5 Security Tips for New DeFi Investors to Keep from Losing Money

First rule of investing is “don’t lose money” as Warren Buffet would say. Doing so may not be as simple with Decentralized Finance. Just last year, over $14B dollars were lost to scams in the crypto world.

The best investors start by making sure they’re not going to lose money. DeFi brings with it some risks that don’t exist in your Robinhood account!

Now, let’s dive in.

Protect Your Keys

The majority of DeFi investors lose money by neglecting some part of their wallet. Remember this key point:

• Your seed phrase and private keys are your wallet — if you share these online or put it somewhere it can easily be accessed by others — you’re asking for your wallet to be emptied.
• Send a test transaction — When first transferring between wallets or exchanges for the first time send a test transaction (assuming the cost is not prohibitive). Doing so will usually cost little but save you the heart-wrenching moments of your funds being in the Ether.

Get a Hardware Wallet

A hardware wallet is just like your metamask or any other software wallet. The one difference is that hardware wallets require physical verification, not just a password. Some good options below:

• Ledger Nano
• Trezor
• KeepKey

Check Your DeFi Protocol Audits

Make sure the protocol you’re using has been audited for smart contract bugs. Most VC funded protocols are audited as a requirement by investors, but some still fall through the cracks. For instance the protocol YAM was able to get almost $400M in Locked in value without an audit!

Get Insurance, If You Can

DeFi can promise yields in the thousands of percentage points at times. By giving back a few percentage points you can insure against the following risks:

• Smart contract risk — the risk that there is a bug in the code that will lose to loss of capital
• Exchange or custodian risk- the risk that the centralized exchange or custodian you are using for your assets gets hacked

Unfortunately not all protocols are able to be insured given how quickly the DeFi space continues to grow.

Diversify Your Risks

Lastly — one of the best forms of risk reduction is to keep your funds split between:

• Different protocols with the majority in large cap protocols
• Different smart contracts — having too much concentration in one contract increases your chances of a larger capital loss
• Different Assets — Coins, LPs, and NFTs all behave differently. The diversity in their volatility will smoothen your long-term return profile.

An Ounce of Prevention is Worth a Pound of Cure

It’s easy to get caught up in the FOMO around crypto, hopefully the few tips above will keep you $$ out of the hands of scammers.

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