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What Are DeFi Coins?
DeFi stands for “decentralized finance”. It’s a financial system alternative to our current one and built on Blockchain. A decade ago, Bitcoin became the first decentralized currency. But currency itself is not sufficient to create a new financial universe: you need infrastructure elements like banks, insurance companies and stock markets. Well DeFi is built to tackle these issues.
In the traditional financial system, every transaction involves a couple of middlemen. If you want to send money to your friend, you involve your bank, an app like Venmo and his or her bank. Unfortunately, this is true even for crypto: you can’t transfer cryptocurrency through Coinbase without bringing in the exchange platform itself, the IRS and banks. This is not the case with DeFi transactions: they all happen peer-to-peer, bypassing any central authority through automated activity.
All DeFi projects function within the Ethereum platform. Think of it as the financial Internet: a huge system that allows for projects to be built within it. These projects are called DIY programs, or Dapps. Another key concept to grasp here is smart contracts. They are akin to traditional financial contracts but are executed automatically through algorithms.
Let’s break down the main advantages of DeFi:
- Speed. You can create a wallet and make transactions within seconds, not waiting for anyone’s approval;
- Anonymity. DeFi doesn’t require you to provide any personal information or identity proof. The benefit of this is that government or banks cannot ban you from any financial activity;
- Transparency. All smart contracts are open, so everyone can see the full set of operations performed;
- Decentralization. Because of this, DeFi services are much cheaper. Less middlemen – less fees.
- Interoperability. With DeFi, there is an effect called “Money Legos”. It means you can combine different financial services with each other to perform the desired transaction (e.g. a wallet, lending platform and insurance provider);
- Safety. This is relative, of course, but we mean that there is no need to deposit funds before trading, so there is no risk of scamming from the platform.
Top DeFi coins (top 15)
It’s very tempting to put Bitcoin at the top of the list, but unfortunately it’s not compatible with the Ethereum platform, so we can’t count it.
When shopping for a DeFi coin, it’s important to consider stablecoins. A stablecoin is cryptocurrency that is attached to a real world fiat money. Think of USD Coin, True USD, Gemini, Paxos, Tether and others. Most of them are pegged to the US dollar 1:1. It means when you buy a stable coin, a new one is minted; if you withdraw one, then one is burned.
So here’s the best DeFi crypto for 2022:
All market capitalization info is relevant for April 2022
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TERRA (LUNA) – a stablecoin
Backed by: fiat (USD, KRW, MNT)
Market Cap: $26,79 bil.
Distribution: 26% vesting & inflation, 20% stability reserves, 20% team members
Note that on May 12th the price of Luna dropped catastrophically (we discussed it in a separate article: https://cryptogeek.info/en/price-predictions/terra-luna-price-prediction), but the stablecoins still has chances of regaining value
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DAI (DAI) – a stablecoin
Backed by: crypto (ETH)
Market Cap: $9,4 bil.
Inflation: none (coins are minted and burnt to prevent it)
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CHAINLINK (LINK)
Market Cap: $6.2 bil.
Distribution: 41% in circulation, 35% locked in smart contracts. 24% operators
Inflation: 4-5%
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AVALANCHE (AVAX)
Market Cap: $19.8 bil.
Distribution: 50% staking, 10% fund, 9% public sale, 7% donations, 5% strategic partners
Staking: 7-12 % profit
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UNISWAP (UNI)
Market Cap: $3.8 bil.
Distribution: 60% UniSwap community, 21% team members, 18% investors
Inflation: 2%
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SYNTHETIX (SNX)
Market Cap: $773 mil.
Distribution: 50% staking, 19% public sale, 18.5% team members
Inflation: down by 1.5% each year
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OSMOSIS (OSMO)
Market Cap: $3 bil.
Distribution: 45% liquidity pool rewards, 25% staking reward, 25% developers' input, 5% community pool
Inflation: 76% (down 1/3 each year)
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FRAX (FRAX & FXS) – a stablecoin
Backed by: algorhythms
Market Cap: $2.9 bil. (FRAX), $1 bil. (FXS)
Distribution: 60% UniSwap initial listing, 20% team members, 12% private investors
Inflation: none (coins are minted and burnt to prevent it)
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UMA (UMA)
Market Cap: $534 mil.
