About decentralised finance (DeFi)

Learn the basics of decentralised finance, how it works, and explore some of the leading projects in the DeFi space.
By:
Updated: Jul 27, 2023
Listen

This beginner-friendly page takes you through everything you need to know about DeFi. We cover what decentralised finance is, offer in depth market analysis, and discuss some of the cryptocurrency tokens that operate in this sector.

What is decentralised finance (DeFi)?

Copy link to section

Decentralised finance, commonly known as DeFi, refers to a financial system built on blockchain technology that aims to recreate traditional financial services in a decentralised and permissionless manner.

Unlike traditional financial systems that rely on intermediaries like banks or financial institutions, DeFi operates on public blockchain networks, making it open, transparent, and accessible to anyone with an internet connection.

DeFi applications are typically built on top of blockchain platforms like Ethereum and utilise smart contracts to automate and execute financial transactions without the need for centralised control.

What are defi coins?

Copy link to section

A defi coin is a cryptocurrency that plays a role within the decentralised finance system, or is associated with a DeFi project in some way. These coins are native to various DeFi platforms and are used to facilitate a wide range of financial activities, such as lending, borrowing, trading, yield farming, and liquidity provision.

What types of DeFi coins are there?

Copy link to section

There are various types of tokens involved in DeFi, each serving different purposes within the ecosystem. Here are some common types of tokens you might encounter in decentralised finance:

  • Governance tokens. These tokens enable holders to participate in the governance and decision-making process of a DeFi protocol. Token holders can vote on proposed changes, upgrades, or improvements to the protocol. Examples include COMP (Compound), UNI (Uniswap), and MKR (MakerDAO).
  • Utility tokens. Utility tokens are used to access and use specific services or features within a DeFi platform. For example, on lending platforms, holding the native utility token might provide users with reduced fees or higher borrowing limits.
  • Liquidity providers. LP tokens are obtained when users provide liquidity to decentralised exchanges (DEXs) or liquidity pools. In return, they receive LP tokens representing their share of the liquidity pool. These tokens can be used to claim a portion of the transaction fees generated by the pool. Examples include LP tokens on Uniswap, SushiSwap, and Curve Finance.
  • Stablecoins. Stablecoins are cryptocurrencies designed to have a stable value, usually pegged to a fiat currency like the US Dollar (USD) or a stable asset. Stablecoins are essential in DeFi for providing stability, acting as a medium of exchange, and enabling users to lock in value without exposure to price volatility. Examples include DAI, USDC, and Tether (USDT).
  • Wrapped tokens. These are tokens that represent other assets on a different blockchain. For example, wBTC (Wrapped Bitcoin) is an ERC-20 token representing Bitcoin on the Ethereum blockchain. Wrapped tokens enable assets from one blockchain to be used on another blockchain, increasing liquidity and interoperability.
  • Yield farming tokens. Yield farming involves users staking or providing liquidity to DeFi protocols in exchange for rewards in the form of additional tokens. These reward tokens are often specific to the platform and can have varied uses, such as providing voting power or being tradable on exchanges. Examples include SUSHI (SushiSwap), YFI (yearn.finance), and FARM (Harvest Finance).
  • Insurance tokens. Some DeFi projects offer insurance against potential risks or smart contract vulnerabilities. Users can purchase insurance tokens to protect their funds in the event of a protocol exploit or hack.
  • Synthetic assets. Synthetic assets are tokens that represent the value of real-world assets, such as stocks, commodities, or other cryptocurrencies. These tokens enable users to gain exposure to these assets without owning them physically. Examples include Synthetix (SNX) and Mirror Protocol (MIR).

How do defi coins work?

Copy link to section

DeFi works through the use of smart contracts, which are self-executing agreements with the terms directly written into code. This allows these coins to operate without the need for a central authority like a bank. Instead, smart contracts are deployed on blockchain networks like Ethereum, and they operate in a trustless and automated manner without intermediaries.

Developers create and deploy smart contracts that define the rules and logic for specific financial services, such as lending, borrowing, decentralised exchanges, and yield farming. Then users can access these DeFi applications through web interfaces or decentralised applications (dApps) to interact with the smart contracts. They typically connect their cryptocurrency wallets (e.g., MetaMask) to these platforms to carry out transactions.

DeFi applications are often governed by their community through the ownership and use of governance tokens. Token holders can propose and vote on changes to the protocol, ensuring the system’s decentralisation and evolution over time.

Examples of DeFi coins

Copy link to section

The number of defi coins continues to grow and each one offers different benefits and uses. Below are a few examples of some of the top defi coins available. 

  • Ethereum (ETH). While not exclusively a DeFi coin, Ethereum is the blockchain platform on which many DeFi applications are built, and it is fundamental to the DeFi ecosystem.
  • Compound (COMP). The governance token of the Compound protocol, which allows users to lend and borrow various cryptocurrencies.
  • Aave (AAVE). The native token of the Aave lending and borrowing protocol, enabling holders to participate in governance and access various features within the platform.
  • Uniswap (UNI). The governance token of the Uniswap decentralised exchange (DEX), where users can swap tokens directly with each other without an intermediary.
  • Synthetix (SNX). The token of the Synthetix protocol, which allows users to create and trade synthetic assets that represent the value of real-world assets like stocks, commodities, and fiat currencies.
  • Maker (MKR). The governance and utility token of the MakerDAO platform, which facilitates the creation and management of the DAI stablecoin through collateralized debt positions (CDPs).
  • SushiSwap (SUSHI). The governance token of the SushiSwap decentralised exchange, a fork of Uniswap with additional features and community-driven governance.
  • Yearn.finance (YFI). The governance token of the yearn.finance platform, which aggregates yields from various DeFi protocols and automates yield farming strategies.
  • Curve Finance (CRV). The token of the Curve decentralised exchange, optimised for stablecoin trading with low slippage and minimal fees.
  • Balancer (BAL). The governance token of the Balancer protocol, a DeFi platform that allows users to create customizable automated market-making (AMM) pools.
  • Chainlink (LINK). While not exclusively a DeFi token, Chainlink provides decentralised oracle services, enabling smart contracts to interact with real-world data, which is critical for many DeFi applications.
  • 1inch (1INCH). The governance and utility token of the 1inch DEX aggregator, which finds the best prices across different DEXes for users.

Which DeFi coins should I choose?

Copy link to section

The best DeFi coins to buy are the ones that have unique technology or the possibility to achieve widespread adoption from the general public. Keep tabs on the latest news to find new projects and to monitor the performance of established tokens you might be interested in.



Sources & references
Risk disclaimer
Prash Raval
Financial Writer
Prash is a financial writer for Invezz covering FX, the stock market and investing. For over a decade he has traded spot FX full time while... read more.