Decentralized Finance (DeFi) uses blockchain technology with coins and tokens for decentralized payments, borrowing and lending, trading, smart contracts, and other functions. Interestingly, the top ten DeFi tokens ranked among the 54 best coins and tokens listed at CoinMarketCap.com as of September 23, 2020. Why do DeFi tokens rank so high?
As of the same date, CoinMarketCap.com listed a total of 98 DeFi tokens. This means that all the related projects and platforms promote decentralized finance, confident that DeFi has a bright future and that people will want to move from centralized to a decentralized manner of doing things.
Top Five DeFi Tokens
Let’s have a look at what the most popular tokens bring to the table. The top five tokens shown below were chosen based on market capitalization ranking at CoinMarketCap for DeFi assets.
BRIEFLY: Chainlink aims to connect smart contracts to real-world data, events and payments. The Chainlink network is set to provide reliable immutable inputs and outputs for complex smart contracts on any blockchain.
How is this achieved? Using a decentralized oracle network (with oracles working as DeFi instruments), Chainlink supplies data to smart contracts from multiple sources, decentralized from any central authority. This ensures the reliability and security of the blockchain which could be compromised if the oracle depended on just a single source.
What are some use cases of Chainlink?
Chainlink can be used to create tokens tied to real-world assets, such as precious metals, indices, car loans, and more. It is instrumental when creating stablecoins pegged to fiat currency, currency baskets, or commodities. Chainlink can be utilized to calculate interest payments, liquidate collateral, and to issue and settle loans. And it can power a decentralized exchange, adjust capital pools, or facilitate multiple forms of payment.
BRIEFLY: Maker is a smart contract platform on the Ethereum blockchain that stabilizes and backs the value of DAIstablecoin. MKR tokens are created or burned in accordance with price fluctuations of the DAI coin so that it stays as close to 1.00 USD as possible. MKR tokens also serve to pay transaction fees on the Maker system and give holders voting rights within Maker’s approval voting system.
Latin Americans (mainly in Venezuela, Argentina, Colombia, and Mexico) realized the significance cryptocurrencies have due to recurring inflation and hyperinflation. For example, Venezuela’s inflation is estimated at 15,000%, and Argentina is facing default. To protect their hard-earned money and savings, many want US dollars because the local currency loses its purchasing power fast. But in Argentina, citizens are only allowed to buy only around $200 per month.
Hoping that its limited supply and resistance to censorship could be the solution when facing hyperinflation, people in Latin America turned to Bitcoin, at first. However, Bitcoin’s volatility precludes it from being used as a fitting store of value.
This region needed something like a digital dollar. Pegged closely to the US dollar, DAI coin is gaining popularity in Latin America. The users need just a smartphone and a free mobile wallet. Even then, Dai coin is not yet used much for usual, everyday payments in shops because most merchants are not ready for that. But people use Dai coin for their savings, converting their Dai into their local currency whenever they need it.
BRIEFLY: Aave is a decentralized lending protocol that enables users to borrow and lend various cryptocurrencies using both fixed and variable interest rates.
Aave was rebranded from ETHlend in September 2018, and since then rose to become one of the most sought out DeFi apps. Aave Protocol was launched in January 2020. This non-custodial protocol is open-source, allowing users to create their own decentralized money markets on the Ethereum blockchain.
Depositors deposit their cryptocurrencies into lending pools with the goal of earning interest. Borrowers can get instant loans from these lending pools, in either an overcollateralized or undercollateralized way. Since the platform uses pools, the loans don’t have to match one borrower to one lender. Instead, the loans are available based on the pool’s state.
Aave offers interesting features, such as “rate switching”, uncollateralized loans, unique collateral types, and Flash Loan. Since Flash Loans require zero collateral to use, they have started attracting more users to this platform.
Aave lending platform supports close to 20 Ethereum-based assets, for example, 0x Coin (ZRX), Aave (LEND), Augur (REP), Basic Attention Token (BAT), Binance USD (BUSD), ChainLink (LINK), Dai (DAI), Decentraland (MANA), Ethereum (ETH), Kyber Network (KNC), Maker (MKR), Synthetix (SNX), Synthetix USD (SUSD), Tether (USDT), TrueUSD (TUSD), USD Coin (USDC), and Wrapped BTC (WBTC).
BRIEFLY: Compound is a protocol that makes it easy to borrow and lend cryptocurrencies such as Dai (DAI), Ether (ETH), USD Coin (USDC), Ox Coin (ZRX), Tether (USDT), Basic Attention Token (BAT), Augur (REP), Wrapped BTC (WBTC), Sai (SAI).
A sobering fact is that the majority of cryptocurrencies might just be locked on crypto exchanges and held in users’ wallets without yielding any interest. Compound aims to change that with its platform for lending and borrowing, allowing you to have an instant savings account or to lend your assets and gain interest.
Compound lending and borrowing rates are calculated algorithmically based on real-time market data. When more users deposit an asset, increasing its supply, the borrowing/lending rates go down. In contrast, if more users want to borrow an asset, increasing the demand, the asset interest rates go up.
Assets (e.g., DAI) in the protocol are swapped to cTokens (e.g., cDAI), whose value rises over time, reflecting the block-by-block compounding effect.
When the asset supply grows as more users deposit the asset, the result is a decrease in lending rates. On the other hand, if the demand for borrowing an asset increases, the result is an increase in the asset interest rates.
Synthetix Network Token (SNX)
BRIEFLY: With Synthetix, you can bet on crypto assets, currencies, precious metals, stocks, and other assets in the form of ERC20 tokens.
Synthetix is a protocol for issuing and trading “Synths” (synthetic assets) on Ethereum. Synthetic assets or “Synths” copy the price of an asset in the “real world” and bring it to the Ethereum blockchain, giving that Synth all the properties of an ERC20 token. The assets from the “real world” can be commodities, stocks, shares, cryptocurrencies, etc.
The large-scale trading of commodities, stocks, currencies, and other assets is still dominated by the Wall Street, London, and other traditional trading centers. Synthetix is set to bring in similar possibilities into the global world of crypto – but in a permissionless and decentralized way.
Synthetix allows you to bet on crypto assets, currencies, precious metals, stocks, and other assets in the form of ERC20 tokens. As a holder of Synths, you can bet the price will go up – i.e. you can go long on an asset. Or you can bet the price will go down – you can short an asset.
You can also stake (lock and hold) your SNX tokens, thereby creating new Synths, getting rewards, and watching your holdings grow.
Top 10 DeFi Tokens by Market Capitalization
The table shows the top ten DeFi tokens, bringing in the top five tokens discussed above, together with five subsequent tokens.
|DeFi Token (Ticker)||DeFi Rank||Market Rank|
|Synthetix Network Token (SNX)||#5||#34|
|Kyber Network (KNC)||#7||#40|
|Band Protocol (BAND)||#9||#50|
What is really striking in this table is the fact how high of a position these DeFi tokens occupy in the ranking. From the total of the 7,094 coins and tokens listed at CoinMarketCap.com as of September 23, 2020 – all these top ten DeFi tokens ranked among the 54 most popular coins and tokens! Some DeFi tokens were outperforming Bitcoin in Q2 of 2020. It seems that DeFi is something that the users want and seek out. To explore DeFi crypto lending platforms, you can use DeFi Rate, DeFi Prime, and other websites.
DeFi platforms, coins and tokens bring in many interesting features to make decentralized finance attractive to users. Even then, please, keep in mind that that DeFi is evolving, the crypto assets are volatile and that any information in this article is meant for educational purposes only and should not be misconstrued as investment advice.