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DeFi tokens: A simple guide for beginners

Discover the cryptocurrencies that provide utility to DeFi applications.

Defined as a sub-category of cryptocurrencies, decentralized finance (DeFi) tokens are used within applications that seek to decentralize traditional financial services. Although a fairly new sector, the tokens have quickly attracted the attention of many investors. It may be why you have found this article today.

In this guide, we will explore what DeFi tokens are, outline their use cases, describe the most popular ones on the market and the risks involved. Let's dig in.

Disclaimer: This information should not be interpreted as an endorsement of cryptocurrency or any specific provider, service or offering. It is not a recommendation to trade.

DeFi protocols are experimental works in progress. Funds deposited into DeFi protocols in general can be at risk of smart contract vulnerabilities, malicious developers and hacks. DeFi protocols are usually governed by token holders through a DAO (decentralized autonomous organization).

What are DeFi tokens?

Each DeFi token is developed for use within an associated decentralized finance application. DeFi applications mirror conventional financial concepts, such as exchanges, lending, borrowing and insurance. Tokens are usually built on the same blockchain that hosts the DeFi application.

Built on the blockchain, DeFi tokens have the same seamless transferability and transparency as all other cryptocurrencies. However, unlike cryptocurrency coins that help secure a blockchain network, DeFi tokens are used in decentralized applications that are built on top of an existing blockchain. Each DeFi token holds a unique purpose within the associated DeFi protocol.

Different types of DeFi tokens

There are 3 types of DeFi tokens. These include:

  1. Fee tokens
  2. Governance tokens
  3. Collateral tokens

Fee tokens

Fee tokens are simply DeFi tokens designed to facilitate the collection of fees generated by a DeFi protocol. Each DeFi protocol implements specific fees and processes for collection. For some, stablecoins are accepted. Others employ a native DeFi token.

Governance tokens

Governance tokens are DeFi tokens that give holders governance rights. They represent voting power within DeFi protocols and enable holders to influence daily operations and future development. Most tokens issued within DeFi applications fall into this category.

Governance tokens represent the foundation of decentra. They effectively represent the "De" in DeFi. By encouraging community participation, holders of such tokens can actively participate in the development of the sector.

Collateral tokens

Collateral tokens are tokens that are used to stabilise a DeFi protocol. If there is a shortfall on a borrowing platform due to user loans being liquidated, any gaps can be covered by collateral tokens. As a result, price is pegged to the stability of a DeFi protocol. The tokens are vital for protocols where cryptocurrencies can be used as collateral or where synthetic assets are created.

List of popular DeFi tokens

UNI

UNI is the primary token of Uniswap, which is one of the leading decentralized exchanges (DEXs). The token was built using the ERC-20 token standard, which means that it is compatible with the Ethereum blockchain.

UNI tokens were launched in September 2020 as a means to reward Uniswap users. The tokens entered the market trading at $2.94. After a development period, holders of the tokens can now use them to vote on upgrades on the protocol. Investors can also stake their tokens on the exchange to earn extra interest on their investment.

At the time of writing, according to coin aggregator Coinmarketcap, UNI holds a price of $18.19 with a 24-hour trading volume of $392,957,848.

Uniswap

LINK

LINK is the native token of Chainlink, one of the most widely used decentralized oracles in the cryptocurrency industry. The decentralized oracles provide real-world data to decentralized finance applications. LINK is another ERC-20 token compatible with the Ethereum blockchain.

LINK has existed since 2017 but the Chainlink application has only gained interest since the DeFi summer of 2020. As a result, LINK's price has increased dramatically over the last 12 months. While holding a price of less than $1 for several years, LINK's value reached $52 in 2021.

MKR

MKR is the governance token of MakerDAO, arguably one of the first-ever DeFi applications. MakerDAO was built on the Ethereum blockchain and offers users the ability to access crypto-backed loans. By depositing cryptocurrencies users can access loans distributed in the US dollar stablecoin DAI.

MKR tokens have grown in popularity due to their requirement in the management of the stablecoin DAI. At the time of writing, DAI holds the 23rd largest market cap of all cryptocurrencies. If DAI performs well and remains pegged 1:1 with the US Dollar, the stability is often reflected in MKR price.

Since launching in 2017, the MKR token has remained below $1,500. With increased interest in cryptocurrencies and increased use of the DAI stablecoin last year, DAI increased to an impressive all-time high of $6,000.

MakerDAO

COMP

COMP is the native token of Compound, a leading and popular decentralized cryptocurrency lending platform. The token was launched in June 2020 and has become a popular investment option in the DeFi sector. The token gives holders voting rights to the Compound protocol and is used by the application to distribute rewards to those lending.

As one of the younger DeFi tokens, COMP has not experienced such extreme price movements. It spent the majority of 2020 consistently below $200. However, with increasing interest in the DeFi sector COMP reached an all-time high of $800 in 2021.

Compound Finance

AAVE

AAVE is the native token of Aave, a cryptocurrency lending platform that is similar to Compound. The DeFi platform was first introduced in the cryptocurrency market in 2017. At the time it went by the name ETHLend and implemented LEND as its native token. In 2018 ETHLend was rebranded to Aave, with all LEND tokens transferring to AAVE.

