Crypto has taken a turn for the better and now DeFi crypto coins are all the rage. But, what are they? In this article, we attempt to explain the fundamental properties of DeFi crypto coins or DeFi tokens and present a brief explanation of their important concepts.
DeFi crypto coins are crypto-assets, which are a part of or originate from Decentralized Finance (DeFi) protocols. They play a central part in the DeFi ecosystem and derive their value from the usage and adoption of such protocols. The protocol users might use them for staking, governance power, profit sharing claims, as collateral, debt position etc.
The DeFi protocols can be divided into eight main categories and DeFi crypto coins have the same classification, based on their roles and nature. These are stablecoins (multi assets are collaterized to issue a pegged token), borrowing and lending (crypto-assets borrowed or lended against a token position), exchanges (tokens representing share in decentralized exchange swap profits and/or governance power).
The other categories are derivatives (price tracking tokens representing an asset), fund management (tokens used for availing active or passive fund management protocol services), lottery (tokens representing claim to a time-dependent draw), payments (those used for merchant trading and payment services) and insurance (tokens representing claims for insurance).
About Decentralized Finance (DeFi) And DeFi Crypto Coins
An alternative to the traditional finance, Decentralized Finance is an emerging blockchain based field, based on the central idea of providing financial services without the presence of third party or intermediaries. Instead, the self-executing complex logic smart contracts are used, which operate without any intervention.
It’s an attempt to go “bankless” – meaning developing the ability and means to override the current financial institutions and banks for a more free inclusive and less restricted system. DeFi Crypto Coins are tokens related to DeFi protocols, deriving their value from them.
The characteristics of DeFi protocols are trustlessness, resistance to censorship, decentralization, ability to verify on-chain, low barriers of entry, decentralization, unhindered transaction execution and interconnectivity- the so called lego-like composability. Unlike traditional finance, DeFi is accessible to anyone with an internet connection and a basic computer or smartphone.
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