no credit score, and the terms are flexible.

Since there’s no third party, the duration for receiving the loans is shortened, and verifications do not take ‘donkey years’ before users can get the loans.

Staking

Staking can be likened to being rewarded for being a member of a group. In this case, a protocol. You do not need to transfer your tokens to anyone. Only enable the ‘staking’ feature on your exchange, and your token will be assigned to a validator who uses it to get a better chance at validating the next block. The rewards are shared depending on the number of tokens you stake.

How To Buy DeFi Coins? (Step-by-Step Procedure)

Buying a DeFi coin is as straightforward as you can think.

  • The first step is opening a wallet. (There are a few suggestions of wallets you can use later in this article.)
  • After this, you will need to buy a stablecoin that is tradable with the DeFi token you want to buy. For instance, you can’t buy an Ethereum DeFi token with a Binance coin. You’ll need an ERC-20 coin.
  • Then you can swap to the coin you want using DeFi platforms like Uniswap or MakerDao (more about this is explained shortly below)

Best DeFi Coins To Invest in 2021

Please note that we did not follow any particular order as all the mentioned coins hold strong fundamentals. Also, we have presented a chart that represents the growth percentage of the corresponding DeFi coins for your reference.   

Algorand (ALGO)

Released in 2019, Algorand’s main goals are to improve scalability, security and to reduce transaction time. Being a Decentralized Finance coin, Algorand can be staked (it uses a pure proof-of-stake network), borrowed, or even used to create a DeFi application (dApp). Its fast and low-cost processing fees make it a suitable choice for new entrants in the DeFi space. We can’t for sure tell if ALGO would be the best DeFi project to invest in, but looking from a long-term view, it would be worth the investment.

Algorand chart
Source | TradingView – ALGO/USDT

Cardano (ADA)

Cardano is seen as the next Ethereum. It is best suitable for smart contracts, blockchain games, DApps, amongst others. The platform, which was established in 2017, uses ADA as its native token. ADA can be exchanged, staked, and used for transaction fees. Cardano is split into two distinct layers, which according to the developers, would be key in helping the network approve millions of transactions in a second.

Cardano price chart
Source | TradingView – ADA/USDT

Compound (COMP)

The operation mechanism of the Compound is simple. You deposit crypto tokens and earn a particular yield annually. Your deposit can also be used as collateral to borrow more assets. Compound runs on the Ethereum blockchain and has a smart contract that calculates the amount of token you can borrow from your deposit. The interest you earn on your deposits varies based on the laws of demand and supply. COMP is the token of the compound platform, and the holders of the token get voting rights depending on the number of tokens you have.

Compound price chart
Source | TradingView – COMP/USDT

Cosmos (ATOM)

Cosmos has a wider use case than many other DeFi projects. From the birds’ eye view, it looks like one of the best DeFi projects to invest in but let’s look at it and leave you to reach a conclusion yourself. Cosmos aims to be a link for a whole lot of blockchains on its network. It wants to act more like the blockchain of blockchains.

There are pre-built modules that can be customized or improved upon to suit different needs on the cosmos network, and the network is built so that the blockchains under it are interoperable and secure. The blockchains under Cosmos act independently and interconnectedly. With the Cosmos network, you can build NFT platforms and also stake the ATOM token for rewards.

Cosmos price chart
Source | TradingView – ATOM/USDT

Eos.io (EOS)

Eos.io is a favorite for institutions and commercial users. Developers can create, modify, and launch their decentralized applications for large-scale use without the fear of network congestion or high fees. It can achieve this because of parallel processing. The network’s token, EOS, uses a delegated proof-of-stake for its staking.

eos.io price chart
Source | TradingView – EOS/USDT

MakerDAO

MakerDAO uses Maker, its community token, and DAI, a stablecoin to allow users to lend and borrow cryptocurrency. The blockchain is governed by the community making it fully decentralized, and it runs fully on the Ethereum network. Assets provided on the MakerDAO platform are locked as collateral to get more DAI tokens.