Aave's open-source protocol is built on the Ethereum blockchain and, therefore, AAVE tokens have been built based on the ERC-20 standard. The token has enjoyed a bullish market for the majority of 2021. Holding AAVE provides users with discounts on the lending platform and allows them to vote on the development of the platform.

Aave protocol

Compare cryptocurrency exchanges that offer DeFi tokens

Some of the exchanges below sell DeFi tokens including the tokens listed above.

Name Product GXFCY Deposit methods Fiat currencies Cryptocurrencies Offer Disclaimer Go to site
OFFER
Uphold - Digital Asset Platform
Bank transfer, Credit card, Debit card, Bank transfer (SEPA), Apple Pay, Google Pay

27

252

Refer a friend to earn US$20 — $10 for you and $10 for the person you refer. T&Cs apply.
Terms apply. Cryptoassets are highly volatile. Your capital is at risk.
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Capital at risk

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Finder Award
EXCLUSIVE
Kraken Cryptocurrency Exchange
Bank transfer, Credit card, Cryptocurrency, Debit card, Apple Pay, Google Pay, SWIFT, ACH online banking

6

261

Go to site

Capital at risk

View details
Finder Award
OFFER
eToro USA LLC Cryptocurrency Trading
Bank transfer, Debit card, PayPal, Wire transfer

6

105

Get $15 when you sign up and deposit $100 in your eToro account. T&Cs apply.
Disclaimer: eToro USA LLC does not offer CFDs and makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication, which has been prepared by our partner utilizing publicly available non-entity specific information about eToro. Your capital is at risk.
Go to site

Capital at risk

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EXCLUSIVE
Paybis Cryptocurrency Exchange
Bank transfer, Credit card, Debit card, Neteller

42

357

Finder Exclusive: Get 25% discount on all commission for 1 transaction when using promocode Finder25. There is no time limit on the validity of the promo code.
US residents: Restricted in the following states - NY, CT, NM, WA, HI, AL, VT, FL, AK, NV.
Go to site

Capital at risk

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OFFER
Gemini Cryptocurrency Exchange
Bank transfer (ACH), Cryptocurrency, Debit card, PayPal, Apple Pay, Google Pay, SWIFT

7

151

Go to site

Capital at risk

View details
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Risks of using DeFi tokens

Price volatility

A risk that all cryptocurrencies share is price volatility. DeFi tokens are highly volatile and can experience significant price movements over a period of hours.

Price volatility is a key reason why many investors remain cautious of cryptocurrencies. As easy as it is for one to make money in the market, it is also easy to lose huge sums. The lack of inherent value is one reason why cryptocurrencies are so volatile.

Technology risks

DeFi applications rely heavily on smart contracts. These are automated digital contracts that are programmed by developers. If there is a coding mistake or exploit in a smart contract, digital assets can be lost in the DeFi ecosystem.

In April 2021, a hacker took advantage of a vulnerability that had been present in Uranium v2 contracts, resulting in a loss of $57 million. The hacker exploited a coding error in the platform's balance modifier logic. Similarly, in May 2021 a hacker exploited Rari Capital smart contracts by "tricking" them into allowing hostile contracts to gain access to funds stored in its vault. The hack resulted in an $11 million loss.

Flash loans

Flash loans are an innovative DeFi feature that allows users to borrow without depositing collateral. The feature facilitates opportunities such as arbitrage, self-liquidation and collateral swapping. However, as beneficial as flash loans are, they have quickly become one of the most common features that hackers target to directly or indirectly steal funds.

Verdict

DeFi is an innovative sector within the cryptocurrency industry and DeFi tokens are a crucial part of the system. By facilitating fee collection, providing governance rights and offsetting collateral, tokens provide many advantages to the financial products on offer. They have already proven popular among cryptocurrency investors, with many solidifying a position within the cryptocurrency market. While not risk-free, the tokens have the potential to help revolutionize the finance and banking sector.

Pros and cons of cryptocurrency lending

Pros

  • Accessibility. DeFi tokens improve accessibility to a broad range of financial services.
  • Increased transparency. DeFi tokens could create new standards of transparency and access in the financial sector.
  • Automation. Combined with smart contracts, DeFi tokens help the automation of DeFi applications, which can greatly reduce the costs for financial services.
  • Governance. DeFi tokens often provide holders with governance rights to a platform. This places the development directly into the hands of loyal users.

Cons

  • Price volatility. Like all cryptocurrencies, DeFi tokens are highly volatile. Significant price swings can occur within hours.
  • Security risks. There is an inherent risk when using DeFi applications, which transfers across to DeFi tokens. If an application is exploited, the value of an associated DeFi token would be affected.
  • No regulation. The DeFi sector is an unregulated industry. There is no insurance in case applications fail or funds are lost.
Disclaimer: Cryptocurrencies are speculative, complex and involve significant risks – they are highly volatile and sensitive to secondary activity. Performance is unpredictable and past performance is no guarantee of future performance. Consider your own circumstances, and obtain your own advice, before relying on this information. You should also verify the nature of any product or service (including its legal status and relevant regulatory requirements) and consult the relevant Regulators' websites before making any decision. Finder, or the author, may have holdings in the cryptocurrencies discussed.

