Decentralized finance (DeFi) has become incredibly popular among retail and professional crypto investors looking to access new crypto-native investment opportunities. Typically powered by a native protocol token, DeFi applications enable crypto-savvy investors to deploy their capital to potentially generate substantial yields on their crypto assets. Read on to learn more about DeFi tokens and whether they could be a good investment or not.
What Is a DeFi Token?
DeFi tokens are digital assets that give access to financial applications and services (e.g. lending, trading, and investing) built on blockchains and governed by smart contracts.
They represent a sub-sector of crypto tokens that DeFi platforms issue and use within their ecosystem, often to enable users to part in the governance process of a protocol and/or to pay out as an incentive to use the protocol.
DeFi tokens have attracted the attention of many investors as they offer opportunities owing to their diverse investment options and improved access to a broad range of Internet-native financial services that anyone with an Internet connection can access.
Top DeFi Tokens
Despite the bear market and recent decline in the interest in DeFi platforms, there are several leading DeFi tokens ranking in the top crypto assets measured by market capitalization. Let’s take a look at some of the most popular DeFi tokens in the market.
DAI
DAI is currently the largest DeFi token, with a market capitalization of $6.8 billion at the time of writing. It is a USD-pegged crypto-collateralized stablecoin issued and managed by MarkerDAO and Maker Protocol. The token is also the 4th largest stablecoin by market capitalization.
One of its unique selling points is that it is governed in a relatively decentralized manner, allowing Maker (MKR) governance tokens holders to participate in the protocol’s development decision-making.
UNI
This is the native token of Uniswap, a highly popular decentralized exchange that runs on the Ethereum blockchain. It is an open-source automated liquidity pool that enables peer-to-peer trading on the blockchain. The exchange’s token, UNI, is one of the largest DeFi tokens by market capitalization, valued at $3.8 billion.
UNI is a governance token that gives holders decision-making power.
LINK
LINK is the native token of Chainlink (LINK), another protocol important to the DeFi ecosystem. Chainlink is a decentralized network of oracles that provides real-world data and blockchain data to support smart contract operations. The protocol is used by numerous protocols in the crypto space, including market-leading DeFi platforms Aave and Compound, helping them to secure billions in value.
The LINK token gives an economic incentive to the participants on the Chainlink protocol to perform their tasks correctly. Its current market capitalization is $2.9 Billion.
AAVE
The Aave protocol’s AAVE token is another popular DeFi token that gives the lending protocol’s users decision-making power. In addition to acting as a governance token, AAVE provides holders with discounts on the decentralized lending platform, making it an interesting token for active Aave users.
With a market capitalization of almost $1 billion, AAVE is one of the leading decentralized finance tokens in the market.
COMP
The COMP token is a governance token but is also paid out as an incentive to liquidity providers on the Compound money markets app. COMP stands out as being the token that started the yield farming craze that ignited the DeFi summer of 2020.
Today, COMP has a market capitalization of around $350 million, which places it firmly in the top ten largest DeFi tokens by market cap.
The Role of DeFi Token on Protocol Governance
Developers typically create DeFi tokens to allow holders to participate in decision-making that will determine the future of a protocol. It represents – to a degree – ownership of the platform and holders will get to decide on proposed changes to the platform in proportion to the total number of the token they possess.
They’ll often decide on the new features to develop or integrate, finances, partnerships, and more. However, participation in protocol governance requires holding some certain quantity of the token in your wallet and connecting it to the governance platform chosen by the protocol.
Generally, the higher your amount of a particular governance token, the higher your voting power. This is done to ensure that users who have more to lose are making decisions and will therefore vote on the most appropriate proposals to enable the project to achieve success and their tokens in turn. Uniswap and MakerDAO were some of the first projects to launch DeFi governance tokens through airdrops.
Numerous other DeFi apps have airdropped tokens to early users to reward them and encourage participation in the voting process while some protocols offer their tokens to users in other ways, like rewarding liquidity providers, for example.
Since governance tokens are also speculative assets, they can be traded on crypto exchanges, which means you can also decide to trade or invest in them without participating in protocol governance.
Where Can You Buy DeFi Token?
Most DeFi tokens can be bought and traded on both decentralized and centralized cryptocurrency exchanges like Uniswap, Binance, Coinbase, etc.
If you prefer to buy through a centralized exchange:
- Check the exchange’s website to see if they have listed the specific DeFi token you want to buy
- Sign up/login to the platform
- Deposit some money
- Buy the DeFi token
- Transfer it into a personal wallet
Conversely, if you want to try out a decentralized exchange:
- Set up a Metamask wallet (or any other DeFi wallet)
- Visit a decentralized trading protocol like Uniswap and connect your wallet
- Search for the DeFi token you wish to buy and hit the buy button
- Make sure you have enough funds in your wallet to cover the gas fees and buy the amount of the DeFi token you want to purchase
If you have never used a decentralized exchange before, educate yourself on how they work first so you don’t lose your funds.
Should You Invest in DeFi Tokens?
DeFi is arguably revolutionizing the financial industry by providing crypto-powered financial services to anyone with an Internet connection and a crypto wallet. However, due to the complexities of navigating the DeFi landscape, it has so far been limited to yield-hungry (and sometimes reckless) crypto investors looking to put their digital capital to work.
As a result of the popularity of DeFi, numerous DeFi tokens have witnessed substantial price gains since their inception. However, the crypto bear market we are now finding ourselves in has also hit DeFi assets hard, highlighting their riskiness as investments.
Whether or not you choose to invest in DeFi tokens or not is entirely up to you. Should you decide to add some DeFi assets to your crypto portfolio, you should first read up on the use case of the DeFi token, how its protocol works, the team behind it, and what value it really brings to the community.
By conducting your own research and adequate due diligence on a DeFi (or any other crypto) token, you can increase your chances that the bet could pay off. But whatever you do, never invest more than you can afford to lose, especially, in the DeFi markets.
FAQs
What is DeFi?
DeFi refers to decentralized finance, which is a movement within the crypto community that aims to replace traditional financial services with blockchain-powered, Internet-native financial services.
Is DeFi Safe?
The decentralized finance (DeFi) market is a relatively new phenomenon in the crypto markets, composed of apps build with smart contracts and often run by anonymous teams. As a result, deploying capital in the DeFi market is widely considered a high-risk activity.
If you plan to deposit funds in a decentralized trading or lending pool to earn yield on your crypto assets, make sure you don’t invest more than you can afford to lose as hacks, scams, and operational errors are – unfortunately – quite commonplace in DeFi.
Where Can You Securely Store DeFi Tokens?
You can store DeFi tokens in a wide range of crypto wallets, including desktop wallets, mobile wallets, and hardware wallets. However, the most important aspect of securely storing DeFi tokens (or any other digital assets) is using a non-custodial wallet that gives you exclusive and complete control over your funds. Also, always back up your wallet to ensure your crypto remains securely stored.
