5 Ways To Manage The Volatile Crypto Markets With DeFi
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Decentralized Financial Solutions (DeFi) have grown in popularity in recent years, offering traders high rewards despite the volatility of the cryptocurrency market and low returns in traditional markets. DeFi applications work with functions similar to existing traditional financial services. However, DeFi applications are built on the blockchain to increase transparency and minimize intermediaries. As the DeFi space continues to evolve, traders continue to use DeFi as a hedge against volatility and as an alternative to traditional banking. In fact, nearly $ 100 billion is now locked in various DeFi protocols.
The persistent volatility and unpredictability of the cryptocurrency market has done little to stop giants like Tesla and Square from betting big on blockchain projects – and those bets have paid off. In the last 12 months alone, the total market capitalization of the cryptocurrency has grown from $ 360 billion to $ 2 trillion. That aggressive growth culminated in cryptocurrency market cap topping $ 2.43 trillion just three months ago, only to suffer a steep 33% discount shortly thereafter. This resulted in more than $ 820 million being removed from the cryptocurrency market over a 12-day period.
Volatility is part of the game and traders need different strategies to manage their risk. Here are five ways DeFi isolates traders from all skill levels of stormy markets.
Related: What Is Holding DeFi Back (And How To Fix It)
1. (Smart Contract) automation
Up until now, it has been incredibly difficult for traders to provide liquidity without suffering a loss as they constantly have to manually rebalance positions in order to generate profits and manage their risk.
To address this issue, some DeFi protocols are now using smart contract automation to help users mitigate losses during a downtrend and replenish inventory during an uptrend. Using applications supported by Web 3.0 middleware platforms, traders can avoid significant losses and optimize their portfolio by automatically adjusting their positions to new prices, setting limit orders or automatically executing trades.
2. Diversified engagement
Security, safety and reliability are non-negotiable. This lack of security has slowed user adoption of DeFi. As a result, blockchain financial products have worked to develop offerings that enable guided engagement in the DeFi sector.
The DeFi Pulse Index (DPI), for example, enables a portfolio of DeFi tokens to be built up without having to monitor multiple DEXs or buy or sell across exchanges. Applications like the DPI offer a way into the industry without fear of major losses.
3. New borrowing and loan terms
Loans and credits have been the be-all and end-all for the DeFi space last year. Credit markets offer an alternative way of generating passive income. Conversely, borrowers can get stablecoin loans with incredibly low interest rates.
However, these loan protocols usually require users to overcollateralise their loans by more than 150% in order to secure the stablecoin loan. This creates a liquidation risk for users should the value of their collateral decrease. Smart contract automation platforms can allow users to automatically replenish collateral when the value drops to avoid liquidation. On the other hand, users can rebalance their collateral if the value of the secured asset increases.
For example, a DeFi credit log has created a credit risk log that allows users to take out under-secured loans. Now borrowers can request cryptocurrency loans based on their credit rating instead of providing collateral.
As DeFi continues to develop, innovative credit options will remain a key cornerstone of the decentralized economy.
Related: 5 Reasons to Get Started with DeFi
4. Protected investments
Due to unpredictable markets, hedge contracts have grown significantly in popularity on platforms like Whiteheart. Hedge contracts help DeFi traders protect the value of their inventory and offer an alternative to smart contract machines.
Despite this fact, hedge contracts are limited in their function and merely ensure that traders who risk the liquidation of assets as negative price movements have the opportunity to pay off and receive the USD difference between the purchase price and the current price. While hedge contracts are innovative, they are not designed to make protocols as feature-rich as intelligent contract automation can.
5. All-in-one interfaces
In the past year, few resources have become more popular than DeFi aggregators. DeFi aggregators compile and display prices on decentralized exchanges (DEXs) and implement various buy and sell strategies to help traders maximize their profits while reducing high gas fees and DEX trading commissions.
While these platforms were only intended to show price comparisons across DEXs, they are constantly evolving to meet the maturing needs of crypto traders. They have now developed into one-stop shops for trading, saving, liquidity mining and yield farming via a single dashboard.
Yield farming would be amazing Difficult without the advent of DeFi aggregators as the earner would have to toggle multiple pools of credit and DEXs to manually compare interest rates, look for available token options, and migrate funds. Despite the volatility of the decentralized economy, updated offers with DeFi aggregators make navigation in space considerably easier.
Other popular front-end DeFi aggregators have taken advantage of smart contract automation to further simplify the trading process for users. Aggregators powered by automated networks can enable users to automatically manage positions to maximize their returns with minimal effort.
To optimize the trading experience for users, DeFi platforms continue to innovate and implement new applications, platforms and interfaces to make DeFi investments easier and safer for new market users.