I've been thinking about what an ideal DEFI portfolio should look like for a while. If I had set up a mutual fund targeting Defi income, what would be the basic rules of this fund? Every DEFI investment I make helps to develop my ideas on this subject. Rapid price increases and decreases affect the performance of DEFI portfolios. DEFI applications are evolving day by day. Therefore, it is difficult to set rules that will remain valid for a very long time. Still, I have a picture formed in my mind that I can share with you.
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1. Have at most 20% of your portfolio on a particular DEFI application.
While DEFI returns are attractive, we know that we face risks such as rug-pull and hacking. It is possible to buy insurance against smart contract risks, but the insurance premiums are extremely high. This means that even for audited applications, there are risks that need to be taken seriously. We don't want to take risks that could cause us to lose our entire portfolio, even if it's unlikely to happen. Therefore, portfolio diversification seems to be a viable solution.
2. Invest in assets that promise real returns.
The return of the assets we invest should be higher than their inflation so that our real return is positive. Since we are investing in two assets in liquidity pools, we need to take the inflation average of both and compare them with the promised return (APR). You can access the inflation values of the top-ranked coins here. You can learn about the inflation of the Hive ecosystem coins from the reports published on the @dalz account. For example, we know that the ETH-BNB liquidity pool(LP) on Cub Finance has an annual return of 19.70%. Ethereum's inflation is 0.54%. BNB's inflation is zero percent. When we take the average of these values, we reach the value of 0.27%. So the expected real DEFI return on Cub for the ETH-BNB LP is 19.43%. Pretty good rate. ETH, BNB, and Cub price movements will determine the total return on this investment.
3. Invest only in audited DEFI platforms.
The security risks of platforms that are checked by a reputable audit firm such as CertiK, Hacken, and Slowmist are reduced. It would also be appropriate to consider the Total Value Locked(TVL) statistics of Defillama while selecting the application. We can expect applications with high TVL to be more reliable.
4. Allocate at least 25% of your portfolio to stable coins.
Stable coins are suitable instruments to reduce the price volatility of our DEFI portfolio. Moreover, unlike traditional finance, they provide high returns. And the return of coin-stable coin liquidity pools is usually higher than coin-coin liquidity pools. In the most heated periods of the bull market, the stable coin rate can be increased up to 50% so that we do not get cold when winter comes. BUSD, USDC, and HBD stand out as solid stable coin alternatives.
5. Have at least 15% of your portfolio consist of Bitcoin.
Bitcoin is pretty boring. Moreover, the DEFI return is close to zero. Still, having it in our portfolio can help us sleep comfortably. Between November 2021 and February 2022, the value of many coins fell to a third or a quarter, while BTC lost only half of its value.
6. Allocate at least 20% of your portfolio to Ethereum.
Ethereum killers spawn, rise and fall. Although Ethereum killers have changed many times, Ethereum is strengthening its position with each passing year. Although it provides low DEFI returns, similar to Bitcoin, it should be in our portfolio, as it has a serious price increase potential as well as being resistant to bear markets.
7. Prioritize Hive ecosystem coins and DEFI apps.
Applications such as Cub Finance, PolyCub, and Beeswap provide higher returns compared to many of their competitors. Moreover, we know the people who created these applications. We know the potential of coins like Hive, HBD, Leo, and SPS. Being in the Hive community gives us advantages such as being informed about the developments early and solving the problems we encounter more easily.
8. Make sure to use a hardware wallet for DEFI transactions.
Security is an important issue, especially in EVM-based blockchains such as Ethereum, BSC, and Polygon. Hardware wallets such as Ledger and Trezor can work with MetaMask. Thus, transaction security is taken to the next level.
9. Consider the possibility of airdrops.
Airdrops are increasingly affecting crypto returns. For example, we witnessed Ragnarok and SPK Network airdrops in Hive earlier this year. Cub token holders benefited from the Polycub airdrop. Alongside the Hive ecosystem, the Cosmos ecosystem also rewarded community members through various airdrops. Therefore, airdrops also significantly increase the return from a particular coin.
10. Optimize the liquidity of your investments.
Blockchain and applications, which are new to the world of DEFI, provide very attractive returns to investors for a certain period to raise funds. To take advantage of such opportunities, we need to have access to some of our funds at any time. I think that it is necessary to be cautious about DEFI investments that include this long-term fund block. In addition, the abundant liquidity of the asset we invest in will provide us with freedom of action.
11. Take reasonable risks to increase the rate of return.
Investing in sustainable price coins of DEFI applications by making a risk-return comparison will increase our average return. In addition, the coins of new blockchains that try to be assertive in the DEFI market can also offer high returns. It is possible to reach the blockchains I mentioned via Defillama.
Conclusion
Although there have been serious fluctuations in the crypto market last year, prices have followed a horizontal course. The total market cap of the crypto market was also around today's levels last year. On the other hand, those with a well-optimized DEFI portfolio received an additional 20% of income by taking reasonable risks.
Creating and following up on the portfolio distribution I mentioned above requires a lot of work. Would you like someone to do this for you? I have a plan to establish a DEFI mutual fund, but first I want to gain some more experience in this regard.
Thank you for reading.