Distribution: 48.5% founders / team members / initial investors, 35% developers / users, 14.5& future sales
Inflation: 0,05%
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COMPUND (COMP)
Market Cap: $696 mil.
Distribution: 42% protocol users, 24% shareholders, 22% developers / team members
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THE GRAPH (GRT)
Market Cap: $2.2 bil.
Distribution: 34% shareholders, 23% team members
Inflation: initially 12.5%, now projected to be 3%
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MAKER (MKR)
Market Cap: $1.6 bil.
Distribution: 55% liquidity providers / exchanges / investors
Inflation: none (coins are minted and burnt to prevent it; plus the max amount of coins in circulation is 1 005 577)
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PANCAKESWAP (CAKE)
Market Cap: $1.7 bil.
Distribution: 59% for burning tokens, 33% blocked in stacking contracts, 18% in smart contracts
Inflation: 750 000 CAKEs daily (the deflation component is intentional)
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AAVE (AAVE)
Market Cap: $1.7 bil.
Distribution: 13 mil AAVE for the community, 3 mil in reserve
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REN (REN)
Market Cap: $395 mil.
Distribution: 56% investors & liquidity pools, 19% Bonded in the Dark
This defi coin list is subjective, so we urge you to look into the matter on your own before investing.
Are DeFi Coins a Good Investment?
To answer this question, you have to consider several things:
- DeFi is still in its infancy, so many projects may be highly vulnerable towards hacker attacks;
- The project themselves may be scams (this risk can be easily eliminated by reading through the smart contracts which are always open to the public);
- Despite the name, some DeFi services may only be partially decentralized.
At the end of the day, as with any investment, you should follow the golden rule: invest only the money that you can comfortably lose. You cannot always bet on finding the best defi project and giving it all.
How to Invest in DeFi?
There are three main ways to make money from DeFi:
- Staking. Staking is essentially a bank deposit in the world of crypto. You lock your funds in your wallet for it to participate in proof-of-stake operations (validating other people’s transactions) and earn a passive income from that. Unlike traditional deposits, staking can bring your unbelievable percentages for such a safe investment – up to 20% on some stablecoins. We have a separate material on passive income in crypto: https://freewallet.org/blog/crypto-passive-income/
- Lending. This is pretty self-explanatory: you lend your coins to other people for a percentage. But note that you don’t have to find these people yourself: everything is done automatically on the platform.
- Liquidity providing. In this option, your money participates in a large liquidity pool, and you get compensation from each trade. The important thing to grasp here is that investors physically cannot pull their money from the pools unilaterally: smart contracts just wouldn’t allow that. So the system stabilizes itself.
A more exotic way of capitalizing on DeFi coins is flash loans. It’s when you borrow money and tell the smart contract to sell it within seconds, automatically repaying your debt. To succeed in these kinds of operations, you need to bet on a sure price increase: with flash loans, the potential gains and losses are maximized.
Where to Buy DeFi Crypto?
Platforms that can sell the best DeFi tokens to invest in divide into two large groups:
- CEXs like Coibase. Centralized exchanges check their customers for reliability and simplify the trading process. In exchange, they retract a certain fee from every exchange.
- DEXs like UniSwap or PancakeSwap. Decentralized exchanges function similarly, but their processes are conducted through Blockchain smart contracts. This gives you more freedom (no need to create an account or transfer the money to the exchange platform first; it goes directly to your buyer) but less security (the procedures of customer verification are less rigid and thus there’s more risk of scamming).
Another big difference is the amount of coins available to the public. Most CEXs offer just dozens of coins, since every new token has to go through a strict process of verification. On the other hand, DEXs store thousands of DeFis. Here you must rely on public data: if the coin has billions of dollars in liquidity pools, then it’s probably trustworthy.
Conclusion
As with cryptocurrency in general, DeFi coins give you a lot of opportunities that come with a certain risk. This year is projected to bring us a lot more DeFi projects, so stay tuned and don’t forget to conduct your own research. Hopefully, at the end of December we’ll give you the final list of top DeFi projects, which will include some mentioned here.