There’s a lot of buzz surrounding DeFi cryptocurrencies right now and I’m going to give you a quick break down on what they are and their purpose.
DeFi is short for Decentralised Finance and it’s a pretty broad term, but the key thing is that most of the projects in this space try to recreate financial services in a decentralised manner. These can be: earning interest, getting loans, trading synthetic assets, crypto trading, banking and so on without relying on any third-party or intermediary. Instead, you put your trust in computer code, or more precisely, in smart contracts running on (predominantly) the Ethereum blockchain.
Since the beginning of 2020, DeFi became the hottest term and it’s featured everywhere: news articles, youtube videos, social media posts… there’s loads of talk about DeFi these days and for a good reason. The best performing tokens (and coins) in the crypto space are in fact those that work within the area of DeFi, so let’s take a look at what they are and what innovation they offer in this space.
In a previous post on this blog, I talked about DeFi and listed these cryptocurrencies without going into details of their technicals, so this time, I decided to go a step further and give you a more in-depth breakdown of the most popular DeFi tokens and coins.
MakerDAO (MKR)
One of the most successful DeFi projects, MakerDAO has over $1 billion in committed assets. According to Coindesk, MakerDAO’s dominance over other DeFi projects comes in at 27.1%
It was first formed in 2015, but they did not launch their stablecoin DAI until 2017.
MakerDAO serves as a smart contract platform on the Ethereum blockchain that backs and stabilizes the value of their stablecoin DAI. Maker was among the first decentralised governance protocols. Holders of the MKR token govern the Maker protocol, which are the smart contracts that power the Ethereum-based token Dai.
MKR tokens are created or destroyed following price fluctuations of DAI. The goal is to keep the price of Dai at around $1. MKR tokens are also used to pay transaction fees on the MakerDAO system and provide holders with voting rights within the network’s continuous approval voting system. MKR tokens are also traded on all good exchanges, including Binance and Kucoin, Bittrex and Poloniex.
MakerDAO does this through a dynamic system of Collateralized Debt Positions (CDP), autonomous feedback mechanisms, and incentivized external agents. These actions are a part of a fully inspectable system on Ethereum’s blockchain. With MakerDAO, anyone can borrow DAI against their Ethereum if the collateral is 1.5 times the amount of DAI requested.
Chainlink (LINK)
Chainlink (LINK) is a decentralized oracle service, which aims to connect smart contracts with data from the real world. Since blockchains cannot access data outside their network, oracles are needed to function as data feeds in smart contracts. Oracles provide external data (e.g. temperature, weather) that trigger smart contract executions upon the fulfillment of pre-defined conditions. Participants on the Chainlink network are incentivized (through rewards) to provide smart contracts with access to external data feeds. Should users desire access to off-chain data, they can submit a requesting contract to ChainLink’s network. These contracts will match the requesting contract with the appropriate oracles. The contracts include a reputation contract, an order-matching contract, and an aggregating contract. The aggregating contract gathers data of the selected oracles to find the most accurate result.
Chainlink aims to bridge the gap between on-chain smart contracts and the off-chain information crucial to run those smart contracts. The team has been building decentralized oracles on Bitcoin and Ethereum for over three years. The team is also working with SWIFT on their oracle called SWIFT Smart Oracle. This will allowing smart contracts on various networks to make payments, send governance instructions, and release collateral with over 11,000 banks.
Only 35% of the LINK’s total supply is circulating at the moment. There could be a potential downward pressure on the price once more supply unlocks.
Band Protocol (BAND)
Similar to Chainlink, Band Protocol offers a decentralized data oracle by making data readily available to be queried on-chain, using delegated proof of stake (“dPoS”) to ensure data integrity. It aims to be the go-to data infrastructure layer for Web 3.0 applications by providing decentralized, curated off-chain data to smart contracts through oracles managed by its dPoS consensus mechanism.
It is is a permissionless blockchain protocol to create token-curated communities, each with its own personalized tokens. It makes it easy for any entities (developers, companies, brands, celebrities) to issue a personalised community token used to curate data in their specific community. These Community Tokens, issued via continuous bonding curve, are used as an economic incentive for curators to provide good, reliable set of data within the community.
Band Protocol is a cross-chain data oracle platform that aggregates and connects real-world data and APIs to smart contracts.
BandChain is aiming to build a high-performance public blockchain that allows anyone to make a request for APIs and services available on the traditional web. It is built on top of the Cosmos SDK, and utilizes Tendermint’s Byzantine Fault Tolerance consensus algorithm to reach immediate finality. This finality is specifically reached upon getting confirmations from a sufficient number of block validators.
BandChain’s network consists of a number of network participants, each owning BAND tokens. These participants can be broken down into two groups; validators and delegators follows Cosmos-based delegated proof-of-stake (DPOS) blockchains.
