The potential of decentralized finance (DeFi) is expanding every day. And with talks of regulation in this financial environment’s future, investing in DeFi coins and tokens has become an increasingly viable option for anyone.
To understand the future of DeFi and the risks and rewards of investing in tokens, let’s first explore what decentralized finance is and what distinguishes a coin from a token.
What Is DeFi?
Simply put, DeFi is an umbrella term for various applications in cryptocurrency with the shared goal of decentralizing finances using blockchain technology. This allows crypto exchanges, like Vauld, to provide services such as trading, payments, investments, lending, and asset management.
Decentralization, in this context, means that instead of requiring an intermediary to communicate transactions, two parties can independently exchange goods.
One of the main problems that DeFi aims to solve is the lack of transparency and total control of funds through banks. With decentralization, anyone can access the public, immutable ledger to view account balances and their transaction history.
By taking control from banks and other intermediaries, DeFi positions you to be in charge of your finances to develop a more free and fair financial market. Through the use of automatic and enforceable agreements known as smart contracts, any third-party need is eliminated.
As it stands today, DeFi has the potential to disrupt our daily financial interactions. However, this is dependent on factors like the development of its regulatory framework and public acceptance.
In addition, understanding the structure and goal of DeFi is only half of the equation. Some form of currency is also needed to operate this complex system.
In this case, DeFi coins and tokens act as the foundation of the decentralized ecosystem. Read on to learn more about these assets and their uses.
DeFi Coins And Tokens
There is a long and growing list of DeFi coins and tokens available for purchase. But what is the difference between them?
Despite the terms often being used interchangeably, coins and tokens are their own unique assets. Let’s take a closer look.
DeFi coins were designed for monetary purposes. In the same way that physical fiat coins can be used to purchase goods and services, the intention of crypto coins such as Bitcoin, Litecoin, and Ether has always been to buy commodities.
Another defining factor of these coins is that they are native to their respective blockchains, and there is a blockchain for Bitcoin and every other DeFi coin on the market.
While coins are meant to be used for direct methods of exchange, tokens represent assets that can be paid with coins. Rather than being used for transactional purposes, tokens are typically kept as a means of earning interest or being traded.
Tether is the most popular token, along with options like USD Coin and Shiba Inu. In addition, some tokens simply exist to have value, while others can only be traded. These assets usually use the blockchain of a coin such as Ether or Bitcoin.
Today, coins and tokens can be used as investment tools. Whether it’s Bitcoin or a token like Tether, these crypto opportunities are both lucrative and risky depending on how they are approached.
As you determine whether investing in the world of DeFi is right for you, below are just a few important considerations and things to know about coins, tokens, and the overall market.
Investing In DeFi Coins And Tokens: What You Should Know
DeFi Is Growing Rapidly
By now, you likely know how common Bitcoin is and maybe even know someone who owns BTC. While there are a variety of factors contributing to its success, similar rapid growth has been seen across the board of decentralized finance.
The Total Value Locked (TVL) figure has been viewed as DeFi’s determining growth factor. This indicator measures its growth rate through the value of all funds connected to DeFi projects.
By using this measurement, we can see the growth of DeFi between 2019 and 2021 was unprecedented. A TVL exceeding $80 billion was recorded in the late spring of 2021. This soared from an initial $1 billion in 2019.
But even with this tremendous growth, a major downfall is a lack of a regulatory framework to accompany it.
DeFi Is Still In Early Stages
Despite growing interest in DeFi, the adoption of decentralized finance is still far from being considered mainstream. The majority of the market consists of highly experienced traders and those extremely familiar with the industry.
This slow acceptance of DeFi means that regulation is still in the early stages of development. Just like any financial asset, regulation is critical in addressing issues such as market manipulation and the fluctuation of value.
With DeFi still falling behind in this way, there are many risks to consider when investing.
DeFi Can Be Risky
As we mentioned above, the current risks of decentralized finance are largely tied to its lack of regulation. These include:
- Cyber security concerns
- Online fraud such as DeFi “Rug Pulls”
- Illegal uses of coins and tokens
- Technical glitches and human error
What exactly is a Rug Pull? This term is used to describe a scam in which an exchange with little to no credibility collects users’ funds only to shut down the project and leave with their earnings.
Regulation can help eliminate this scam, along with the majority of these risks. But, in the meantime, these are concerns to be aware of.
Finding an exchange with ideal security features can help you avoid these uncertainties. At Vauld, we ensure safety and security options for all of our customers.
Here are just a few of the many options you can choose to protect your assets:
- Various authentication methods
- Biometric and pin-based authentication
- Multi-factor authentication
- Video verification
- Safelisting against third-party attacks
- User alerts
- Up to $100M in asset insurance
We also ensure that your assets are safe by moving funds from your wallet to a centralized lending pool that’s insured for $100 million in BitGo, a leading digital asset trust and security company.
DeFi Is Lucrative
Arguably the most important feature of an investment is the money that you will earn down the road. Investing in DeFi coins and tokens helps you earn more than you could by partnering with a traditional bank.
The interest rates offered by crypto exchanges are significantly higher than the rates offered by banks. Let’s take a look at just how drastic this difference is.
For U.S. banks, the average savings rate is about 0.06%, while the average fixed deposit rate with a CD falls anywhere between 0.14-0.28%, depending on how long you choose to lock in your funds.
On the other hand, crypto exchanges offer upwards of 10% on certain coins, like DAI, through a simple savings account. This number jumps about 2-3% on average when your funds are temporarily locked through a fixed deposit, and you can even earn interest while trading.
While there are still risks to consider, the good news is that there are several high- and low-risk opportunities for every type of investor.
DeFi Opportunities Are Nearly Endless
Along with earning interest through exchanges like Vauld, there are countless ways to expand your portfolio while maximizing your wealth-building power and minimizing risks.
Trading DeFi tokens and coins is an innovative way to earn high profits within a short time, and the ways you can trade are only limited to your trading preferences.
One of the most common ways to trade is day trading, which is a higher-risk model that utilizes liquidity and volatility to predict crypto prices. This short-term strategy, as its name suggests, is used by traders looking to buy and sell crypto on the same day.
Underneath the umbrella of day trading are options such as:
- Range trading
- High-frequency trading
- Bot trading
But this is only scraping the surface of how you can engage in this DeFi investment strategy.
Staking coins begins with verifying crypto transactions by committing your assets to a blockchain network. In other words, you lock up a portion of your crypto for a predetermined period to support the blockchain and earn crypto.
Automatic Investment Plans
The new mechanism of automatic investment plans (AIPs) allows you to pick or customize a basket of crypto assets and then set them to buy at regular intervals. To purchase during short-term buying opportunities, you can even try our “buy the dip” function.
Along with the options listed above, there is also crypto mining, yield farming, hodling, and much more to choose from. With so many choices, the key to making the most of these opportunities is to partner with the right customer-focused crypto exchange.
Invest In DeFi Coins And Tokens With Vauld
Although there is incredible opportunity that comes with investing in DeFi coins and tokens, the risks associated with a lack of regulation and rapid growth should be weighed before getting started.
Choosing your ideal investment method and the best exchange will help manage these risks.
Here at Vauld, we offer a variety of opportunities, from Instant Swap trading to AIP Token Baskets to simply saving your assets and earning interest along the way. Sign up with Vauld today and begin your DeFi investments with confidence.