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What are DeFi tokens?
Decentralized finance tokens, or more commonly known as DeFi tokens, are decentralized applications that run on blockchains with smart contracts. They aim to transform banks, exchanges, and other traditional financial systems through the use of cryptocurrencies, reducing or eliminating the need for third parties.
Most of the DeFi tokens run on the Ethereum blockchain. Users can trade, get loans, earn interest, and more. Despite its hype and outstanding yields, DeFi tokens are considered high-risk investments with high volatility.
Some popular DeFi tokens include Polygon (MATIC) Uniswap (UNI), PancakeSwap (CAKE), Wrapped Bitcoin (WBTC), Dai (DAI), Avalanche (AVAX), Chainlink (LINK) etc.
- Polygon (MATIC)
While Polygon is often referred to as a layer 2 scaling solution, it is actually a Layer 2 aggregator. It aggregates multiple scaling solutions, including Plasma, Optimistic Rollups, and ZK Rollups, into a single platform, which developers can use to deploy decentralized applications (dApps) and other services. This enables faster and cheaper transactions while still maintaining the security of the Ethereum network.
Avalanche is a layer one blockchain that serves as a platform for decentralized apps and custom blockchain networks. It is a competitor to Ethereum, with the goal of dethroning Ethereum as the most popular blockchain for smart contracts. It intends to achieve this by providing a higher transaction output of up to 6,500 transactions per second while maintaining scalability.
The unique architecture of Avalanche allows for this. The X-Chain, C-Chain, and P-Chain are the three blockchains that make up the Avalanche network. Each chain serves a specific purpose, which is in stark contrast to Bitcoin and Ethereum’s strategy of having all nodes validate all transactions. Avalanche blockchains employ a variety of consensus techniques, depending on their intended usage.
Avalanche has been working on establishing its own ecosystem of DApps and DeFi since its mainnet launch in 2020. Avalanche has been integrated with a number of Ethereum-based projects, including SushiSwap and TrueUSD. Furthermore, through the building of bridges, the platform is continually attempting to improve interoperability between its own ecosystem and Ethereum.
- DAI (DAI)
The Maker Protocol and the MakerDAO decentralized autonomous organization govern the issue and development of DAI, an Ethereum-based stablecoin (stable-price cryptocurrency).
DAI is soft-pegged to the US dollar and is backed by a mix of other cryptocurrencies that are placed into smart-contract vaults whenever new DAI is minted.
It’s important to distinguish Multi-Collateral DAI from Single-Collateral DAI (SAI), an older form of the defi token that could only be collateralized by a single cryptocurrency; SAI also doesn’t support the DAI Savings Rate, which allows users to earn some money by holding DAI tokens.
Multi-Collateral DAI was launched in November 2019.
Wrapped Bitcoin (WBTC) is a tokenized version of Bitcoin (BTC) that runs on the Ethereum blockchain (ETH).
WBTC is ERC-20 compatible, which means it can be fully integrated into the Ethereum blockchain’s ecosystem of decentralized exchanges, crypto lending services, prediction markets, and other ERC-20-enabled decentralized finance (DeFi) applications.
WBTC is also backed by Bitcoin at a 1:1 ratio via a network of automatically monitored merchants and custodians, ensuring that its price is always tied to Bitcoin and allowing users to transfer liquidity independently and autonomously between the BTC and ETH networks.
Wrapped Bitcoin was announced on October 26, 2018, and went live on January 31, 2019.
Chainlink is a blockchain abstraction layer that enables universally connected smart contracts. Founded in 2017, Chainlink enables blockchains to safely communicate with external data feeds, events, and payment mechanisms via a decentralized oracle network, delivering the vital off-chain information required by complicated smart contracts to become the dominant form of digital agreement.
A huge open-source community of data producers, node operators, smart contract developers, researchers, security auditors, and others power the Chainlink Network. The company is focused on guaranteeing that all node operators and users that want to contribute to the network have decentralized participation.
Uniswap is a well-known decentralized trading system that helps automate the trading of DeFi tokens.
Uniswap, an automated market maker (AMM), debuted in November 2018, but has grown in popularity this year as a result of the DeFi craze and the resulting spike in token trading.
Uniswap seeks to keep token trading automated and open to anyone who owns DeFi tokens, while also enhancing trading efficiency over traditional exchanges.
Uniswap improves efficiency by using automated ways to solve liquidity difficulties, avoiding the problems that plagued the early decentralized exchanges.
Uniswap went a step further in September 2020, establishing and giving its own governance token, UNI, to former protocol users. This increased both the possibility for profit and the ability for users to control the destiny of the entity – a desirable feature of decentralized entities.
As an alternative to Ethereum, Fantom is an open-source decentralized smart contract platform for DApps and digital assets. Fantom aims to overcome the drawbacks of earlier blockchain generations by balancing three factors: scalability, security, and decentralization. The project includes a collection of tools for making existing DApps easier to integrate, as well as a detailed staking incentive structure and built-in DeFi instruments.
Fantom is a Layer-1 blockchain that facilitates DeFi and related services on the basis of smart contracts using a scratch-built consensus mechanism and separate consensus layer, Lachesis. Other layers, such as Opera, Fantom’s EVM-compatible smart contract chain, are also secured using Lachesis. The project’s long-term goal is to “grant compatibility between all transaction bodies around the world.”
