What Are DeFi Coins? Everything You Need to Know

Traditional cryptocurrencies and DeFi coins both thrive on blockchain, but their purposes and capabilities diverge sharply. Below, we break down the core differences to highlight how each shapes the future of finance. 

Purpose and Functionality

• Traditional Cryptocurrencies: Coins like Bitcoin and Litecoin are built to act as digital currency or stores of value. They focus on secure, decentralized transactions or wealth preservation, mimicking cash or gold in the digital realm.
• DeFi Coins: These power decentralized finance (DeFi) ecosystems, enabling complex financial activities like lending, borrowing, trading, and governance without banks or brokers. They’re utility-driven, fueling specific protocols like Uniswap (exchanges) or Aave (lending). 

Role in Ecosystems

• Traditional Cryptocurrencies: Operate as standalone assets for payments, transfers, or investment. Their role is straightforward, think peer-to-peer money or a hedge against inflation.
• DeFi Coins: Serve as the backbone of decentralized applications (dApps). They facilitate staking, yield farming, or voting within DeFi platforms, making them integral to dynamic, user-driven financial systems. 

Platform Dependency

• Traditional Cryptocurrencies: Run on their own blockchains (e.g., Bitcoin’s blockchain) with limited or no support for smart contracts, restricting their use to basic transactions.
• DeFi Coins: Typically built on platforms like Ethereum, which supports smart contracts. This allows DeFi coins to interact with dApps, enabling programmable, automated financial services. 

Intermediaries

• Traditional Cryptocurrencies: Designed to eliminate middlemen for payments or value storage, but they don’t inherently support broader financial functions.
• DeFi Coins: Go further by cutting out intermediaries entirely for a range of financial services, from loans to decentralized governance, creating open, trustless systems. 

Examples in Action

• Traditional Cryptocurrencies: Bitcoin for global payments; Litecoin for faster transactions.
• DeFi Coins: UNI (Uniswap) for decentralized trading; AAVE for lending and borrowing; COMP (Compound) for protocol governance. 

The Big Picture Traditional cryptocurrencies pioneered decentralized money, focusing on simplicity and security. DeFi coins, however, unlock a broader financial revolution, powering innovative, intermediary-free services on platforms like Ethereum. While Bitcoin stores value, DeFi coins create it, reshaping finance one protocol at a time.

Smart contracts are essentially pieces of code deployed on a blockchain, which automatically execute transactions when certain conditions are met. These contracts eliminate the need for intermediaries, reducing transaction costs and increasing the efficiency of financial services.

For example, when a user deposits funds into a DeFi lending platform, a smart contract can automatically trigger the transfer of assets and enforce the agreed-upon terms. The beauty of smart contracts is that they are immutable and transparent, meaning once they’re deployed, they cannot be changed, ensuring trust and security within DeFi ecosystems.

Some of the top DeFi coins by market capitalization include:

• Uniswap (UNI): Uniswap is a decentralized exchange (DEX) built on Ethereum that allows users to swap various tokens without an intermediary. UNI tokens are used for governance and voting within the Uniswap ecosystem.

• Aave (AAVE): Aave is a decentralized lending and borrowing platform that allows users to earn interest on their deposits or borrow assets. AAVE tokens serve as governance tokens within the platform.

• MakerDAO (MKR): MakerDAO is a decentralized platform that allows users to create and manage Dai, a stablecoin that is pegged to the US dollar. MKR tokens are used for governance and decision-making within the MakerDAO protocol.

DeFi tokens often provide users with the ability to stake, lend, or govern decentralized protocols. For example, with Aave and Compound, users can lend assets to others and earn interest, while in the case of Uniswap, users can stake tokens and earn rewards in the form of transaction fees. Additionally, many DeFi protocols offer governance tokens, such as UNI and AAVE, which allow holders to vote on decisions like fee structures or protocol upgrades.

DeFi protocols rely heavily on smart contracts, but these contracts can have bugs or vulnerabilities that may be exploited by malicious actors. There have been several high-profile incidents where smart contract vulnerabilities led to the loss of millions of dollars. Therefore, it’s crucial to carefully assess the security of any DeFi project before investing. For instance, in 2020, the bZx protocol was exploited twice due to vulnerabilities in its smart contracts, resulting in significant losses. 

In this attack, the culprit used a flash loan via dYdX to launch a permissionless “pump and dump” scheme involving WBTC and the bZx, Compound, KyberSwap, and Uniswap projects. The ensuing manipulation allowed the attacker to make off with more than 1,200 ETH.

Another significant challenge is the volatility of the cryptocurrency market. DeFi coins, like other cryptocurrencies, are subject to sharp price fluctuations, making them high-risk investments. Additionally, the regulatory landscape surrounding DeFi is still evolving, and future regulations could impact the viability of DeFi projects or lead to restrictions on certain activities.

When purchasing DeFi coins, it’s crucial to choose a secure wallet to store your assets. Hardware wallets like Ledger or Trezor are the most secure options, as they store your private keys offline, making them less vulnerable to hacking. Software wallets like MetaMask and Trust Wallet are also popular but require extra caution.

To trade DeFi coins, use decentralized exchanges (DEXs) like Uniswap, SushiSwap, PancakeSwap, or Rango Exchange, a cross-chain DEX and bridge aggregator that can route swaps across many blockchains, so you can trade without intermediaries and keep self-custody of your funds.