Unpacking The DeFi Token Universe — A Brief Explainer

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In Brief
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Decentralized Finance (DeFi) has continued its boom since the start of DeFi Summer 2020. However, for those new to the space, even the basic concept of DeFi tokens can quickly become complicated. 

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Most people arrive at the world of cryptocurrencies through bitcoin, or at least they used to. With the growth of NFTs and meme coins, people’s first entry into the crypto world has expanded.

DeFi’s growth has come alongside this expansion but has not gained much in the way of simplicity. This means while someone entering crypto may grasp buying a piece of art or holding some Shiba Inu Coin, they aren’t immediately going to understand the purpose of tokens for DeFi.

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This is because DeFi tokens have wider utility than a hyped coin. Users can utilize them for loans, as collateral, governance, and investment. Projects create these tokens to enable their specific goals.

Breaking down DeFi token use

DeFi tokens aren’t like your everyday bitcoin. While bitcoin is just starting to build an ecosystem as a currency, DeFi is already used daily for financial services purposes.

This is what makes DeFi tokens that slight bit more complicated. They aren’t just a means of exchange for goods and services. They encompass much more.

Governance

Since the goal of DeFi is to offer an alternative to traditional financial systems, regulatory rules must be established, which allows DeFi projects to make important decisions regarding changes in protocols.

This is why governance relies upon a framework of rules and operations to regulate all actions on the network. A perk of owning a governance token is that users make decisions that affect the future protocol and the shaping of the project by offering proposals or submitting a vote. 

Collateral

The benefit of DeFi is financial assets that are accessible without the need for intermediaries or red tape. Token holders can receive these collateral-backed loans as long as they have contributed to the platform’s liquidity themselves in return.

Investment

Another use of DeFi tokens is as a speculative investment. People are buying and holding tokens as they expect them to gain in value. However, like holding any cryptocurrency, there are risks. From volatility to security breaches, DeeFi protocols are not immune to vulnerabilities.

Staking

This involves the act of “locking up” a portion of cryptocurrency holdings for a duration of time. This is a way to offer contributions to a blockchain network.

This way, stakeholders can receive rewards, often in the form of supplementary tokens. In a nutshell, crypto staking is on par with depositing money in a bank. When this is done, the depositor essentially “locks up” their wealth, and in turn, ends up being rewarded with interest. 

Presently, there are 214 DeFi tokens to choose from, each with different characteristics. Here are some of the most popular platforms and their tokens.

Aave – 16,000,000 AAVE

Aave is one of the DeFi platforms at the moment. This liquidity protocol is where users can earn interest on deposits or borrow assets. Its native token is called LEND. Participants use it to obtain reduced fees with future projections for participating in governance. This means users can either engage as borrowers or depositors. The platform deposits user funds on a non-custodial smart contract on the Ethereum (ETH) blockchain. 

yEarn – 30,000 YFI

The yEarn protocol serves as an automated yield aggregator governed by the native token, YFI. It grants various opportunities for yield farming. Holders are able to stake YFI for participating in governance, with the added bonus for claiming a pro-rata share of platform fees.

Ren Protocol – 1,000,000,000 REN

Ren Protocol exists as a compatible link that ports assets to Ethereum using the RenVM network while functioning as a permissionless and decentralized virtual machine protocol. Users are required to offer 100,000 REN as collateral to become eligible to host a dark node. In turn, they are entitled to a pro-rata share that covers all trading fees, which are then collected from the platform.  Ren allows tokens to be ERC20 wrapped, making it easy for Defi platforms to support one token standard.

Uniswap – 1,000,000,000 UNI

Uniswap is the leading decentralized exchange in DeFi and has its own native token UNI based on the Ethereum blockchain. Users initially got UNI as a reward for participating in the exchange, and users with large enough UNI holdings can vote on different policies proposed for the Uniswap platform. UNI has a market cap of over $18 billion, making it one of the most valuable DeFi tokens.

Not all DeFi tokens are created equal

As with any space that is proving itself to be profitable, DeFi is not without its fair share of scams and real-value issues.

“The majority of coins in DeFi are worthless. Most are not connected to cash flow generated by the project, and the ‘value’ they offer is often paying you in more worthless tokens,” explains Red, Community Foreman of Harvest Finance and leading DeFi yield aggregator.  

“It’s important to look at what happens to these projects after the initial hype wave. Liquidity locusts flock to new farms with their high emissions, eat up all the rewards and move onto the next thing, leaving behind a pump and dumped token where the project likely has zero viability,” he says.

However, this isn’t a DeFi-specific problem. Red compares it to the current hype around NFTs.

“There may be value in a small percentage of NFTs, but most of the NFTs we are seeing are just variations of an animal ‘pfp’ with no utility, and people hoping to cash in on the NFT craze,” he says.

As such, those new to the DeFi space should really consider the entirety of the projects they are interested in. Many legitimate, valuable projects which have successful tokens also have well-built communities around them.

Through these decentralized communities, the value of a certain DeFi project and its token can be evaluated. A strong community indicates the human commitment in the space, not just some token hype.

Disclaimer

All the information contained on our website is published in good faith and for general information purposes only. Any action the reader takes upon the information found on our website is strictly at their own risk.
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Jesse McGraw is a former classical concert pianist. He is also known by his moniker GhostExodus, and is also the former founder of a hacktivist group. Naturally, he is passionate about cyber security, being a former threat actor and insider threat. Aside from InfoSec, justice reforms and other social impact initiatives are topics important to him. But after its all said and done, he slinks off to plays his violin and makes waffles.

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