The world of Decentralized Finance (DeFi) offers a vast and exciting ecosystem, but choosing the right blockchain to invest in can be a challenge. While Ethereum is the most popular network for DeFi, there are other interesting options to consider depending on your intended use.
In this article we will discuss the factors we consider most important for you to consider before choosing the blockchain network you will use for investing.
Although Ethereum is the most popular network for DeFi, depending on the use you want to make you can find more interesting options. Below we define a list of features that you have to take into account to choose the network that best suits your needs:
This is the main aspect to consider, since DeFi involves the transfer and management of digital assets.
The first aspect to evaluate is the architecture of the blockchain and how security is implemented in its design. The programming language to reduce vulnerabilities and the mode of transaction encryption are also key aspects to be assessed.
We know that auditing security is within the reach of only a few experts. so what is usually done is researching the reputation of the network. This less rigorous analysis of security is based on reading expert opinions, researching the founders or main players in the community, understanding the history of the blockchain, looking for hacks it has suffered and how it solved them or, finally, although it is not a guarantee at all, comparing the blocked volume (TLV).
Finally, because of the way in which blockchains are configured, the degree of decentralization has an impact on security because in principle the greater the number of validators the more complicated it is for them to agree to block or manipulate transactions.
We have the example of Terra, one of the strongest Blockchains at the time, which due to a security breach that was discovered and exploited in the definition of its stable coin, lost almost 100% of the value of its token and the TVL (Total Value Locked) of the entire network. This is something that Terra never quite managed to overcome and which triggered a total loss of investor confidence.
Transaction costs, also known as gas fees, are another critical factor to consider when choosing a blockchain to invest in DeFi. Every transaction you make on a blockchain involves paying a fee for miners or validators to process and validate that transaction.
This fee depends broadly on 3 factors: network congestion, the cost of computing the transaction, and the exchange rate of the native cryptocurrency.
Depending on the volume of your investment, it may happen that the cost of the operation makes it unprofitable, so when your investment is small, it will pay to sacrifice security by using networks that have a lower transaction cost.
For example, the clearest case is that although Ethereum is one of the most secure networks many users who invest with little amount do not use it because it is experiencing high gas rates due to network congestion at times of high demand.
In order to maintain the security of the most relevant networks but trying to reduce transaction costs, what is known as Layer 2 is being created.
The availability of DeFi projects is another crucial aspect when choosing a blockchain to invest in. Since DeFi is based on smart contracts and protocols built on a blockchain, you should evaluate the quantity and quality of DeFi projects available on a given platform.
Ethereum has historically been the leading blockchain in terms of DeFi projects, and has hosted a wide range of applications such as decentralized exchanges, lending, derivatives and more. However, as the DeFi ecosystem continues to grow, projects have also emerged on other blockchains.
When evaluating the availability of DeFi, you should consider the diversity of applications, community size, liquidity and overall adoption of the projects on the blockchain in question. We use https://defillama.com/ to investigate these aspects.
In addition to the points mentioned above, for us the most important when analyzing and deciding on a blockchain to invest in, other factors of great importance must also be taken into account when making a good decision.
The speed of transactions. Fast transactions allow you to take advantage of opportunities, maximize returns and maintain liquidity.
Scalability refers to the ability of a blockchain to handle a large volume of transactions efficiently and quickly. As the DeFi ecosystem grows and transaction demand increases, it is critical that the blockchain can scale and maintain optimal performance. It is important to investigate whether the blockchain has implemented scalability solutions, such as sharding or adopting layer 2 technologies.
Interoperability refers to the ability of a blockchain to interact and communicate with other blockchains efficiently. In the context of DeFi, interoperability is important because it allows moving assets from other networks so it will be easier to start investing in the network in question as well as withdrawing funds. In the next section we tell you a bit more about the types of networks.
The degree of decentralization will make it more or less complicated for miners, validators to agree to seize funds or modify operations. In other words, a highly centralized blockchain may limit transparency, security and resistance to censorship.
When considering investing in DeFi, it is essential to evaluate the community and governance surrounding the blockchain and associated DeFi protocols. Community and governance play a critical role in the future direction and development of a blockchain, as well as in the management of DeFi protocols. Here are some aspects to consider:
Choosing the right blockchain to invest in DeFi is a critical and complex process. Each blockchain has its own characteristics and advantages, and what may work for one investor may not be best for another.
It is essential to investigate and compare the different options, considering both technical capabilities and governance and community aspects.
That said, add that the aspects mentioned in this article are focused only on choosing a blockchain to invest in DEFI and are not intended to be aspects on which to base the choice of the native currency of the network as an investment, because although it is true that the greater the utility of a network the more potential its currency may have, aspects such as the design of the token economy or the utility of the token that have great impact on the value.
Now you have some bases on which to start learning how to choose the best Blockchain for your investments, put them into practice and do not hesitate to come to our community to share your concerns or solve any doubts you may have!
