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What Are DeFi Tokens?

Decentralized finance tokens provide crypto users with access to several banking-like services such as lending, lending, and insurance.

DeFi tokens represent a diverse set of cryptocurrencies that are derived from automated, decentralized platforms that operate using smart contracts. These provide users with access to a suite of financial applications and services built on top of the blockchain.

DeFi has a market cap of $114 billion, a relatively small percentage of the overall $1.7 trillion crypto market. It has become one of the fastest growing sectors in the industry.

What are the top DeFi tokens?

LUNA is the largest DeFi token, with a market capitalization of $34.3 billion. It is the native currency of the Terra network, where it is used to counterbalance the mechanisms that support Terra’s algorithmic stablecoins. Terra is also used in the network’s proof-of-stake consensus, where validators stake tokens and are rewarded for providing security to the network.

According to Coin Gecko’s DeFi token list, DAI, a USD-pegged stablecoin mined by MarkerDAO, is the second-largest DeFi token by market capitalization.

Next is Chainlink’s LINK, the native token of the decentralized oracle network that provides smart contracts with accurate, real-world data, such as weather reports or price information.

While crypto market trackers such as CoinMarketCap and CoinGecko group all DeFi-related projects in the same category, they can be further differentiated based on the governance tokens that some DeFi protocols provide.

What are governance tokens?

Most DeFi tokens are linked to DeFi protocols that are, in some cases, regulated almost entirely by their community of users.

In order to participate in the future decision-making of these types of DeFi platforms, users are required to purchase and hold what are known as “governance tokens.” It allows owners to vote on proposed changes to the platform. These votes are nominally binding on the developer team, and their value is typically a proxy for trust in the project.

Decentralized Exchange Uniswap’s UNI Native Token is the largest governance token of its kind, with a market capitalization of $5.9 billion. Accordingly, users who hold more specific governance tokens will have higher voting power than those with fewer tokens. This is done with the assumption that those who are willing to invest more in a particular project are more likely to want it to succeed and will therefore vote on the proposals most suitable for achieving the goal. there.

Since the Uniswap airdrop, many other protocols have also airdropped governance tokens to early adopters to incentivize participation in the voting process. Governance tokens can also be earned through active contributions to protocols, e.g., by providing liquidity to the protocol’s asset pools.

Other major governance tokens include:

  • PancakeSwap
  • AAVE
  • MKR

Governance tokens are also speculative assets, like most other cryptocurrencies. You can trade them on centralized or decentralized exchanges without participating in any governance decisions, and their prices often fluctuate just like any other volatile asset.

Some newly issued governance tokens may not be tradable until token holders decide they can be transferred between wallets.

Where to buy DeFi tokens?

DeFi tokens sound like tokens you can only buy on DeFi protocols, but they’re not at all. Most centralized crypto exchanges, like Coinbase (COIN), Binance, and FTX, list major DeFi tokens. They can be traded or invested in just like you would with any other cryptocurrency.

To participate in protocol governance, you will need to hold the tokens in a DeFi wallet and connect the wallet to the governance platform used by that particular protocol, such as Snapshot. It should be noted that participation in the administration is not subject to any gas fees.

What are the risks of DeFi tokens?

If you purchase DeFi tokens through non-DeFi-based platforms, such as centralized exchanges like Coinbase, you are still subject to the DeFi risk associated with the protocol those tokens represent.

DeFi tokens can suffer significant losses when the underlying protocol encounters a critical vulnerability. Like with other cryptocurrencies, changes in the project or team can also change the sentiment of the market.

Is there a way to gain exposure to all major DeFi tokens?

If you’re not sure which DeFi token to invest in, you might want to consider a DeFi token index fund, such as the DeFi Pulse Index (DPI), offered by Index Coop. The token tracks the performance of DeFi tokens in its basket, such as UNI, AAVE, and MKR.

However, the DeFi Pulse Index (DPI) and individual DeFi tokens will not necessarily track the long-term success of DeFi, just as stock market shares can perpetuate themselves independently of the success of DeFi. company’s work.

Furthermore, the risks of investing in DeFi also apply to index funds. Indexed Finance, another index fund protocol, was mined for $16 million in October 2021.

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