What are DeFi Tokens?
5 mins read
1 yrs ago
Before we go deep into DeFi tokens, let's talk about the blockchains technology where they exist. A blockchain are databases that are decentralised and help to record transactions in secured blocks. They are decentralised because they are not controlled or managed by any unified or central body.
This unique feature of the blockchain is the reason why many protocols are built on them. Protocols can also be known as smart contracts, which enable people to lend and borrow crypto, take part in liquidity pools, and trade cryptocurrencies in a self-executing order without any manual human control like the banks of today.
One of the primary things that make the crypto industry stand out is because of how decentralised it is. The launching of Ethereum led to more applications in the industry. It is through these applications enabled by the Ethereum blockchain that the foundation of decentralised finance (DeFi) was built.
What Is Decentralised Finance (DeFi)?
Take for example, when you go to the bank, financial activities must be handled by someone and all these cause long queues and delays at the bank.
With blockchain and smart contracts which is a decentralised mechanism, DeFi can now save you all of that stress as you execute transactions from your comfort without bias or delays.
The application that this system makes use of through blockchain technology can also be known as the DeFi protocol. The most popular and accessible platform that most DeFi companies build on is the Ethereum blockchain, although it is possible to build on other blockchains. Although DeFi has been around for some time, it gained popularity just between 2020 to 2021. According to Dmarketforces, this industry grew up to $85 billion in September 2021.
What Are DeFi Tokens?
To now answer the question "what are defi tokens", DeFi tokens are the digital currencies that DeFi projects or companies issue and use within its ecosystem.
It's like having the different banks in your state today having their currency. These currencies are called tokens because they are digital, exist and are stored on the blockchain. DeFi tokens transfer value during a transaction and are similar to fiat (paper money).
One of the main characteristics of DeFi tokens is that most of them are named and built after their native networks. Some of the DeFi tokens include Uniswap, Aave, Chainlink, Compound, Maker, etc. DeFi tokens can be built on already made networks instead of a new one too.
Some of the key things that you need to note about DeFi tokens are that:
- Just like cryptocurrency, DeFi tokens are transparent and have seamless transferability.
- In some cases, DeFi tokens are backed by US dollars and can be used to receive US dollar grants.
- DeFi tokens can exist on another blockchain other than a native blockchain.
- DeFi tokens are predominantly classified as financial tools rather than an asset.
What Are The Top DeFi Tokens?
Some innovative DeFi tokens have made giant strides in the industry and these include:
LUNA is the native currency of the Terra network that is used to collateralize the elements that back up TerraUSD. In terms of market cap, LUNA has the largest among DeFi tokens.
Aave is one of the leading DeFi tokens in the industry and it leverages a native token to take part in the governance of the network. With a total supply of 16,000,000 AAVE, you can receive rewards by stacking them through the safety module.
UNI is used for governance in one of the leading decentralised exchanges in the DeFi industry. With a total supply of 1,000,000,000 UNI, providing liquidity to select pools is one of the major ways that UNI is earned today
- . Others include COMP, KNC, MKR, ZRX, etc.
How To Invest In DeFi
When it comes to opportunities, the DeFi industry is one of the platforms that stands out in that aspect. The following steps will put you ahead in your quest to know how to invest in DeFi.
- Get Your Wallet Prepared:
Getting your wallet prepared is one of the first steps when investing in DeFi because this is the place where you will store the coins that will be used while participating in DeFi protocols. There are many crypto wallets that you can make use of and these include Metamask, Trustwallet, etc.
- Get Your Crypto Coins Ready:
- Get Started With The Smart Contracts:
Also known as DeFi protocols, this is where the main DeFi investment activities are carried out. All of the above-mentioned tokens have their DeFi projects with protocols that enable DeFi investors to trade crypto, stake their crypto for a reward, lend and take part in liquidity pools, and also yield farming.
You can join in any of these activities by going to the protocol app or website and connecting your wallet with the platform to enable interaction between your wallet and the platform. The website or app typically provides instructions on how their platform operates and this will help you to start your trading, yield farming, and other investment activities.
- Check On Your DeFi Investments:
As a good investor, you must check on your DeFi Investments from time to time to know your progress. This will enable you to know how good or bad the investments you made are doing.
Decentralised Finance (DeFi) is a huge industry that has a large market cap. This is because of the numerous applications and opportunities that decentralised finance presents. One of the important things to note about DeFi tokens is that they can exist on another blockchain other than their native blockchain. With the opportunities that this industry presents, learning how to invest in defi can generate a lot of financial resources in the long run. And for the record, investing in DeFi is not very hard, but is quite rewarding due to the diverse options of investment.
Disclaimer: This article is meant to provide general guidance and understanding of cryptocurrency and the Blockchain network. It’s not an exhaustive list and should not be taken as financial advice. Yellow Card Academy is not responsible for your investment decisions.