This process is called over-collateralization. The MakerDAO platform is largely successful because the DAI is pegged to be almost $1 and is not affected by volatility or market cycles. If you’re looking for a secure and trusted project for lending and borrowing crypto, MakerDAO is surely the best DeFi project to invest in.

PolkaDot (DOT)

PolkaDot maybe a year old, but it has given early investors at least a 1000% profit. PolkaDot seeks to bridge two networks and allow data to be sent between them in a fast and scalable manner.  PolkaDot uses two blockchains; the relay blockchain and parallel blockchains. The parallel blockchains are user-created, and they ease the validation work off the relay blockchain.

PolkaDot can process 1000 transactions per second (which is much more than Bitcoin and Ethereum combined). Unlike other DeFi projects on this list, the more users get into PolkaDot (creating more parallel chains), the faster the network becomes. This can raise a very valid claim that PolkaDot is the best DeFi project to invest in.

POLKADOT PRICE CHART
Source | TradingView – DOT/USDT

Solana (SOL)

Solana is just an upgraded version of Ethereum. It does much better and faster at almost everything Ethereum does, and it has also become the go-to blockchain for NFTs. One noticeable advantage of Solana is speed and the 50,000 transactions per second it carries out dwarfs Ethereum and its proposed upgrade.

How is it this fast? Simple. Unlike Ethereum that uses a proof-of-work mechanism (soon to be proof-of-stake in the new upgrade), Solana uses both the proof-of-stake and a new mechanism known as the Proof-of-history. Solana’s speed, lack of congestion, and low fees make it one of the highly hyped DeFi projects in the world.

Solana price chart
Source | TradingView – SOL/USDT

Uniswap (UNI)

Uniswap was the first of many decentralized platforms to gain prominence on the Ethereum blockchain, and it remains the most popular. Earlier this year, Uniswap processed over $10billion in weekly transactions. Using the Automated Market Maker system, liquidity is pooled, and rewards are earned whenever any transaction occurs in the pool.

Uniswap price chart
Source | TradingView – UNI/USDT

Aave (AAVE)

Aave, like many other projects in this list, is a community-governed token. It uses community pools for lending or borrowing interests. Tokens are used as collateral if one wants to borrow loans from Aave. Some extra perks of Aave that makes it one of the best crypto DeFi to invest in includes

  • Discounts on the Aave network with your token.
  • Availing flash loans with zero collaterals on Aave when you see arbitrage opportunities.
AAVE price chart
Source | TradingView – AAVE/USDT

DeFi Safety Practices

The DeFi world is a relatively new one. Since any developer can come up with a project because of its relatively low barrier to entry, it is important to know which DeFi tokens to avoid. There are a few tips that will guide you from falling into scam projects.

What’s the goal?

Is the project valuable, or does it solely exist to look like another project and compete against it? Is there any iota of long-term plans? Does the project complement the cryptocurrency space? If your answers above are negative, don’t buy into the project (irrespective of any hype it might receive).

Who are the founders?

Yes, we know Bitcoin’s founder is anonymous, but don’t buy into any new anonymous founder for the safety of your funds. When there’s a rug pull, putting a face to the token can prove useful In getting your funds back.

What’s the smart contract saying?

It’s important to read the smart contract or pay attention to the opinions of other developers on it. Avoiding carefully planted loopholes takes a lot of patience and wit.

Diversify

After you’ve checked the protocol and you’re sure it is a legit one, put only a percentage of your investment into it. The common phrase, ‘don’t put all your eggs in one basket,’ applies here. More on diversification strategies here.

DeFi For Individual Investors vs. Institutions

The DeFi world has the infrastructure to host individual investors, but major institutions have to find a way into it to get the worldwide attention it needs. Since institutions want more returns but in a regulated environment, the current structure of DeFi may discourage them from it. So what do we do? Leave the tenets of DeFi to get institutions or create special features for them?

