How to Manage Volatile markets with DeFi

How to Manage Volatile markets with DeFi

Since the inception of decentralized finance, investors have pumped hundreds of millions of dollars into various crypto projects. While a majority of DeFi users have benefited from the various concepts and use cases, some investors have lost huge sums of money due to market volatility.

The crypto market, in general, is volatile, but DeFi tokens have even proven to be more fragile in terms of volatility. As an active or potential investor in the DeFi space, tactical steps can be taken to curb losses.

Smart Contract Automation

One extreme experience that has plagued many DeFi users is the constant need for them to manually adjust their trade positions. Early DeFi exchanges were built in such a way that users cannot place automatic trigger orders. A trader will have to sell or buy a token manually when a transaction needs to be executed.

The use of take profit and stop loss to close a trade position was a foreign concept to DeFi users until recently. The constantly evolving and improving DeFi ecosystem now have platforms that permit smart contract automation. Thus, users can now cut down their losses when the market goes south and claim their profits at the right time when the market soars.

Limit orders are automatically executed with or without the presence of the trader. A typical DeFi project that was founded primarily to support smart contract automation is the Addax Protocol. The project was built on the Cardano blockchain. Although relatively new, it has lived up to the expectations of DeFi fans.

Diversified Exposure

DeFi Pulse Index allows investors to keep tabs on DeFi projects. The data provided on this platform can aid a trader in determining which tokens to invest in.

Data such as the total supply, circulating supply, and price alterations of a token are exhibited on indexcoop.com.

The goal of making this data available in a decentralized platform is to aid traders in diversifying their portfolios. This reduces risk exposure.

In practicality, suppose a DeFi protocol is hacked and the price of the token drastically plummets as a result, traders holding the token will likely suffer huge losses. On the other hand, a trader with a diverse portfolio will less likely be affected. The gains from other tokens held by a trader with a diversified portfolio will cover up for the potential loss.

In recent times, more DeFi projects have offered crypto products that provide users with a guided exposure in the crypto market. This innovation will improve the security of the ecosystem. More crypto users will also turn their focus towards DeFi investments when the security concerns are minimized.

Capitalizing on Modified Terms for Borrowing and Lending

It is almost impossible to talk about the use cases of DeFi protocols without including borrowing and lending. Borrowing and lending with the aid of smart contracts are now more common than ever before.

While it is an interesting aspect of decentralized finance, it has its downsides. Lending protocols require users to deposit huge collaterals. In many cases, the collateral can be as high as 150% of the loan amount. The major cause of concern isn't the huge collateral but the fact that borrowers can lose their collateral and get liquidated when the market is extremely volatile.

This major concern has not gone unnoticed by the DeFi projects. Some projects have been built to curb the risk exposure of borrowers. A few DeFi platforms may permit users to borrow without collateral, provided the user has a great loan score and has consistently paid back previous loans before the due date. This helps to reduce the user's exposure to market volatility and unfair trading conditions.

Hedge Contracts

DeFi hedge contracts have served as a reliable means to preserve the value of crypto assets. Whiteheart is a popular hedge platform that has gained traction over the years. While Hedge platforms do not protect a trader from losses, they protect traders from losing it all. When the market is extremely volatile and investors risk losing their hard-earned crypto assets, hedge contracts provide traders with the option of jumping out of the "crashing train".

The value an investor salvage is the difference between the purchase price in USD and the current price of the crypto asset. This architecture has protected many investors from totally losing funds when the market is highly volatile.

Although hedge contracts are not as effective as smart contract automation, they serve their purpose and help investors manage risk appropriately.

DeFi Aggregators

DeFi aggregators gather data from multiple DeFi platforms. The data gathered is then vetted and displayed for traders to compare prices. Although the role aggregators play seems to be minimal, they help traders make sound investment decisions.

Archaic versions of aggregators simply displayed the value of a token across various exchanges. Modified versions can be used for trading, mining tokens, saving, and yield farming.

DeFi aggregators are especially useful for yield farming since users would need to toggle several decentralized exchanges and lending pools to choose the best rate.  Modern DeFi aggregators with multiple features help provide a seamless user experience for traders. This also helps traders manage their funds efficiently.

Conclusion

Smart contract automation, Hedge funds, and DeFi aggregators are all useful tools that can help investors manage market volatility. Additionally, effective trading practices must be carried out for users to protect their investments.

While it is impossible to avoid incurring losses in the world of crypto, DeFi platforms keep improving to satisfy the needs of users. It is expected that more DeFi projects will be launched to close the gap between users' needs and currently existing problems in decentralized finance.