DeFi has been showing great promise and the market is starting to reflect this, as many DeFi tokens have been pumping strongly in 2020 and encouraging people to invest in it.
Cryptocurrency has been made to make money and payments universally accessible to anyone, no matter where they are. In order to take benefit from that we have to know what is Decentralized Finance (DeFi) and how dapps and DeFi tokens work. Imagine a global, open alternative to every financial service you use today such as savings, loans, trading, insurance and more that is accessible to anyone in the world with an internet connection. That’s what DeFi does.
This is now possible on smart contract blockchains, like Ethereum. “Smart contracts” are programs running on the blockchain that can execute automatically when certain conditions are met. These smart contracts enable developers to build more sophisticated functionality than simply sending and receiving cryptocurrency. These programs are what we now call decentralized apps, or dapps.
You can consider it a DeFi app as an app that works on decentralized technology, rather than being built and controlled by a single, centralized company.
While some of these concepts might sound futuristic, as there is no bank in the middle of trading, many of these dapps are already live today. There are DeFi dapps that allow you to create stablecoins (cryptocurrency whose value is pegged to the US dollar), lend out money and earn interest on your crypto, take out a loan, exchange one asset for another, go long or short assets, and implement automated, advanced investment strategies.
What are the differences between these DeFi dapps and their traditional bank or Wall Street counterparts?
- At their core, the operations of these businesses are not managed by an institution and its employees — instead the rules are written in code (or smart contract, as mentioned above). Once the smart contract is deployed to the blockchain, DeFi dapps can run themselves with little to no human intervention (although in practice developers often do maintain the dapps with upgrades or bug fixes).
- The code is transparent on the blockchain for anyone to audit. This builds a different kind of trust with users, because anyone has the opportunity to understand the contract’s functionality or find bugs. All transaction activity is also viewable for anyone. While this may raise privacy questions, transactions are pseudonymous by default, i.e. not tied directly to your real-life identity.
- Dapps work globally. Of course, local regulations may apply but, technically speaking, most DeFi apps are available to anyone with an internet connection.
- “Permissionless” to create and “permissionless” to participate, anyone can create DeFi apps, and anyone can use them. Unlike finance today, there are no gatekeepers or accounts with lengthy forms. Users interact directly with the smart contracts from their crypto wallets.
- It is flexible user experience as anyone can use a third party interface, or build their own. Smart contracts are like an open API that anyone can build an app for.
- They are interoperable as new DeFi applications can be built or composed by combining other Decentralized Finance products like Lego pieces, e.g. stablecoins, decentralized exchanges, and prediction markets can be combined to form entirely new products.
DeFi is now one of the fastest growing sectors in crypto. Industry observers measure traction with a unique new metric — “ETH locked in DeFi”.
Following Compound and Balancer liquidity mining, a wave of projects have followed, which are best exemplified by mStable‘s MTA and yEarn‘s YFI. A more degenerate sector of DeFi quickly followed suits with the launch of TEND, YAM, BASED and some others. While DeFi principles can be applied to any smart contract, not all DeFi tokens are created equal.
Following the rise of Synthetix SNX, Kyber‘s KNC, and Aave‘s LEND, we’re now seeing other projects pivot to DeFi to stay relevant. Best exemplified by Mainframe (MFT) and Akropolis (AKRO and ADEL), projects are coming out of the woodwork with new iterations of crypto’s hottest sectors.
Underpinning all of these is the rising trend of governance. Whether it be Curve‘s upcoming CRV token, pTokens new pNetwork DAO with PNT staking or others in the pipeline, governance has officially taken center stage. Even legacy tokens like Bancor’s BNT are getting a governance overhaul with the release of Bancor V2 – a clear signal that tokenholders are now meant to drive multibillion-dollar networks.
Still, the way these DeFi tokens get distributed is still a conundrum in and of itself. While Initial DEX Offerings on Uniswap appeared to be the move, many are looking to take extra precautions from allowing whales to snipe big allocations on the first block.
