Decentralized Finance (DeFi) is transforming the financial landscape in incredible ways. It provides everyday people with amazing new ways to access high yields, trade tokens with unmatched speed and efficiency, and participate in a global, open financial system. This new world of possibilities, open to anyone with an electronic wallet and an internet connection, is fraught with dangers. It takes a mix of common sense, research, and strategic planning to navigate the DeFi space to make sure you don’t fall into some of the traps.

Unlocking DeFi Opportunities

DeFi platforms have a lot of exciting opportunities—to earn high returns on savings, to instantaneously exchange different cryptocurrencies at the market rate. Yield farming allows users to stake their cryptocurrencies in liquidity pools. In exchange, they recirculate this capital in return for rewards that can top 20% or more. Platforms like MakerDAO allow users to lend out their DAI (a stablecoin) and earn upwards of 100 percent interest.

So if you’re looking to jump into the world of more active trading, Uniswap is a great place to get your feet wet. It only takes $50 to get started swapping ETH for DAI and other tokens! PancakeSwap offers a high-stakes video game, giving users the experience of being crypto farmers, reaping tokens every seven days. These platforms democratize access to new financial tools. They provide tools that give people control of their own assets while engaging in a dynamic global financial ecosystem.

Mitigating Risks in the DeFi Realm

Beneath its glamourous surface, the DeFi space is riddled with risks that users should understand. Today, the Ethereum network is encountering a big problem—skyrocketing transaction fees. This problem affects most DeFi applications that use the network. In some cases, users have warned others about being charged excessive fees, like $30 to exchange only $10 in tokens. To maximize savings on distributor fees, time your transactions for low-fee times. Late nights and early mornings are the best times, as that’s when there is less network congestion.

A second, equally important consideration is that scams and other fraudulent projects have become all too common in the DeFi space. Phishing attacks, where users are baited into clicking on suspicious links that offer “free airdrops,” resulted in billions lost. As with anything new that comes with promise, it’s important to be careful and only engage with trusted platforms and projects.

Here smart contract vulnerabilities are another grave danger. Exploits or exploits in smart contracts can empty liquidity pools, causing huge amounts of money to be lost by users. Due to the nature of DeFi—its anonymity, decentralization and pseudonimity—it is often extremely challenging to recover funds lost in these incidents.

Best Practices for DeFi Users

In order to move within the expansive DeFi ecosystem securely and efficiently, users should follow a few key best practices. As always — especially when investing in new gated DeFi projects, rigorous research and diligence is required. Resources like DefiPulse provide rankings of legitimate DeFi projects, allowing users to assess the credibility and security of various platforms.

Checking a project's audit history on platforms like RugDoc or X (formerly Twitter) can provide valuable insights into its security and community sentiment. Take baby steps. Start off by only investing what you’re okay with losing entirely. As you become more comfortable and with their body of work, start to expand your reach.

Doing a little research into Layer-2 solutions such as Optimism or Arbitrum can cut transaction fees down remarkably. Plus, use a cheaper chain like Binance Smart Chain to save even more. These platforms provide users with faster and cheaper transactions, allowing greater broad participation in DeFi and providing retail users with a lower overall cost structure. MetaMask is one of the best tools for connecting to almost any DeFi app. It allows users to easily manage their wallets and connect with decentralized applications.

Liquidity pools can be incredibly lucrative, as a recent investment of $200 showed—returning over $12 million. Users must keep in mind that returns are not a certainty. They can be subject to change depending on market activity and the performance of the underlying assets.