DeFi projects can be a good way to diversify your overall investment portfolio, earn passive income, and unlock value from your portfolio. Through a complex mix of smart contracts and financial engineering, these DeFi projects allow investors to lend and stake digital assets on their platforms and earn a premium in return.

The DeFi projects discussed in this article are some of the best of the best that the market has to offer. These platforms offer high APY returns and have some of the most advanced features. Using them can be an interesting way to support decentralized finance and improve your total return potential.

So here are the three DeFi projects you should consider signing up for.

Aave (AAVE)

Aave (AAVE-USD) allows users to lend, borrow, and earn interest on crypto assets. Like most others, AAVE is built on Ethereum (ETH-USD) and is non-custodial, which means it doesn’t hold users’ funds directly.

One of the things I like the most about AAVE is that it’s making some headway into institutional investment space via Aave Arc. This would allow the smart money to lend and borrow large amounts of crypto assets in a regulated manner and may ultimately be a boon for AAVE token holders.

It should also be noted that AAVE is generally seen as a high liquidity token. The implication of this is complex, but it can be boiled down to be generally less risky to hold compared to some other options in the market. The downside is that it can also lead to lower yields for borrowers.

However, the high liquidity of AAVE’s token may further work to attract institutions to its platform, thus making it one of those DeFi projects to buy.

Compound (COMP)

Compound (COMP-USD) is a DeFi lending platform where users can earn interest on their crypto by lending it or borrowing against their crypto assets. It’s built on Ethereum, and like other platforms, it also allows COMP holders to participate in the governance process.

One of COMP’s strengths is its ability for users to participate in yield farming schemes. This means users can earn from lending their idle crypto assets.

Due to the volatile nature of cryptocurrencies, yield farming can be problematic when some underlying tokens surge in value. The issue is that when specific altcoins rally, liquidity can get locked up into that particular asset via yield farming and speculation, which leaves a much smaller amount of liquidity to go around to other coins for genuine use.

The good news is that COMP has addressed this issue by changing its yield farming reward structure to favor assets like stablecoins, which may promote a more sustainable and genuine use of liquidity.

COMP is one of the few platforms that seem to have solved this issue common to the yield farming process, which makes it one of those DeFi projects to look into.

Yearn.Finance (YFI)

Yearn.Finance (YFI-USD) offers a suite of products to optimize earnings on crypto assets through lending and trading. One way to think of YFI is that it’s a yield aggregator, which means it can automate the tedious process of earning yield on stablecoins and other cryptocurrencies by moving them between different lending platforms.

Yield aggregators have a somewhat more speculative reputation in the DeFI space due to the amount of control given to these platforms. However, offsetting some of these risks is that YFI did not conduct an initial coin offering (ICO) for its YFI token, and there was no pre-mine of the token either. To not do either is somewhat rare for projects in the same, and it significantly enhances the platform’s credibility by absolving some conflict of interest.

Another avenue Yearn is exploring to enhance its credibility further is via its yInsure/Cover, which offers insurance on deposits into DeFi protocols.

These efforts then intend to allow users to get the highest APY returns with reduced risk, which helps to differentiate the platform from its competitors and also makes it one of those DeFi projects to buy.

On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.