![]() In many cases, users who hold DeFi tokens can have a say in the future direction of a project. Many DeFi dApps add voting privileges to their DeFi tokens to promote decentralized blockchain governance. Since then, prominent dApps like Uniswap, Aave, and PancakeSwap have been offering DeFi tokens as rewards to liquidity providers. The Ethereum-based lending dApp Compound was the first to introduce a DeFi token reward with its COMP token in 2020. After locking your crypto in a DeFi dApp’s liquidity pool, you’ll receive token rewards in the protocol’s native cryptocurrency. Since locking crypto in a liquidity pool carries many risks, developers incentivize liquidity providers with token rewards. These liquidity pools run on smart contracts, allowing DeFi users to make trustless peer-to-peer transactions. ![]() If you have a compatible wallet, you can add liquidity to a DeFi protocol by depositing crypto into a liquidity pool. Instead, DEXs and crypto lending platforms need to rely on funds from the Web3 community. Since DeFi is “decentralized,” it can’t take advantage of centralized market makers or banks to supply liquidity. Specifically, these DeFi tokens are used as rewards for users who lock their crypto in a dApp’s liquidity pools. Liquidity pool rewardsĭeFi tokens often serve as an incentive to attract more users to their platform. However, most of these cryptocurrencies have the following three use cases: 1. What are the uses of DeFi tokens?Įvery DeFi dApp has a different reason for issuing DeFi tokens. Since most of the activity in DeFi is on the Ethereum blockchain, most DeFi tokens follow Ethereum’s ERC-20 token standard. Typically, DeFi developers launch these cryptocurrencies on top of whatever blockchain they build their dApp on. In the case of DeFi tokens, these cryptocurrencies typically have a purpose within their associated dApp. Unlike coins or security tokens, utility tokens should have a clear function in their respective protocols. ![]() Often, these tokens serve a specific use case within each DeFi protocol’s ecosystem, which technically makes them a form of “utility token.” What are DeFi tokens?ĭeFi tokens are cryptocurrencies that are associated with specific DeFi projects. Whether it’s “Ethereum killer” chains like Solana or an Ethereum layer-2 solution like Polygon, it’s becoming easier to find DeFi protocols across Web3. In addition to decentralized crypto lending services, DeFi includes decentralized exchanges (DEXs) like Uniswap and decentralized crypto staking pools like Lido Finance.Ĭurrently, DeFi is most active on the Ethereum blockchain, but many competing smart contract blockchains have DeFi dApps. Once you pay off your loan on Aave, the smart contract will automatically release your collateral back into your wallet. The smart contract will automatically charge interest payments and monitor the value of your margin balance. If you want to use a DeFi dApp, all you need is to connect your crypto wallet to take advantage of various services.įor example, if you’re a DeFi user and want to take out a loan from the Aave borrowing and lending protocol, you’d first deposit crypto collateral into a smart contract and receive borrowed funds in your wallet. Instead, these protocols recognize users by their unique crypto wallet addresses. First introduced on Ethereum (ETH), smart contracts are blockchain-based programs that can automatically fulfill commands when specific criteria are met.ĭeFi also doesn’t ask users for KYC (know-your-customer) information. Instead of relying on bankers or brokers to verify transactions, dApps (decentralized applications) in DeFi use smart contracts. This includes allowing users to deposit funds for interest, borrowing and lending, and more. DeFi is short for “decentralized finance,” which refers to a new financial industry within Web3.ĭeFi protocols offer users all the financial services you’d expect from a bank or brokerage house, except there are no centralized authorities.
0 Comments
Leave a Reply. |