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What are DeFi tokens and why should you keep an eye on them?

Judy Unger

By Judy Unger

While many projects are still in a nascent stage, DeFi tokens (short for “decentralised finance tokens”) have been causing a frenzy on the crypto markets which is reminiscent of the Bitcoin boom back in its early days.

So what are DeFi tokens? They are decentralised financial applications running on blockchains which mirror concepts successfully used in traditional banking and finance. DeFi tokens are shaking things up in the markets. The key idea is to recreate financial services in a decentralised manner, without the need of a third party, like a bank, in between.

Instead, you put your trust in computer code, or more precisely, in smart contracts running on, mostly, the Ethereum blockchain. This allows you to earn interest, get loans, trade (synthetic) assets and more, without relying on any third party. Thanks to DeFi, crypto is on its way to reaching the next level. Sounds interesting? Then let’s get started!

While the hype around DeFi tokens has truly meant some outstanding yields, it is important you bear in mind that DeFi tokens are considered high-risk investments and prices are subject to extremely high volatility, as traders saw some serious price action over the past weeks. Plus, just in case you missed it: Bitpanda recently launched six of the most popular DeFi tokens in the crypto sphere, and another six shortly afterwards.

Five reasons why you should keep an eye on DeFi tokens

As you see, the DeFi season is on and going strong. Here are some great reasons why you should keep an eye on decentralised finance projects and tokens:

1. DeFi tokens are the logical next step in disrupting finance

For instance, DeFi tokens enable people to borrow and lend within a peer-to-peer network or to take insurance out directly, without needing intermediaries such as banks. In other words, decentralised finance tokens provide users and token holders the same or similar services offered by the traditional financial sector. In a way, they are the next evolutionary step in the crypto sphere - similar to what Netflix did to traditional cable television.

2. DeFi tokens realise the potential of blockchain

By creating a system parallel to traditional finance, DeFi tokens do not only aim to establish new standards in terms of transparency and access but are bound to significantly reduce costs for financial services and ensure the fast processing of transactions thanks to automation. DeFi tokens are a really interesting use case of the concepts introduced by projects such as Ethereum, which allow decentralised applications to run on their network infrastructure.

3. DeFi tokens are making finance accessible

Thanks to decentralised platforms, DeFi tokens are another milestone in making investing and commerce opportunities accessible to individuals that may not have been able to participate up to this point, pioneering an economic paradigm shift.

A vast range of use cases, from savings in interest-bearing accounts, lending and borrowing, network staking and derivatives, to insurance, gaming and synthetic assets, offers great potential to those interested in simply investing for the long term in today’s most active sector in blockchain.

4. DeFi tokens are just at the beginning

If you are a passionate crypto enthusiast, there is hardly a way you can ignore developments in decentralised finance. Whether we are talking about the most popular DeFi token UNI, the governance token of the Uniswap Protocol, the Synthetix Network Token SNX, one of the largest DeFi projects, to-date or Maker MKR, one of the oldest decentralised governance protocols, these are all great assets to start with and to diversify your crypto portfolio.

True enough, most DeFi projects are still in their early stages. Part of the hype that sparked the interest of traders may have been caused by short-term speculation. While the best projects are bound to stay and to evolve further, we are also expecting to see more big players in the industry jump on this.

5. DeFi tokens bring additional value to Ethereum

Finally, if you consider yourself a more risk-averse investor and you want to wait until the wheat separates from the chaff, investing in Ethereum (ETH) may be a more attractive option for you than investment in the actual DeFi tokens.

Since almost all DeFi tokens run on smart contracts on the Ethereum blockchain, a number of analysts are predicting significant potential for corresponding increases in the price of ETH. Some even believe DeFi coins to be the final factor that is missing to tilt the flippening scale, the battle between Bitcoin and Ethereum for the top spot in market capitalisation, in favour of Ethereum in the medium to long term. Although Ethereum would still need to scale considerably to get to that stage, DeFi has brought some of the spotlight back to this discussion.

What else you should know

All DeFi tokens available on Bitpanda are currently “non-right tokens”, listed on Bitpanda as “trade only”. This means that if you are holding DeFi tokens on Bitpanda, you can’t exercise the rights associated with holding them at the moment. In order to exercise all the rights associated with owning DeFi tokens, such as voting rights, staking or other rights, the token would need to be transferred elsewhere.

In any case, DeFi tokens are on their way to revolutionising the crypto scene, so make sure you don’t miss out. Bitpanda already offers an attractive range of DeFi tokens for investment. Are you ready to start investing?

RISK WARNING: The information contained in this article is for general purposes of information only and is not investment advice in any form. Please note that cryptocurrency trading may involve a significant level of risk and is not suitable for inexperienced traders. As DeFi tokens are relatively new, they possess higher than normal risk, and as such will likely be subject to high price volatility. For further information regarding the risk in connection with cryptocurrency, please also refer to our terms and conditions (see 13. Risks).

Start diversifying your crypto investments now

Judy Unger

Judy Unger

Content Creation Expert at Bitpanda writing on blockchain and personal finance for everyone no matter their background, breaking down the barriers of investing.