FTM is Fantom’s native utility PoS token that drives the ecosystem and is used for payments, network fees, staking, and governance. FTM is the transaction’s backbone, allowing fee collection and staking, as well as the user incentives that the latter represents.
The Fantom Foundation, which manages the Fantom product line, was founded in 2018, with OPERA, Fantom’s mainnet, set to launch in December 2019.
Theta (THETA) is a blockchain-based network that was created specifically for video streaming. Theta mainnet, which went live in March 2019, is a decentralized network where users exchange bandwidth and processing resources on a peer-to-peer (P2P) basis. Steve Chen, co-founder of YouTube, and Justin Kan, co-founder of Twitch, are advising the initiative.
Theta has its own native cryptocurrency token, THETA, which is used to execute various governance duties within the network. Enterprise validators include Google, Binance, Blockchain Ventures, Gumi, Sony Europe, and Samsung, as well as a Guardian network of thousands of community-run guardian nodes.
According to the project’s creators, the project intends to shake up the video streaming market in its current state, where centralization, bad infrastructure, and high expenses result in a terrible user experience. Due to the obstacles between content providers and end users, content creators also make less money.
Tezos is a blockchain network that is similar to Ethereum in that it is based on smart contracts. However, there is a significant difference: Tezos seeks to provide more advanced infrastructure, which means it may evolve and improve over time without the risk of a hard fork. Since their inception, both Bitcoin and Ethereum have suffered from this problem. People who own XTZ can vote on protocol changes proposed by Tezos developers.
This open-source platform claims to be “secure, upgradable, and built to last,” and claims to provide smart contract language that delivers the accuracy needed for high-value use cases. Tezos claims that its approach makes it futureproof and that it will “remain state-of-the-art long into the future,” implying that it can adapt to changes in blockchain technology.
Tezos’ underlying technology was first suggested in a white paper published in September 2014. The Tezos mainnet launched four years later, after a series of setbacks.
PancakeSwap is an automated market maker (AMM) – a decentralized finance (DeFi) program that lets users trade tokens while also providing liquidity and earning fees.
It’s a decentralized exchange for transferring BEP20 tokens on Binance Smart Chain that started in September 2020. Users of PancakeSwap trade against a liquidity pool using an automated market maker methodology. Users deposit funds into these pools in exchange for liquidity provider (LP) tokens, which are used to fill the pools.
These tokens can then be redeemed for a portion of the pool as well as a portion of the trading costs. FLIP is the name given to these LP tokens. Users can also farm other tokens like CAKE and SYRUP on PancakeSwap. Users can deposit LP tokens on the farm and receive CAKE as a reward.
Users can trade BEP20 tokens, provide liquidity to the exchange and earn fees, stake LP tokens to earn CAKE, stake CAKE to earn additional CAKE, and stake CAKE to earn tokens from other projects through PancakeSwap.
Aave is a decentralized finance system that enables users to lend and borrow cryptocurrency.
Depositing digital assets into specially designed liquidity pools earns lenders interest. Borrowers can then use this liquidity to take out a flash loan using their crypto as collateral.
When it first started in November 2017, Aave (which means “ghost” in Finnish) was known as ETHLend, however it was rebranded to Aave in September 2018. AAVE is a governance token that gives owners a say in the protocol’s future development. It also rewards holders with lower platform fees.
The Graph is an indexing protocol for organizing and efficiently accessing data from blockchains and storage networks. The Graph has been running a hosted service since January 2019 with over 3,400 subgraphs deployed for Web3 and DeFi applications built on Ethereum, IPFS and POA, like Uniswap, Synthetix, DaoStack, Aave, Balancer, Gnosis, Aragon, and more. The decentralized network launched its mainnet in December 2020, and The Graph Foundation will be working with Edge & Node to build out a production-ready Graph Explorer dApp and Gateway that supports all network contributors. Any individual or third-party can also build gateways, applications or developer tooling for the network.
Maker (MKR) is the governance token of the MakerDAO and Maker Protocol, which are both built on the Ethereum blockchain and allow users to issue and control the DAI stablecoin.
Maker is a project whose goal is to run DAI, a community-managed decentralized cryptocurrency with a stable value soft-pegged to the US dollar. It was first envisioned in 2015 and fully launched in December 2017.
MKR tokens operate as a voting share for the corporation that runs DAI; while they do not pay dividends, they do provide holders voting rights over the development of Maker Protocol and are expected to increase in value in line with DAI’s success.
The Maker ecosystem is one of the first projects in the decentralized finance (DeFi) space, which aims to create decentralized financial products based on smart-contract-enabled blockchains like Ethereum.
Best DeFi Tokens – The Bottom Line
Finally, the DeFi industry is continually changing. DeFi platforms have grown from being an experimental aspect of the financial sector to the massive ecosystem that it is today in a relatively short period of time. Although DeFi applications may appear to be a niche industry at the moment, it is feasible that they will be accepted by the larger market in the near future.
The various components of DeFi tokens will flow into ordinary life and money once the concept becomes ubiquitous. To put it another way, DeFi tokens have the ability to transform the financial landscape as we know it.
It’s crucial to remember, though, that the decentralized finance sector is still in its infancy. There are still hazards in this investment, just as there are with any other. As a result, doing your due research and gaining insight into how this new financial system is progressing will be useful.