The list of DeFi tokens will be updated periodically. Consider the DeFi tokens listed here as education and not our recommendation.
To see which DeFi tokens have the highest market cap at any time, we recommend this tool from DeFiMarketCap.
Compound – COMP
Total Supply: 10,000,000 COMP
As the native governance token behind the leading lending protocol, COMP is earned by those who aim to lend or borrow assets. COMP is used to govern notable protocol decisions that can be voted or delegated on the Compound Governance Dashboard.
COMP is allocated to markets relative to the amount of interest accrued, meaning assets that make the most interest will earn the most COMP per day. Here’s a tool to know which assets are earning the most COMP on any given day. DeFi Rate is making a big push to be a Compound delegate.
Synthetix – SNX
Total Supply: 190,075,446
Synthetix is a leading derivatives protocol backed by a native token SNX. To mint new derivatives which are called Synths, users must stake at least 750% of the Synths value in SNX. Maintaining this ratio which is referred to as a cRatio, allows users to earn native inflation along with a pro-rata portion of trading fees from the Synthetix Exchange.
Aave – LEND
Total Supply: 1,299,999,942 LEND
Aave is an important lending protocol that leverages a native token LEND to accrue value earned from protocol fees like borrowing and Flash Loans. Today, 80% of all fees are used to burn LEND. Soon, LEND will become a governance token used to vote on protocol decisions and will act as a means of insurance to protect again any potential deficits.
Kyber Network – KNC
Total Supply: 210,623,056 KNC
Kyber Network is a leading DEX that captures value through a native token – Kyber Network Crystals (KNC). Fees collected from the exchange are largely used to burn KNC. Kyber underwent it’s Katalyst tokenomics upgrade, introducing key governance mechanisms through the advent of the KyberDAO.
Using KNC, users will have the ability to vote (or delegate) on important protocol decisions including the distribution of fees collected from DEX trading.
Maker – MKR
Total Supply: 1,005,577 MKR
Maker is the decentralized lending protocol responsible for the creation of DAI. MKR votes on protocol decisions through the Maker voting dashboard and is burned using a portion of Stability Fees collected from outstanding loans.
0x Protocol – ZRX
Total Supply: 1,000,000,000 ZRX
0x Protocol is a DEX liquidity protocol used to funnel liquidity to various exchanges. ZRX governs the protocol along with being staked by Market Makers as a means of collecting trading fees.
Balancer – BAL
Total Supply: 100,000,000 BAL
Balancer is an automated asset management and liquidity protocol governed by a native token – BAL. Since launch its Liquidity Mining program in June, Balancer has seen strong growth on all fronts. BAL is used to govern important protocol decisions like protocol fees, support assets, and Factors relative to how BAL is earned.
UMA – UMA
Total Supply: 100,224,817 UMA
UMA is a derivatives protocol for the creation of permissionless synthetic assets. The native token – UMA – is used to govern protocol decisions and can be used to challenge underlying registries that are out of sync with the synthetic asset they are connected to.
Curve – CRV
Total Supply: 3,030,000,000
Curve is a liquidity aggregator for same-peg assets like stablecoins and Bitcoin wrappers. The native token – CRV – is staked via the Curve DAO for both time-weighted governance right and liquidity multipliers on CRV liquidity mining. It’s been hinted that the Curve DAO will use protocol fees to buy and burn CRV off the open market.
Ren Protocol – REN
Total Supply: 999,999,633 REN
Ren Protocol is an interoperable bridge to port assets to ETH using the RenVM. To become a validator on the network, users must post 100,000 REN as collateral to host a darknode. Those which operate a darknode are entitled to a pro-rata share on all trading fees which are collected from the protocol.
