In June 2020, a leading DeFi protocol called Compound made headlines for reaching $1 billion USD in funds borrowed. Between June 16th and July 19th, the total amount locked in these types of decentralized finance protocols surged by more than 150% to hit nearly $2.7 billion. At the time of the writing, on August 6th, the total value locked has climbed to almost $4.5 billion. Complementing this growth in Q2 2020, many DeFi-related tokens surged by over 100%, largely outperforming Bitcoin.In this blog, we will cover the origins of DeFi Tokens, their use cases, and focus on their recent performance.
DeFi Tokens are generally considered 'Utility Tokens.' However to cover their range of uses, it would be helpful to look at three sub-categories: governance, revenue shares, and platform token.
As decentralized protocols continue to develop, the decision-making processes around them is a critical point. Governance tokens are at the base of blockchain-based voting systems, so are often used to vote on protocol upgrades including fees, supported collateral, and interest rate changes. We could mention MKR from the the Maker Protocol or COMP for Compound.
Unlike MKR or COMP that allow holders to have a voice in the governance system, Revenue Shares Tokens do not. However by staking tokens, users receive revenue shares generated by the DeFi platform. The best example is NEXO, one of the biggest crypto lending platforms. Nexo pays out 30 percent of the company’s profits to token holders each month.
This category corresponds mainly to tokens that do not have governance or profit sharing utility. Some of these include DEX tokens, alongside tokens from lending platforms such as SNX. SNX tokens are staked as collateral in order to mint new synthetic assets (Synths). SNX Stakers are incentivized to create Synths by earning fees generated from the Synthetix Exchange.
In its first week of trading, COMP surged 233%, and has since been listed on Quadency's Official Partners Kraken, Binance, KuCoin, OKEx and other global exchanges. Other DeFi tokens have surged recently as well, including LEND by more than 1000% in Q2 2020, and KNC by 280% in the same period.
As many countries see rates of traditional finance services near zero, DeFi lending rates appear very appealing to many. However, not all of this movement is related and different aspects of DeFi tokenemics come into play.
DeFi platforms are expected to scale up and become more popular in the next coming years. As they generate more revenue, DeFi Tokens like NEXO give users a share in that revenue. As these platforms grow, the value of their token mechanically rises. Even though tokens like COMP don't offer revenue shares, having a stake in such a platform is seen by many as a long-term investment.
Another driver is the investment in protocols powering the DeFi ecosystem. REN is the perfect example: an open protocol that enables the permissionless and private transfer of value between any blockchain. Ren's core product RenVM, brings interoperability to DeFi and offers the possibility to 'wrap' BTC into an ERC-20 token tradeable on DEXes.
As mentioned by Beincrypto, there's likely a fomo element surrounding the DeFi Tokens and largely the DeFi ecosystem. A good example is the recent KNC rally. The Kyber Network protocol (KNC) was due to an upgrade in early July, leading to investors purchasing KNC anticipating a higher return. It was only fueled further as these tokens continued making headlines and gaining popularity on crypto-twitter.
After the rise of DeFi in 2019, 2020 seems to be the rise of the DeFi Tokens, undoubtedly related to DeFi's increasing popularity. While the amount of funds locked in DeFi protocols continues growing, it is very possible that DeFi tokens will continue to outperform Bitcoin as traders seek higher returns.
If you want to learn more about DeFi, read our Introduction to DeFi!
DeFi Tokens are generally considered 'Utility Tokens.' However to cover their range of uses, it would be helpful to look at three sub-categories: governance, revenue shares, and platform token.
As decentralized protocols continue to develop, the decision-making processes around them is a critical point. Governance tokens are at the base of blockchain-based voting systems, so are often used to vote on protocol upgrades including fees, supported collateral, and interest rate changes. We could mention MKR from the the Maker Protocol or COMP for Compound.
Unlike MKR or COMP that allow holders to have a voice in the governance system, Revenue Shares Tokens do not. However by staking tokens, users receive revenue shares generated by the DeFi platform. The best example is NEXO, one of the biggest crypto lending platforms. Nexo pays out 30 percent of the company’s profits to token holders each month.
This category corresponds mainly to tokens that do not have governance or profit sharing utility. Some of these include DEX tokens, alongside tokens from lending platforms such as SNX. SNX tokens are staked as collateral in order to mint new synthetic assets (Synths). SNX Stakers are incentivized to create Synths by earning fees generated from the Synthetix Exchange.
In its first week of trading, COMP surged 233%, and has since been listed on Quadency's Official Partners Kraken, Binance, KuCoin, OKEx and other global exchanges. Other DeFi tokens have surged recently as well, including LEND by more than 1000% in Q2 2020, and KNC by 280% in the same period.
As many countries see rates of traditional finance services near zero, DeFi lending rates appear very appealing to many. However, not all of this movement is related and different aspects of DeFi tokenemics come into play.
DeFi platforms are expected to scale up and become more popular in the next coming years. As they generate more revenue, DeFi Tokens like NEXO give users a share in that revenue. As these platforms grow, the value of their token mechanically rises. Even though tokens like COMP don't offer revenue shares, having a stake in such a platform is seen by many as a long-term investment.
Another driver is the investment in protocols powering the DeFi ecosystem. REN is the perfect example: an open protocol that enables the permissionless and private transfer of value between any blockchain. Ren's core product RenVM, brings interoperability to DeFi and offers the possibility to 'wrap' BTC into an ERC-20 token tradeable on DEXes.
As mentioned by Beincrypto, there's likely a fomo element surrounding the DeFi Tokens and largely the DeFi ecosystem. A good example is the recent KNC rally. The Kyber Network protocol (KNC) was due to an upgrade in early July, leading to investors purchasing KNC anticipating a higher return. It was only fueled further as these tokens continued making headlines and gaining popularity on crypto-twitter.
After the rise of DeFi in 2019, 2020 seems to be the rise of the DeFi Tokens, undoubtedly related to DeFi's increasing popularity. While the amount of funds locked in DeFi protocols continues growing, it is very possible that DeFi tokens will continue to outperform Bitcoin as traders seek higher returns.
If you want to learn more about DeFi, read our Introduction to DeFi!
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