The crypto industry has grown a lot in the past few years, and if you are a beginner, you may get overwhelmed with all the new terms. Cryptocurrencies such as Bitcoin and Ethereum have become common knowledge now, and people are moving towards DeFi. Decentralized Finance has opened the door to too many sectors for the crypto industry. Today, you can find DEX, DeFi wallets, and even DeFi tokens on the market
DeFi Tokens
DeFi tokens are cryptocurrencies that are built on automated, decentralized platforms to operate using smart contracts. Some popular DeFi tokens are: AAVE, UNI by Uniswap, and SUSHI by Sushiswap. These tokens also have different types, such as
- Utility tokens: They can be used to provide access to a resource like a password.
- Asset tokens: These are used to represent real-world assets.
- NFTs: These represent unique items such as art, music etc.
How Does It Work?
DeFi tokens are operated on smart contracts. Smart contracts are programs or digital contracts stored on blockchains and automatically executed when the predetermined conditions are met. Smart contracts come with many benefits, such as efficiency, accuracy, transparency, speed, and trust.
How Are Defi Tokens Different From Defi Coins?
- DeFi tokens are built on existing blockchain networks, which differ from DeFi coins.
- DeFi coins are described as a digital version of fiat currency.They are capable of transferring value over a financial transaction whereas DeFI tokens do not necessarily transfer value in terms of financial transaction.
Defi Token And Governance Token
Most of the DeFi tokens are linked to DeFi protocols. Now, these protocols are almost entirely controlled by their respective communities. If you want to participate in the decision making process of these DeFi platforms, you have to purchase these “governance tokens’ that will provide you with special rights and voting authority.
Where To Buy Defi Tokens
By the name of it, you may think that DeFI tokens would be available only on decentralized exchanges or DeFi terminals, but you can find the majority of them listed on major centralized exchanges too. Just as you would invest in any other cryptocurrency, you can do the same with them.
If you are looking forward to participating in the protocol governance, then you need to hold your tokens in a DeFi wallet. Then, you’ll need to connect that wallet with the governance platform being used by that particular protocol. Also, remember that no gas fees can be charged for participating in the governance of a token.
Associated Risks With The Defi Tokens
- If a critical flaw is found in the protocol that a DeFI token is based on, that token will also lose a lot of value.
- Also, if there are any changes in the team or the project, market sentiment may be disturbed or changed.
Conclusion
DeFi tokens are crypto assets that are built on decentralized platforms. They are operated by smart contracts. These tokens come in different types and are available on both centralized and decentralized exchanges. DeFi tokens are controlled by DeFi protocols, so they can be governed too.