Synthetix Network (SNX)
Synthetix Network is a derivatives liquidity protocol. Their goal is to act as the backbone for decentralised derivatives trading by allowing users to gain exposure to synthetic assets running on Ethereum.
Essentially, the Synthetix platform allows the creation of on-chain synthetic assets that track the value of assets in the real world. The project initially was called Havven, but later rebranded to Synthetix Network (in 2018). With the rebranding, the project launched with a whole slate of new features. Their native token is SNX (Synthetix Network Token) which is used to collateralise Synths, which are tokens that provide access to assets such as gold, silver, Bitcoin, US dollars, stocks like TESLA and APPL, and even complex assets like equity indices.
This DeFi project is trying to solve liquidity and slippage issues common for tokens trading on DEXes (decentralised exchanges). Holders of SNX token stake the coin to get paid a portion of the fees generated from the exchange activity.
The token is traded on a few exchanges, including Kucoin, with around $1 million in total daily volume.
Bancor (BNT)
Bancor (BNT) offers a marketplace that facilitates the exchange of cryptoassets that may otherwise lack consistent liquidity on exchanges. Bancor’s protocol uses smart contracts to create Smart Tokens, which performs conversions of various ERC-20 tokens with its reserves of other ERC20 tokens. The built-in automated market makers dynamically adjusts token price and supply after each trade.
Bancor provides the service of a DEX as well as a wallet. The site is now releasing Bancor 2.0 to improve on the service. The Bancor Protocol enables automatic price determination and an autonomous liquidity mechanism for tokens on smart contract blockchains. The Bancor Network provides decentralized liquidity, based on the Bancor Protocol, which leverages the capabilities of Ethereum smart contracts to build liquidity directly into tokens which are always available to be both bought and sold directly through their smart contracts.
The Bancor Network Token (BNT) is used as the hub Network Token, connecting all tokens in the Bancor Network.
Compound (COMP)
Compound was one of the first DeFi projects to gain mass attention in the current DeFi cycle. It was launched in 2017, in the midst of the parabolic crypto bull-run, and as a result, Compound’s native token COMP skyrocketed in value before correcting to its current levels.
Compound is an algorithmic, autonomous interest rate protocol built for developers. The goal is to allow users to earn interest on their crypto holdings within the Compound ecosystem which operates as a decentralised finance lending protocol built on Ethereum, that enables users to borrow or lend from a pool of assets.
COMP is the native token running on the Ethereum blockchain. Its purpose is to govern the autonomous Compound protocol, with which users can earn interest on their holdings, short assets they believe are overvalued, and obtain assets without purchasing them.
Stakeholders who hold at least 1% of COMP tokens in circulation can submit governance proposals. In contrast, stakeholders with fewer coins can vote on proposals or delegate their votes to other community members.
The COMP token is crucial in maintaining the DeFi nature of the project as Compound is currently turning over development and control of the protocol to its users.
Surprisingly, Compound has recently passed MakerDAO in terms of assets with the recent DeFi surge as they have over $1.5 billion in committed assets.
Aave (LEND)
Aave is an Open Source and Non-Custodial protocol to earn interest on deposits & borrow assets. Depositors provide liquidity to the market to earn a passive income, while borrowers are able to borrow in an overcollateralized (perpetually) or undercollateralized (one-block liquidity) fashion.
The Aave protocol relies on the lending pool model to offer high liquidity. Loans are backed-up by collateral and representation by aTokens, derivative tokens which accrue the interests.
The Total Supply is 1,299,999,942 LEND and has a very good overall score on Token Metrics (as seen in the screenshot above).
Aave is not the only lending protocol in the DeFi space, in fact, the decentralized lending industry is thriving this year, with not one, but more than 10 strong blockchain-based projects competing for their share of the billion-dollar market that is lending and borrowing, with Nexo, Celsius, Aave, MakerDao and Blockfi being the current leaders.
Nexo (NEXO)
Nexo, just like Aave, comes in as a leader in crypto lending projects. Backed by one of the leading European FinTech groups, Credissimo, Nexo launched in 2018 as the world’s first instantly crypto-backed loan platform. It allows investors and businesses to access instant cash while retaining ownership of their cryptocurrency holdings. In their launch year alone, Nexo raised over $50 million.
As Nexo is a crypto-backed loan service, the platform primarily exists for instant crypto overdrafts. This statement means that with Nexo, you can overdraft your account to get cash to spend while keeping your crypto, including the profits. One of Nexo’s most appealing aspects is that it is a licensed and regulated financial institution in the European Union.
It is essential to note, though, that the only fiat currencies that can earn interest on Nexo’s platform are the EUR, GBP, and USD.