Nexus Mutual – NXM
Total Supply: 4,355,684 NXM
Nexus Mutual issues mutual members NXM in exchange for ETH that is deposited to the Capital Pool to protect against smart contract vulnerabilities. In the event that a claim is passed, ETH from the capital pool is used to compensate the affected party. Members can stake NXM on different contracts to collect a portion of fees that are earned when covers are bought. Nexus will introduce pooled staking which allows all covers bought to be allocated across all those that stake their NXM.
Bancor – BNT
Total Supply: 69,148,554 BNT
Bancor is a DEX which is fueled by a native token – BNT. A portion of trading fees collected from the exchange are distributed to BNT holders. Bancor is rolling out its V2 upgrade that introduces BNT staking through a BancorDAO.
Numerai – NMR
Total Supply: 10,979,551
Numerai is an AI-based hedge fund responsible for the creation of Erasure – a prediction protocol in which users stake NMR to signal confidence in their predictions. NMR is listed on Coinbase.
bZx – BZRX
Total Supply: 1,030,000,000 BZRX
bZx is a lending and margin protocol behind products like Fulcrum and Torque. The project recently debuted its BZRX governance token with an upgraded token model kickstarted by an Initial DEX Offering. BZRX is used to cover protocol deficits and can be staked via the bZxDAO for trading fees and inflation.
yEarn – YFI
Total Supply: 30,000 YFI
yEarn is an automated liquidity aggregator offering many different yield farming opportunities. The protocol is governed by a native token – YFI – which was launched with no premine and did not hold an Initial DEX Offering. Users can burn YFI to claim a pro-rata share of protocol fees.
mStable – MTA
Total Supply: 100,000,000
mStable is a liquidity aggregator for same-peg tokens which are called mASSETS like mUSD. The protocol is governed by a native token – MTA – which can be staked via the Earn feature for a claim on protocol fees and MTA inflation. MTA was debuted with an Initial DEX Offering but decided to use Mesa for fair price discovery to avoid bot front-running.
Loopring – LRC
Total Supply: 1,374,513,897 LRC
Loopring is a Layer 2 exchange protocol that offers scalability solutions to optimize throughput on ETH. LRC is staked to earn a portion of trading fees earned both on the DEX on on applications like Loopring Pay.
Mainframe – MFT
Total Supply: 17,000,000
Mainframe recently pivoted to a fixed lending tokenized debt market with their recent acquisition of Sablier. Now, the protocol will look to incentivize usage through the MFT token in tandem with its ongoing liquidity mining project.
Akropolis – ADEL
Total Supply: 60,000,000
Akropolis laid a blueprint for the rollout of a governance token specially for its yield farming product – Delphi. The token can only be earned through liquidity mining using the protocol token – AKRO – or stablecoins and supported collateral.
Outside of protocol-specific tokens, we’ve seen the surge of various flavors that are given to a depositor for supplying assets to a DeFi protocol. They include:
- cTokens– ERC-20 tokens which represents an underlying loan being supplied out on Compound Finance. cTokens accrue interest based on the supply interest rate and thus, each token becomes redeemable into an increasing amount of the underlying asset.
- dTokens – Dharma‘s token flavor which offers the same benefits as cTokens with 10% of collected interest being siphoned back to Dharma as a revenue stream.
- oTokens – oTokens are options offered on the Convexity Protocol used in products like Opyn. When buying a put users receive oTokens in return.
- TokenSets – Set Protocol-based asset management tokens. Investors buy into a single ERC-20 token with a programmable trading strategy and underlying components like Ethereum and cUSDC.
- tBTC – a decentralized and trustless system for wrapping Bitcoin proposed by Keep Project and the Cross-Chain Working Group. Bitcoin is deposited into a multi-sig wallet where the key holders are incentives to act accordingly by locking up other crypto assets as collateral (in this case ETH). Once this is confirmed on-chain, the TBTC smart contract mints the user with a 1:1 equivalent of the token on ETH.
- wBTC – wBTC is a multi-institutional framework for wrapping Bitcoin on Ethereum through the use of Merchants and Custodians to issue, burn, and custody of the underlying assets.