Explore Real DeFi Tokens & Their Impact on the Crypto Space
Decentralized finance is expanding and reaching more industries. It has become the rising sector that promises limitless possibilities with technological innovations. Moreover, tapping into the potential of DeFi is easy.
If one is using a DeFi token, one can easily explore the possibilities of decentralization. By design, these blockchain-based assets aren’t very different from regular cryptos. However, their enhanced functionality makes them much better for investors and users of digital assets.
Unearthing DeFi Tokens
A DeFi token represents a particular decentralized platform. Usually, that platform offers a range of services like DeFi lending/borrowing, loans, insurance, etc. They may give access to a slew of applications that run on smart contracts. Today, the decentralized finance tokens boast a $45 Billion market cap.
The figure is quite humble compared to the overall crypto market valuation. Still, the DeFi token is one of the fastest-growing domains in the world. Some popular DeFi tokens are Cardano, Aave, Chainlink, Compound, etc. All these coins run on specific protocols. As of now, most tokens are attempting to broaden the adaptability of decentralization.
They are offering a suite of services along with fast transactions and low fees. Some are even introducing new algorithms with some unique functionality. For example, Algorand introduced an all-new consensus called Pure-Proof-of-Stake (PPoS). The functionality could be diverse and investors need to pick them wisely.
investors need to know the different aspects of these DeFi tokens.
Are Defi Tokens and Governance Tokens The Same?
Typically, a DeFi token is linked to its protocol. Similar to the governance tokens, they are also managed by the entire community. In order to participate in the decision-making process, users have to buy the tokens. The tokens possess distinct rights including the ones to vote on updates and proposed changes.
Uniswap’s native token UNI is the largest governance token in terms of market cap. It can also be used as a regular DeFi token as it gives many privileges. Launched in September 2020, UNI started with a mega airdrop campaign. It gave 400 UNI tokens to each wallet address whose owners showed interest in the protocol.
In the case of governance tokens, holders with a greater number of assets have more powers. The DeFi tokens follow the same structure in terms of distributing ownership and administration. Nonetheless, governance can also be obtained with contributions to the protocols. On the other hand, DeFi tokens can only be purchased through exchanges.
Maker, PancakeSwap, and Aave are some popular governance tokens. Notably, both types of tokens are also very speculative. The investors can purchase both on centralized as well as decentralized exchanges. They don’t have to necessarily participate in the decision-making or administration.
Like any other volatile assets, DeFi and governance token prices also fluctuate. Besides volatility, there are some other perils that investors should know about.
Risks Associated with DeFi Tokens
The price of DeFi tokens depends upon several factors including the underlying protocol. For example, the price of COMP, the Compound’s governance token took a hit in October 2021. The reason was a fault in the code which was exploited by a hacker. It resulted in the loss of assets worth millions of dollars.
In addition, changes in the project or team also impact the market sentiment towards that coin. A perfect example of that would be the DeFi token from Andre Cronje’s project. Its price fell when Cronje’s colleagues announced that they were quitting. Supposedly, the news impacted the growth prospects of the coin and resulted in a price fall.
Some Popular DeFi Tokens
Aave– Aave belongs to a group of protocols that let users earn rewards. It allows the token holders to borrow, lend, and earn interest while leveraging smart contracts.
Algorand– Algorand aims to improve scalability while reducing the transaction time. Developers can use this protocol to build dApps for decentralized loans.
Bitcoin Cash– Bitcoin Cash brings the peer-to-peer mechanism of payment transactions. It works on the original Bitcoin mechanism but delivers better capacity while charging lower fees.
Best Way to Invest in DeFi Tokens
Currequite a few DeFi tokens are operating in the crypto space. So, investors who lack knowledge of these assets may be confused. In that case, a DeFi token index fund could become a savior. This particular index tracks the performance of DeFi tokens like MKR, UNI, AAVE, etc. The DeFi Pulse Index (DPI) is one such token index.
However, it should be noted that index funds also depend on the performance of DeFi tokens. So if something is impacting the DeFi market, all tokens may see a downtrend.
In October 2021, index fund protocol, Indexed Finance suffered losses of $16 Million. Hence, choosing assets after doing an analysis may be a better choice. In both cases, it’s important to be informed about the markets. So close analysis and careful selection are a must for crypto index fund investors.
Disclaimer
This article is only for information purposes and does not promote any type of investment, it is strictly suggested to do your research before investing or to consult with investment professionals.
Amanda Shinoy is one of the few women in the space invested knee-deep in crypto. An advocate for increasing the presence of women in crypto, she is known for her accurate technical analysis and price prediction of cryptocurrencies. Readers are often waiting for her opinion about the next rally. She is a finance expert with an MBA in finance. Quitting a corporate job at a leading financial institution, she now engages herself full-time into financial education for the general public.
