- The DeFi landscape is growing exponentially, but not all new DeFi tokens have true value or utility.
- Wrapped Bitcoin (WBTC), DAI, Uniswap (UNI), Aave (AAVE), and Chainlink (LINK) are currently the most successful DeFi tokens.
- Taken together, these five tokens cover more than half of the DeFi landscape in terms of market value.
In the last year, the number and variety of digital assets operating in the decentralized finance (DeFi) niche has grown considerably, as ever more creative uses for blockchain technology and DeFi are unraveled.
As a result, there are now hundreds of digital assets with a primarily DeFi use case, which can cause a great deal of confusion for those looking to wrap their head around the space, since many of these tokens have overlapping functions, while some have close to no real utility at all.
To help make things clear, we take a look at five of the most popular DeFi assets today and examine what these tokens can do for you, and how they fit into the current DeFi landscape.
1. Wrapped Bitcoin (WBTC)
Created by BitGo in 2018, Wrapped Bitcoin (WBTC) is a simple ERC20 token that represents Bitcoin on the Ethereum blockchain.
To get Wrapped Bitcoin, you need to deposit native Bitcoin (BTC) to a wallet controlled by one of several WBTC merchants. These merchants will then work with authorized custodians to issue an identical amount of WBTC as an ERC20 token, and transfer it to you.
This ERC20 tokenized BTC can be transferred like a regular Ethereum token, and can be used to interact with various Ethereum DeFi protocols and decentralized applications (DApps), or it can be converted back into the equivalent amount of BTC through a simple unwrapping process.
As of writing, over 107,000 BTC worth $1.3 billion is currently wrapped as WBTC, making Wrapped Bitcoin the third-largest DeFi protocol in current operation
2. Uniswap (UNI)
Uniswap (UNI) is the native governance token of the Uniswap decentralized exchange. By holding UNI tokens, individuals can help make changes to how the Uniswap protocol operates by creating and voting on governance proposals.
The first governance proposal, which sought to reduce the governance proposal and quorum thresholds was recently defeated despite an overwhelming majority of votes in support of the change — ironically, due to failing to meet the minimum quorum threshold.
If you used Uniswap any time before September 1, 2020, then you may have noticed that you received an unexpected 400 Uniswap (UNI) token airdrop to your Ethereum wallet. At its peak, this airdrop was worth over $3,000, and more than 300,000 wallets qualified, making it one of the most valuable airdrops of all time.
3. Dai (DAI)
DAI is a type of digital asset known as a stablecoin. As the term implies, this means the value of DAI is designed to remain stable at 1 US dollar (USD) per coin — resisting the volatility that most other digital assets are known to experience.
Unlike other stablecoins like Tether (USDT) and USD Coin (USDC), DAI isn’t directly collateralized by US dollars held in a bank account. Instead, you obtain DAI by depositing Ethereum (ETH) into a collateralized debt position (CDP) smart contract. Once deposited, you can then borrow up to 66% of the USD value of your deposit in DAI tokens. To get back your ETH, you need to return the DAI you borrowed, plus a small amount of interest.
DAI offers low minimum deposit amounts, and because DAI isn’t backed by real money, you don’t need to complete KYC to acquire it. But you do run the risk of possible liquidation and black swan events.
4. Chainlink (LINK)
Chainlink is a network that provides data inputs and outputs for a variety of blockchains, allowing smart contracts to take in reliable information from external real-world sources, and helping smart contracts securely communicate data to non-blockchain platforms.
This network achieves this through a decentralized network of oracles, which can be used to feed real-world data into smart contracts, allowing them to react to any changes or execute specific functions based on the data they receive. For example, a smart contract might take in data about the current BTC to USD exchange rate, to help decide pricing for a digital asset brokerage.
The LINK token is the native digital asset of the Chainlink ecosystem and is used for paying nodes (also known as oracles) for retrieving data and as collateral when running a node. This collateral can be penalized if the node provides bad data, helping to ensure data providers remain reliable at all times.
5. Aave (AAVE)
Aave (AAVE) is the native token of the non-custodial Aave DeFi lending and borrowing protocol.
Through Aave, you can lend out various ERC20 tokens by depositing to a range of lending pools — including those for stablecoins like DAI and True USD (TUSD) as well as more volatile digital assets, like Ethereum (ETH), Yearn Finance (YFI), and Wrapped Bitcoin (WBTC). By contributing to these lending pools, you earn a variable interest rate. This interest is paid by borrowers, who must also put up more than 100% of the loan amount as collateral before they can borrow.
Launched in July 2020, AAVE itself is a multi-functional token that can be used to reduce fees and participate in the governance of the Aave protocol. These are gained by swapping the platform’s older LEND tokens to AAVE at a ratio of 100:1, or by simply using the Aave platform to lend or borrow.
As DeFi continues to gain momentum, new protocols, tokens, and use-cases are likely to be elaborated, further closing the gap between the capabilities of DeFi compared to CeFi (centralized finance).
With the DeFi market currently worth approximately $12b+, it has grown by more than 5,000% in the last two years, making it arguably the fastest growing industry right now. If this pace of growth were to continue into the future, the DeFi industry could rival the size of the $36 trillion US stock market by the mid-2020s, and the size of the $124 trillion worldwide banking industry shortly after that.
But it will need to overcome a host of challenges to get to that point. Not the least of which is the recent spate of “rug pull” scams.