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Do you already own any of these top cryptos?
Key points
- Decentralized finance can cut the middleman out of traditional financial transactions, but it is in its infancy and carries additional risks.
- Terra, Aave, Chainlink, and Clover Finance are good coins to watch.
Decentralized finance (DeFi) is an umbrella term for various apps that cut the middleman out of financial services, such as lending, borrowing, trading, and earning interest. DeFi continued to gain traction last year with increased adoption, more applications, and more money invested.
In some ways, DeFi cuts across the whole cryptocurrency industry. After all, Bitcoin (BTC), the first-ever crypto, was designed as a decentralized form of payment. But there are some DeFi specific tokens that are worth keeping an eye on.
1. Terra (LUNA)
Terra grew almost 13,000% in 2021, but — like many cryptos — its price has fallen in 2022. It’s a DeFi ecosystem that’s underpinned by algorithmic stablecoins — dubbed the next generation of money. The idea is to be a complete digital financial system, based on stablecoins. Terra’s Chai payment platform is accepted by thousands of merchants in Korea and its Anchor savings platform is proving popular.
A stablecoin’s value is pegged to a non-crypto commodity like gold or a fiat currency like the U.S. dollar. And unlike a fiat-backed stablecoin which is backed 1:1 by a traditional currency, an algorithmic stablecoin keeps its peg by using a smart contract to issue or buy coins. Terra does this using the LUNA token to increase or reduce the supply.
2. Aave (AAVE)
Aave is a relatively well established player in the DeFi space. It is a decentralized lending platform where people can borrow, lend, and earn interest on their crypto assets. Users can deposit the crypto they want to earn interest on, which becomes part of a lending pool. Borrowers can then take out loans from the pools and the interest goes to the people who deposited their assets. It’s similar to what a traditional bank does with money you deposit, but since there’s no middleman, you earn a higher percentage of the loan interest.
There’s always a risk older DeFi cryptos will be overtaken by new products. However, Aave remains top of DeFi Llama’s list of lenders in terms of total value locked (the amount of money on the platform). It upgraded to Aave v2 at the end of 2020 and now operates on Ethereum (ETH), Avalanche (AVAX), and Polygon (MATIC) networks — which means users don’t have to pay Ethereum’s huge gas fees for each transaction.
3. Chainlink (LINK)
To understand Chainlink, we need to know about oracles…
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