DeFi Tokens

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NEWS AND ANALYTICS View All

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Top Defi Tokens by Market Capitalization - FX Leaders

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Top DeFi Tokens: Live Decentralized Finance Data

What is Decentralized Finance?

Decentralized finance, also known as DeFi, is a blockchain-based finance application that does not rely on central financial mediators, such as exchanges, brokerages or banks, to offer traditional financial instruments. Alternatively, they utilize smart contracts on blockchains, the most common being Ethereum. Decentralized finance or DeFi platforms enable users to lend or borrow funds from others. In addition to this, users can capture price movements of a range of assets using derivatives, trade cryptocurrencies, insure against risks and earn interest in savings-like accounts.

DeFi uses highly composable building blocks and a layered architecture. About $11 billion (worth in cryptocurrency) was deposited in different decentralized finance protocols in October 2020, which represented more than ten times as much growth during 2020. About $20.5 billion was invested in DeFi in January 2021.

Moreover, decentralized finance (DeFi) is quickly gaining attention as a more reliable, secure and efficient alternative to traditional financial services. It creates an open and reliable financial system, which is much more accessible, by reducing the need for centralized financial institutions. Decentralized finance lessens the risks of corruption, fraud and mismanagement of user assets. Furthermore, DeFi also makes managing finance considerably more cost-effective and efficient, with no costs for wire transfers, no overdraft fees and no waiting for banking hours for a transaction to be verified.

What categories of DeFi are there?

For a comprehensive understanding of DeFi, we first need to understand its products. One thing that is seen as standard among all the products is based on blockchain-powered open protocols. With the exclusion of one, which is on the Bitcoin blockchain, many of the existing products are based on the Ethereum blockchain.

1 – Lending

Users can borrow one asset by offering another asset as security. The security is usually ETH, and the borrowed token depends on what the firm is offering. The interest on the debt increases, and this compound interest must be paid off along with principal interest.
Projects: Some of the leading Decentralized Finance (DeFi) lending projects are:

2-Derivatives

Derivatives are another class of DeFi products. In this category, derivatives can range from asset-backed tokens to alternative insurance, or from alternative insurance to decentralized oracles or p2p protocols for prediction markets.

3 – DEXes

Dexes are open protocols that use liquidity pools for token exchange. Put simply, they help one to exchange crypto assets using smart contracts deployed on the blockchain, via liquidity pools. The trading rules are coded into smart contracts deployed on the Ethereum blockchain.
DEXes use the concept of either order books or liquidity pools.

4 – Assets

Assets are another class of DeFi products. There are different types of product offerings — sets of tokens as an investment, tokens backed by other tokens, or decentralized asset management. Although asset values change in CeFi and DeFi, many things that may be bought or sold in the world of finance can be found in one place or country.

5 – Payments

Payments are an interesting use-case in decentralized finance, with products that utilize both the Bitcoin and Ethereum blockchains. In the payments sector, DeFi products have tried to make micro-payments more efficient and inexpensive, thereby improving the scalability of blockchain networks.

Payments in finance refer to the exchange of assets or services for other assets or services, or in other words, payments are simply exchanges.

What are the benefits of DeFi?

i: Autonomy
The money or assets that you have in a decentralized finance ecosystem are yours and yours alone. There is no centralized power, such as a bank, that can freeze your account, block your transactions or seize your assets.

ii: Accessibility
If you have been working as a user in the digital assets industry for some time, you have probably heard about the 1.7 billion unbanked people across the globe. Because they are unable to access a bank account, these people are at a disadvantage when it comes to pursuing many financial opportunities.

Regrettably, centralized financial institutions don’t have any reason to target these disadvantaged members of the population. The revenue they would receive from providing services to the currently unbanked doesn’t justify the costs of reaching them.

iii: Tradability:
Synthetic assets, aka tokenized assets, are another phase of DeFi that brings immense value. By creating tradable tokens that, for example, represent a share of a real estate investment. You make the investment available to those who previously couldn’t afford it, and you give them access from anywhere on the planet.

Likewise, DeFi allows users to trade more efficiently, because they aren’t required to commit to a full high-value investment, all at once.

iv: Transparency
As it functions on blockchain technology, all transactions, data and codes on the blockchain are transparent to everyone. DeFi data is publicly available, which ensures that service providers remain honest. For example, you can easily check the provisions of a DeFi bank, or shop around for accurate loan rates. In fact, users can even track the transactions of public figures.
High levels of trust
Assurance of safety
Auditability
Authenticity

How to Invest in DeFi?

The easiest way, which provides only broad exposure to DeFi, is to buy Ether or another coin that uses DeFi technology. Buying a DeFi-powered coin gives exposure to nearly the entire DeFi industry. By depositing your Bitcoin straight with a DeFi lending platform, you can earn interest on it.

What are The Key Risks of DeFi?

It is essential to know that investing in DeFi is highly risky. Each DeFi protocol and project has a particular level of risk and compensation.

There are three key types of risk to consider:

Technology risk
Smart contracts, or combinations of code that carry out a collection of instructions on the blockchain, are necessary for DeFi applications to run. However, if there is an issue with a developer’s code, there could be weaknesses within a DeFi protocol.

Ultimately, the quality of the software relies on the coding that has been done, and sometimes there are hidden errors in the code that govern these protocols.

Asset risk
When borrowing on a DeFi platform, you usually offer other crypto assets that you own as security. For instance, the DeFi protocol, Maker, needs borrowers to collateralize their loans for a minimum of 150% of the loan value.

Since cryptocurrencies are volatile, their price usually fluctuates. If there is a bearish trend, the crypto assets used as security may drop sharply in value. Thus, some may see their positions liquidated. This is why some use stablecoins, which are supposed to be pegged to fiat, making them less volatile.

Product risk
Meltem Demirors says, “Normally, less mature pools or newer protocols will have higher yields because they’re untested. There’s a significant amount of risk related to how the yield you’re earning is being generated.”

Unlike with a traditional bank, when you use DeFi, there is no law or security relating to your money. Despite the fact that DeFi loans are secured by other crypto assets, borrowers who use DeFi protocols cannot be held liable if they are unable to repay a loan.

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