The latter has been unanimously chosen, with on-chain asset management and KYC-only pools being the features to lead the way. Major financial institutions in the United States have hinted at a percentage of crypto exposure, and we can only wonder how many more will follow suit.

DeFi Trading Strategies You Must Be Aware Of

Algorithm Trading

One of the best ways to trade DeFi tokens is by using Trading Algorithms. This involves using bots to execute carefully defined orders with speeds faster than the fastest humans can. It would be best to be careful with free bots, as some are not as profitable as they make them seem.

Arbitrage Trading

Some DeFi tokens are listed on more than one exchange. These two exchanges often do not have the same prices, and traders can leverage ok arbitrage trading to buy from one market at a low price and sell at the order at a higher price. The price difference is the trader’s profit. Some platforms give flash loans for arbitrage trading.

Scalp Trading

Many DeFi tokens are very volatile, which means you can lose your profits as fast as you make them. Scalp trading involves making consistent small profits. The goal isn’t to profit from large price changes but to use leverage and stop loss to grow your account consistently. If you are a short-term DeFi trader, this strategy will suit you well.

Diversification

For long-term DeFi investors, it is important not to put all your eggs in a basket so you won’t lose both the eggs and the basket when things go south. Invest in different tokens that have different use cases and watch your investment grow. The difficult part for long-term trades is finding the token that will stand the test of time. Once that is settled, the rest is easy.

Best DeFi Platforms To Use

Uniswap

Created as an open-source, decentralized exchange on the Ethereum network, Uniswap gained prominence as a low-cost option for new tokens looking for a listing. Users’ ease of use, security, and total control of funds make it an amazing choice for newbies and adept traders alike.

MakerDAO

The Maker protocol is built majorly around the DAI stablecoin. It gained prominence by removing counterparty risk for both lender and borrower.

The stability and many use cases of the DAI coupled with MakerDAO being on the Ethereum blockchain are some of the features leading to its prominence as a DeFi platform.

Yearn.Finance

One of the most prominent names in DeFi, Yearn.finance, is a platform under the Ethereum network that focuses on borrowing, yield Farming, and lending. It works with in-built codes that move liquidity between lending platforms to maximize profit.

Aave

Aave is similar to Uniswap in many regards (mostly because both are on the Ethereum network). Still, it offers an edge by allowing the lender and the borrower to agree on the loan terms before it is given. It also acts as a decentralized peer-to-peer platform.

Best DeFi Wallet To Use

Metamask

Metamask is both a website extension and a DeFi wallet. You can install it on any browser, or you can use it on your mobile phone. It is one of the most versatile wallets available, and it supports both ERC-20 and BEP-20 coins. The user interface of metamask is so friendly that it is used as a template for new wallets. Although metamask is an amazing wallet, it is not without its risks. Major risks include phishing and malware.

Coinbase Wallet

Although not to be mistaken for the general wallet used alongside the coinbase exchange, this coinbase wallet is specially made for DeFi tokens. The Coinbase company makes it, but it is a non-custodial wallet. What makes Coinbase wallet unique is the ease of use, security, and wide reach of DApps.

Trustology.io

Trustology.io is about security and utility with no compromise to speed or access, and that’s what makes them an amazing DeFi wallet. It offers different security layers ranging from multisig and whitelist functionality through to its bespoke DeFi Firewall smart contract rules that make it almost impossible for hackers to breach your wallet. They are the only custodial wallet to have their own bespoke integration with MetaMask (TrustVault + MetaMask extension) and recently integrated with WalletConnect to provide users with more choice in secure DeFi access.

Conclusion

DeFi is no doubt advanced finance, and that might have been responsible for its low adoption. Still, with the world advancing towards faster ways of doing things, it is yet to be seen if centralized platforms can match the speed their DeFi counterparts are aiming at.

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