Whether products shown are available to you is subject to individual provider sole approval and discretion in accordance with the eligibility criteria and T&Cs on the provider website.

Name Product GXFCY Deposit methods Fiat currencies Cryptocurrencies Offer Disclaimer Go to site
eToro Cryptocurrency Trading
eToro Cryptocurrency Trading
Bank transfer, Credit card, Debit card, Neteller, Skrill

18

78

Disclaimer: Cryptoasset investing is highly volatile and unregulated in the UK and some EU countries. No consumer protection. Tax on profits may apply.
Go to site

Capital at risk

View details
Binance Cryptocurrency Exchange (Not available to US users)
Bank transfer, Cryptocurrency

1

369

Go to site

Capital at risk

View details
KuCoin Cryptocurrency Exchange
KuCoin Cryptocurrency Exchange
Bank transfer, Credit card, Cryptocurrency, Debit card, PayPal, P2P

50

743

Go to site

Capital at risk

View details
Bybit Cryptocurrency Exchange
Bybit Cryptocurrency Exchange
Bank transfer, Credit card, Cryptocurrency, Debit card, P2P

73

279

Disclaimer: Highly volatile investment product. Your capital is at risk.
Go to site

Capital at risk

View details
Gate.io Cryptocurrency Exchange
Bank transfer, Credit card, Cryptocurrency, Debit card

8

1607

Go to site

Capital at risk

View details
Kraken Cryptocurrency Exchange
Bank transfer, Credit card, Cryptocurrency, Debit card, Apple Pay, Google Pay, SWIFT

8

222

Go to site

Capital at risk

View details
OKX Cryptocurrency Exchange
Bank transfer, Cryptocurrency, iDEAL, PayPal, POLi, SEPA, Faster Payments (FPS)

35

338

Go to site

Capital at risk

View details
Uphold
Uphold
Bank transfer (ACH), Credit card, Debit card, Apple Pay, Google Pay

27

237

Capital at risk

View details
EXCLUSIVE
Paybis Cryptocurrency Exchange
Bank transfer, Credit card, Debit card, Neteller

42

357

Finder Exclusive: Get 25% discount on all commission for 1 transaction when using promocode Finder25. There is no time limit on the validity of the promo code.
US residents: Restricted in the following states - NY, CT, NM, WA, HI, AL, VT, FL, AK, NV.
Go to site

Capital at risk

View details
Finder Award
Bitstamp Cryptocurrency Exchange
Bank transfer, Credit card, Cryptocurrency, Debit card, SEPA, Faster Payments (FPS)

3

96

Capital at risk

View details
Coinmama Cryptocurrency Marketplace
Credit card, Fedwire, SEPA, Google Pay, SWIFT, Bank card

6

15

Capital at risk

View details
OFFER
Gemini Cryptocurrency Exchange
Bank transfer (ACH), Cryptocurrency, Debit card, PayPal, Apple Pay, Google Pay, SWIFT

7

151

Go to site

Capital at risk

View details
Finder Award
Crypto.com App
Bank transfer, Credit card, Cryptocurrency, Debit card, PayPal, Wire transfer, Apple Pay, Google Pay, SWIFT

31

378

Capital at risk

View details
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Bybit Cryptocurrency Exchange

Bybit Cryptocurrency Exchange logo
  • Offers leverage and derivative trading
  • Supports EUR, GBP and CHF
  • Licensed to operate in all European countries
Go to site
Disclaimer: Highly volatile investment product. Your capital is at risk.

KuCoin Cryptocurrency Exchange

KuCoin Cryptocurrency Exchange logo
  • Buy, sell and trade over 700 crypto assets
  • Supports 10 Asian fiat currencies
  • Offers crypto futures trading
Go to site

Kraken Cryptocurrency Exchange

Kraken Cryptocurrency Exchange logo
  • Buy, sell and trade over 200 crypto assets
  • Licensed to operate in 17 jurisdictions in Oceania
  • Supports AUD
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Binance Cryptocurrency Exchange (Not available to US users)

Binance Cryptocurrency Exchange (Not available to US users) logo
  • Supports over 300 crypto assets
  • Binance Pay enables users spend their crypto
  • Binance P2P supports multiple African fiat currencies
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Binance Cryptocurrency Exchange (Not available to US users)

Binance Cryptocurrency Exchange (Not available to US users) logo
  • Supports over 300 crypto assets
  • Binance Pay works with Credencial Payments to support crypto payments
  • Binance P2P supports five Latin American fiat currencies
Go to site

Bybit Cryptocurrency Exchange

Bybit Cryptocurrency Exchange logo
  • Supports leverage and derivative trading
  • Supports 300 spot trading pairs
  • Low-to-non-existent trading fees
Go to site
Disclaimer: Highly volatile investment product. Your capital is at risk.
Written by

Writer

Jay Jackson was a crypto trader, researcher and freelance writer. He works closely with people and businesses in the crypto sphere, writing blog posts, guides, press releases, reviews and ebooks. See full bio

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