What Are DeFi Tokens, And Why Are They Growing

What Are DeFi Tokens, And Why Are They Growing

The wired telephone or landline was once the pinnacle of telecommunication which was disrupted by mobile phones in just a span of a few years. These days smartphones are more common than the almost extinct landline. The same sea change is happening on a larger scale with finance and crypto. The centralized banking systems are now on the verge of being replaced by Decentralized Finance (DeFi) systems. In this article, we will uncover, what are the top DeFi tokens, and how DeFi will change the way we bank forever!

What Are DeFi tokens in Crypto?

Decentralized finance applications are geared to reinvent conventional financial systems such as banks and exchanges with cryptocurrency. These are financial services that utilize smart contracts, which are automated agreements that can be enforced and don’t require intermediary organizations such as banks. Most DeFi applications work on the Ethereum blockchain.

DeFi applications run in the absence of central regulatory control over the whole system, with users being able to lend cryptocurrency and assets in return for interest from a lender. Users can also act as a liquidity center for a decentralized exchange. 

Since there is no need for regulatory control, interest rates can be more appealing than the ones offered by conventional banks. Also, it needs to be noted that it is easier to borrow in this setup as well, with the only requirement being the ability to offer up other crypto assets as collateral. 

To ensure that the DeFi ecosystem functions smoothly, DeFi tokens are used. They are the individual units in DeFi representing a discrete value in crypto banking/ blockchain banking transactions among peers.

Investing in DeFi for Beginners

For all you hotshots out there, the first step you should take before investing in any DeFi application would be to verify and validate the application to be secure and well-audited.

One should also remember to choose a blockchain or exchange that isn’t consistently influenced by a limited number of users. You should also ensure that such networks should have reasonable transaction fees and are capable of handling heavy user demand.

A good sign of such technologies is that they always share their code and address security concerns in forums and social platforms. Some of the best DeFi projects or applications are started by nearly anonymous founders, but transparency about their application is of paramount importance.

Is There any Risk Involved in DeFi Cryptocurrency?

Like all high-yield investments, DeFi cryptos, too, have a risk factor. Volatility is one of the best-known factors to contribute to the risks involved with DeFi investing. Besides, the risks attached can be categorized into Technological, Asset, and Product risks.

Let’s look at them one by one:

1. Technology risk

Since DeFi is basically founded on smart contracts, issues with developer code could result in vulnerabilities in protocol that could be exploited by others. As with any software, coding errors can lead to issues with the software itself and this is a sizable risk.

2. Product risk

The flip side of crypto’s non-regulation is that DeFi protocols or applications cannot be held accountable by lenders in case their borrowers are unable to repay a loan. This is why some investors in this space tell people to invest only that which they can afford to lose. This is why you always need to thoroughly research the DeFi protocol you are about to use, just to be sure.

3. Asset risk

This is slightly more complex at the outset but can be understood in a simple manner. We now know that collateral in the form of crypto assets is required to borrow cryptocurrency. Since cryptocurrencies are known to be relatively more volatile than conventional currency, the value of crypto assets used as collateral may suddenly decline. It might be a result of a sharp downturn in the crypto asset value. This is why some DeFi protocols require borrowers to submit a minimum of 150% of the loan value.

Another solution to such volatility is the use of Stablecoins that are moderated in connection to other fiat currencies that are less volatile. These are digital assets also known as coins that are architected to retain their value in relation to conventional currencies and assets.

Top 5 DeFi tokens

Investors are steadily increasing their stakes in DeFi tokens, and in case you are wondering which DeFi crypto tokens to buy, here are the top DeFi tokens to invest in.

Chainlink enables the transfer of tamper-proof data from off-chain (blockchain) sources to on-chain smart contracts. This is basically an oracle network that is built on Ethereum. 

2. Uniswap (UNI)

As a decentralized finance platform, this Ethereum-based Automated Market Maker (AMM) generates what can be termed as “liquidity pools,” where liquidity providers are given a tiny commission for every purchase. Such a clever system is built to get better with scale, as a higher number of liquidity providers will lead to lower fees over a span of time.

3. Pancakeswap (CAKE)

Globally, going by the number of users, this is the largest DeFi platform. It also stands out with a massive developer base, lower transaction fees, a relatively simple setup, and higher levels of security.

4. Terra (LUNA)

It stands out from the rest of the players in this list as it can be pegged to other currencies from South Korea, Europe, and Mongolia as well. Terra Stablecoins offer instant settlements, low fees, and seamless cross-border exchange.

5. Avalanche (AVAX)

Avalanche has solidified its place in the booming NFT space and has been diligently building connectivity with other blockchain projects such as SushiSwap (SUSHI), Chainlink (LINK), and Graph (GRT). Positioned as an alternative to Ethereum, Avalanche offers cheaper transactions in a fraction of the time. 

Investing In DeFi Tokens On Mudrex

One of the top reasons for the explosive growth of DeFi tokens is FOMO, where many new tokens are also gaining traction due to the top DeFi tokens gaining more investments. Therefore, making sound investment decisions is imperative when it comes to DeFi investments.

However, there is no denying that we are heading towards a novel financial ecosystem where decentralized finance is the norm. The key question that arises is how to invest in DeFi tokens by minimizing the risks associated with them. 

This is where Mudrex can help. With Mudrex Coin Sets, you can invest in crypto baskets based on different ideas, including Blue Chip, emerging cryptocurrencies, and of course, top DeFi tokens. With efficient risk management and rebalancing, you can generate consistent returns with Mudrex.

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