There are many problems with DeFi investing.Here are a few ways to stay away from them.
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Investing in decentralized finance (DeFi) tokens during the bull market was like shooting fish in a barrel. However, now that inflows to the sector pale in comparison to the market's heyday, it is much harder to identify good trades in the space. DeFi has a problem with pump and dumps.
Protocols were able to entice liquidity providers during the DeFi summer by offering yields in the three- to four-digit range and mechanisms like liquid staking, lending with asset collateral, and token rewards for staking.The main problem was that many of these reward offerings couldn't be sustained, and high emissions from some protocols caused liquidity providers to automatically dump their rewards, putting constant sell pressure on the price of a token.
DeFi protocols also had to contend with total value locked (TVL) wars because they had to constantly compete for investor capital to keep the number of "users" willing to lock their funds within the protocol.As a result, mercenary capital from whales and other cash-strapped investors essentially airdropped funds onto platforms with the highest APY rewards for a brief period of time before eventually dumping rewards on the open market and moving investment funds to better opportunities.
The same type of activity occurred for platforms that received series funding from venture capitalists.VCs give money in exchange for tokens, and they are among the biggest holders of tokens in the most profitable liquidity pools.The looming threat of token unlocks from early investors, high reward emissions, and the consistent auto-dumping of those rewards all contributed to constant sell pressure and clearly prevented any investor from making a long investment based on fundamental analysis.