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How to avoid getting rekt in DeFi?

How to avoid getting rekt in DeFi?

June 30, 2022
3
 min read

Learn how web3 beginners can avoid getting rekt while exploring DeFi with these tips.

By Alan

Here’s some advice on how beginners can avoid getting rekt while exploring DeFi.

First check out this list of mistakes that beginners make in web3 overall. Now let's cover how not to get rekt in DeFi:

  1. Understand where the yield is from
  2. Stick to trusted DeFi protocols
  3. Understand basic tokenomics
  4. Use leverage carefully, if at all
  5. Be careful about impermanent loss
  6. Factor in gas costs when calculating your return
  7. Consider passive options like yield aggregators and index funds

1. Understand where the yield is from

Some yields are incentivized for a short period or are inflationary with the protocol creating new tokens. These yields are likely not sustainable. Make sure you do your research, especially if it's too good to be true.

2. Stick to trusted DeFi protocols

Work with established and audited protocols with reputable teams to reduce the risk of bugs or hacks. You can see a list of the top protocols on DeFi Llama. DeFi protocols are more transparent than centralized platforms. This can give you more insight into the financial health of the protocol.

3. Understand basic tokenomics

Consider these questions about a token you are using:

  • Is there a set amount of tokens or no supply cap?
  • How are the tokens released?

4. Use leverage carefully, if at all

Leverage (borrowing assets) leads to possible liquidation and requires oversight. If you use leverage:

  • Be conservative, unless you plan to monitor the loan 24/7
  • Use stablecoins as collateral if possible

See How to lend and borrow assets?

5. Be careful about impermanent loss

Providing liquidity is risky, especially with volatile assets. Many liquidity providers experience impermanent loss that outweighs the transaction fees.

See How to provide liquidity?

6. Factor in gas costs when calculating your return

On Ethereum mainnet, gas fees can be high. Any strategy with multiple transactions will require significant gas costs.

  • Look into using alternative Layer 1 blockchains and Layer 2 scaling solutions
  • If you’re using mainnet, look into transacting at the times of the day that gas is cheapest.

See How to pay less gas?, How to use L2 chains? and How to use other L1 chains?

7. Consider passive options like yield aggregators and index funds

Passive options are great if you don’t want to constantly manage your portfolio. Consider these options:

  • Index funds, like those created by Index Coop allow you to get exposure to multiple tokens for a low fee. This can give you diversification in a single transaction. Index handles rebalances, so you can avoid gas fees. 
  • Yield aggregators are a great alternative to hands-on yield farming. Platforms like Yearn can create a risk adjusted return for you with no effort on your end.
Up next: DeFi path: Where to explore more?
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