The native token, NEXO, serves as a compliance token backed by Nexo’s loan portfolio’s underlying assets. The NEXO token provides holders with regular passive income in the form of 30% of the company’s profits. The first dividend payout using the NEXO token was in 2018 and reportedly totaled $912,071.
The native token also allows for discounted interest rates on Nexo’s instant loan service, amounting to 50% off while also being used as collateral on the platform.
POLKADOT (DOT)
Polkadot is an open-source protocol that wants to enable cross-blockchain transfers of any type of data or asset. This means that Polkadot gives you the ability to interoperate with a wide variety of blockchains within the Polkadot network.
The native token DOT serves three main purposes: Governance, Staking and Bonding:
- Governance means that DOT holders are the ones who control the protocol
- Staking makes the network more secure by rewarding good actors
- Bonding makes sure that bonding tokens verify that new parachains are useful.
In short: Polkadot is a scalable heterogeneous multi-chain that aims to make cross-blockchain networks work together under the protection of shared security, called “pooled security,” where Polkadot’s validators secure multiple chains.
Polkadot’s goal is to enable true interoperability, cross-blockchain transfers of any type of data or asset, not just tokens; and to provide a framework under which new blockchains may be created and to which existing blockchains can, if their communities desire, be transitioned.
Polkadot blockchain implements Nominated Proof of Stake scheme (NPoS). This scheme allows participants who do not wish to run nodes to be able to help with the validator selection and is privacy oriented, implementing a parachain utilising the properties of zk-SNARKs (the privacy protocol of Zcash) in order to ensure that identities of transactors are kept private.
Its Fundamental Score on Token Metrics is above 85% and Technical Score is above 75% which is a great indicator for its future potential.
UNISWAP (UNI)
screenshot provided by Token Metrics
This is the newest addition to the top DeFi cryptocurrencies, the token was launched in September this year (just a week ago from the time of writing) and it created a huge buzz in the crypto community by airdropping 400 UNI tokens to each user of the Uniswap DEX (decentralised exchange).
This was one of the biggest airdrops to date, worth over $2000 in the first 2 days of the launch. The price of the token jumped to $7 at some point, before correcting down to $4 and is currently sitting at $5 (at the time of writing).
UNI is the governance token of the Uniswap Protocol, which allows users to delegate votes and influence the protocol’s future. The token has a deflationary model of distribution which rolls over a period of 4 years and is billed to be one of the strongest tokens in the DeFi realm.
Uniswap DEX is currently the most popular decentralized exchange and earlier this year it even surpassed CoinbasePro in trading volume. It was launched in 2018 as an exchange that allows decentralised trading for Ethereum-based ERC20 tokens. It’s an automated market maker protocol (AMM) where users deposit supported digital assets into liquidity pools and then receive a share of the transaction fees as interest. This year it released its Version 2 that comes with more token-swap pairs, an oracle service, and an added flash loan functionality.
Flash loans are a somewhat controversial addition as they have been used to attack various protocols, but at their heart, they enable flexibility and composability. An experienced trader could also watch the market to see where prices get out of sync and take advantage of the opportunity for immense profits via flash loans.
A flash loan permits a user to borrow any amount up to the total liquidity available if the whole sum returns in the same transaction.
…and what is a top 10 without an honourable mention?
Here is my 11th most popular token in the DeFi realm right now.
Yearn Finance (YFI)
Another recently launched project is Yearn.finance – a range of decentralised finance applications running on the Ethereum blockchain.
It consists of four main products: yVaults, Earn, Zap and Cover.
- yVaults is a community-developed yield farming robot.
- Earn optimises profits by automatically switching between lending providers.
- Zap is a way to make swapping various coins more convenient.
- Cover is a pooled insurance product.
It is a decentralised ecosystem of aggregators that utilise lending services such as Aave, Compound, Dydx, and Fulcrum to optimise your token lending. When you deposit your tokens to Yearn.finance, they are converted to yTokens, which are periodically rebalanced to choose the most profitable lending service(s). Curve.fi is a prominent integrator of yTokens – creating an AMM (Automated Market Maker) between yDAI, yUSDC, yUSDT, yTUSD that not only earns the lending fees but also the trading fees on Curve.fi.
YFI is the governance token of the yearn.finance ecosystem. As I reported in a previous post on this blog, the price of YFI shot up in the crypto stratosphere by nearly 4000% recently and is currently valued at more than 3 BTC.
Yes, this is more than $30,000 at the time of writing and according to some industry professionals, a $100,000 price tag is not impossible too, so all eyes are currently on this project which has one of the most scarce supply (only 30,000 tokens ever to be released).
Arthur Hayes is the co-founder and head of BITMEX exchange.
You can also grab a free copy of my spreadsheet "The DeFi List" from this link.
