What Every Investor Should Know About DeFi Coins And Tokens
The early months of 2022 have already shown that DeFi will be a trending topic this year. This new financial system is earning its space between novice and senior investors seeking new ventures and among entrepreneurs looking for an opportunity to raise funds for their startups.
It is about time that you get to know DeFi, and here we have explained all the details that will help you make good investing choices. Check it out!
What Is Decentralized Finance?
DeFi or decentralized finance is a financial system that provides products and services built with blockchain technology and governed by smart contracts.
Unlike traditional financial institutions, DeFi works without centralized intermediaries or entities and uses open protocols to execute services programmatically and flexibly.
In short, the DeFi ecosystem is a collective of decentralized applications that offer financial services through a blockchain, resulting in faster, safer, and more transparent transactions. Such services include payments, lending, trading, investments, insurance, and asset administration.
Decentralized and non-custodial DeFi applications’ goal is to disrupt the conventional financial industry. Developers guarantee decentralization by handing over the smart contracts’ ownership of protocols and apps to their users, creating community-controlled assets.
On the other hand, it is also non-custodial. Users have complete control over their coins and tokens, unlike traditional institutions that take custody of your assets whenever you need to complete a transaction.
How and Why Was DeFi Developed?
DeFi projects are built on blockchains, decentralized networks with no central institution in control. Blockchains also power the technology that makes DeFi possible, such as tokens and wallets, smart contracts, DAOs, and the like.
The development of DeFi provided alternatives to traditional financial services comparable with the creation of cryptocurrencies as options to fiat money. DeFi maintains the user in control of their assets and eliminates intermediaries, while CeFi puts the reins on the hands of conventional entities.
Decentralized finance also emerged as a more accessible financial outlet for audiences that don’t have access to banks or other traditional organizations. It provides those people with high-quality financial services in a more transparent, flexible, and democratic manner, as DeFi doesn’t connect identities to transactions. Some Decentralized Exchanges dominating this new space are Uniswap, PancakeSwap, and SushiSwap.
While this revolutionary concept is still in its early stages and has yet to be regulated, DeFi holds much potential as the foundation for a more efficient, adaptable, and egalitarian financial future.
DeFi Coins vs. Tokens
As DeFi is a dimension of the crypto market, the concept of coins and tokens is inseparable from decentralized finance. While some may think that both words have the same meaning, crypto coins and crypto tokens are, in fact, different.
Such a difference even creates a fun riddle: all coins are tokens, but not all tokens are coins. How does that work?
A DeFi coin, like Bitcoin, works as a digital interpretation of fiat coins, transferring value through a decentralized financial transaction. They operate on their own blockchain networks, which keep track of all coin transactions. A coin can also be mined, meaning that experts can create new digital currency units through Proof of Work or Proof of Stake.
On the other hand, a DeFi token transaction relies on smart contracts, as it does not have a particular blockchain; they operate on coins’ blockchains. For example, while Ether is Ethereum’s native coin, many tokens can also run on this network.
Similar to coins, tokens can also convey value though not always in a monetary sense. There are Non-fungible tokens (NFTs), for example, that represent unique digital assets, and utility tokens that can be used as passwords to a resource. Stablecoins also enter this category.
In a nutshell, the differences between coins and tokens lie in their usability and how the transaction is processed, if it is through a blockchain or smart contracts. Knowing their particularities can help an investor choose which asset to use when buying a DeFi product or service.
How to Start Investing in DeFi
Now that you know the principles and basic concepts of DeFi, it is time to learn how to invest in it through the lending and borrowing dynamic.
Many protocols and platforms support this investing process, so we’ll be using BullPerks‘ system as the guideline to make the instructions more precise.
1. Set Up Your Wallet
You’ll use your crypto wallet to store, transfer, and receive DeFi coins. Wallets come with various structures, and some are even linked to exchanges where you can buy coins.
To use BullPerks’ platform, you’ll need a MetaMask wallet. You can then add the Binance Smart Chain to your networks and create a space for BLP tokens.
2. Purchase DeFi Coins
The coin you’ll invest in depends on the protocol you want to participate in. BullPerks is built on the BSC network, so you’ll need BNB coins.
You can buy BNB coins directly on Binance Exchange.
3. Take Part in the Protocol of Choice
DeFi relies on lending and borrowing just as much as the traditional financial system. However, one of the advantages of DeFi is that it allows users to borrow and lend assets while maintaining custody of their coins.
With BullPerks, you can invest through fundraising by participating in a VC or IDO deal, or you support crypto-based initiatives by buying their tokens. The platform lists only the top promising projects, and you can invest in any of them anonymously in a secure space.
Top 5 DeFi Coins in 2022
Here are some of the best DeFi coins to watch in 2022, with a high market capitalization. If you want to give DeFi a go this year, this list can help you pick your next coin investment. Take a look!
1. Maker (MKR)
Maker is an Ethereum-based decentralized autonomous organization (DAO) that allows anyone to lend or borrow cryptocurrency.
The MKR token exists to create a dual-crypto technique and ensure that the DAI coin continues tied to the dollar, reducing volatility and giving investors greater confidence in the initiative.
2. SushiSwap (SUSHI)
SushiSwap is a token and platform also based on Ethereum that uses the Automated Market Maker (AMM) to enable cryptocurrency decentralized exchange.
The platform allows DeFi users to employ features like staking and yield farming, and its token value is expected to rise in the future.
3. Aave (AAVE)
Aave is a non-custodial open-source protocol that allows users to earn interest on deposits and borrow crypto-based assets.
It is built on Ethereum but uses a smart contract method to allow assets management through a distributed network of computers that run its software. This way, users only have to trust the code, not any central authority or organization.
4. Compound (COMP)
Compound is a protocol running on Ethereum that enables users to deposit coins within lending pools, which borrowers can access.
COMP coin users can make extra money lending and borrowing coins, and they have an incentive to keep the token since they can influence how the platform develops in the future.
5. Ballancer (BAL)
Balancer is an AMM that virtually allows anyone to generate or provide liquidity to trading pools, earning adjustable trading fees in the process.
BAL ensures that no central entity has control over how the system runs. Users who deposit assets in the Balancer pools can earn BAL tokens, so it’s also an incentive mechanism. It is a vital element of Balancer’s ecosystem’s distribution of operations.
DeFi is on the rise, and so are the coins emerging during the early stages of this new financial system. Investing in this modality right now may bring highly profitable returns in the near future.
However, it is essential to conduct an extensive study on DeFi protocols, exchanges, and coins before allocating your money to any initiative. It is also crucial to be confident about which investment technique you will be using, such as crowdfunding, lending, borrowing, or waiting for a token to increase value.